cannot change its mind mid- or late-stream in litigation and decide
to proceed elsewhere. Under the circumstances of the case, a delay
of more than 19 months, for which no justification is offered and
during which the party that sought to change venue has repeatedly
invoked the rights available to California litigants, did not survive a
test of reasonableness.
Thus, the court would not allow enforcement of the forum selection clause because it was unreasonable to do so after 19 months of
litigation as a matter of law. This is certainly an extreme case, but
lenders and lessors cannot simply rely on an affirmative defense in an
answer of waiver/improper jurisdiction and wait for trial or some other
distant date and then attempt to rely on a forum selection clause
to later attempt to dismiss or stay the case. Instead, the motion to
dismiss or stay should be made at the earliest opportunity to avoid a
court holding that enforcement of the clause is unreasonable under
the circumstances.
Arbitration
There is a similar rule with respect to arbitration clauses but it is
not a reasonableness standard but instead is a prejudice standard.
Many arbitration provisions state that all claims between the parties,
including without limitation, contract and tort disputes, shall be arbitrated pursuant to the rules of the American Arbitration Association in
effect at the time the claim is filed, upon request of either party and
the Federal Arbitration Act (FAA) shall apply to construction, interpretation and enforcement of the arbitration provision. The Federal
Arbitration Act embodies a strong federal policy favoring arbitration.
See Southland Corp. v. Keating, 465 U.S. 1, 104 S. Ct. 852 (1984).
Thus, waiver of a contractual right to arbitrate under the FAA is disfavored and any examination of whether there has been a waiver must
be “conducted in light of the strong federal policy favoring enforcement of arbitration agreements.” See Fisher v. A.G. Becker Paribas
Inc., 791 F.2d 691 (9th Cir. 1986); St. Agnes Medical Center v.
Pacificare of California, 31 Cal.4th 1187 (2003).
It is the burden on the party claiming any waiver of an arbitration
clause to prove the waiver by clear and convincing evidence and that
party must show 1.) the movant’s knowledge of an existing right
to compel arbitration; 2.) acts inconsistent with invoking that right;
and 3.) prejudice to the non-moving party. Likewise, simply participating in litigation of an arbitrable claim does not in and of itself
waive a party’s right later to seek arbitration. See ATSA of California
Inc. v. Continental Insurance Co., 702 F.2d 172 (9th Cir. 1983);
Groom v. Health Net, 82 Cal.App.4th 1189 (2nd App. Dist. 2000).
Furthermore, most courts hold that simply incurring legal fees is not
sufficient to show prejudice. There must be more than incurring legal
fees and costs to demonstrate prejudice.
However, there are situations where prejudice does exist. For
example in Christensen v. Dewor Developments, 33 Cal.3d 778 (1983),
a defendant made a showing that a delay in exercising an arbitration
clause by the party requesting arbitration resulted in lost evidence.
This was considered to be prejudice resulting in a waiver of the right
to arbitrate. In Guess?, Inc. v. Superior Court, 79 Cal.App.4th 553
(2000), a court held that the defendant waived its right to compel arbitration because it failed to explain why it deferred seeking arbitration
for three months, failed to raise the affirmative defense of arbitration
in its answer, and participated in the discovery process by objecting to
propounding party’s interrogatories and document requests.
Likewise, in Adolph v. Coastal Auto Sales, Inc. 184 Cal.App.4th
1443 (2010), a court found that an automobile dealership’s partici-
pation in the judicial process and six-month delay in seeking arbitra-
tion prejudiced the car buyer and thus constituted a waiver of the
dealership’s rights to arbitrate the buyer’s claims. In Sobremonte v.
Superior Court, 61 Cal.App.4th 980 (1998), a court held that the
defendants engaged in discovery procedures that were more expan-
sive than those available through arbitration and the defendant moved
to compel arbitration only a month before trial and six months after
answering the complaint. Therefore, the court held that the arbitra-
tion clause was waived by the defendants’ conduct.
If a lessor or lender wants to either proceed with arbitration or
chooses to enforce a forum selection clause, this decision should
be made at the earliest time possible in order to avoid claims of
waiver, estoppel or having a court rule that it is unreasonable to
enforce the provision because of extensive litigation…
The bottom line is that the situations where conduct has resulted
in the waiver of an arbitration clause are very fact specific and courts
have a considerable amount of discretion as to whether there has
been a waiver of the right to arbitration, even though there is a strong
presumption in favor of no waiver of arbitration if a party elects to
arbitrate despite its initial election to commence litigation.
Conclusion
Based on the foregoing, if a lessor or lender wants to either proceed
with arbitration or chooses to enforce a forum selection clause, this
decision should be made at the earliest time possible in order to avoid
claims of waiver, estoppel or having a court rule that it is unreasonable to enforce the provision because of extensive litigation in court
and, as a result, the other party has been prejudiced by the conduct.
In today’s economy, it is not surprising that a jury will rule against
a financial institution simply because of the negative perception of
financial institutions, which may have absolutely nothing to do with the
case before the court. Therefore, careful drafting and use of judicial
reference, arbitration, jury trial waivers (where they are enforceable)
and forum selection clauses placing the lender or lessor in a more
creditor friendly environment should be used whenever possible. m
ANDRE W K. ALPER is a partner with the law firm of Frandzel Robins
Bloom & Csato, LC in Los Angeles. Alper has been representing equipment lessors, funding sources and other financial institutions since
1978. Alper obtained his Bachelor of Arts degree in Political Science,
magna cum laude, from the University of California at Santa Barbara,
and received his Juris Doctor from Loyola Marymount University
School of Law making the Dean’s List. Alper’s practice emphasizes
the representation of equipment lessors and funding sources in all
aspects of equipment leasing including litigation, documentation,
bankruptcy and transactional matters. Besides representing equipment lessors and funding sources, Alper represents banks and other
financial institutions in the area of commercial litigation, insolvency,
secured transactions, banking law, real estate and business litigation.
