Editor’s note: This article describes a hypothetical situation.

ADR

Bob’s client, Roger, came to Bob with a tale of woe. More than five years ago, Roger entered into a service contract with Alan. Roger completed the requested work, Alan paid the amount due, and the matter was over — seemingly. Except that a few months later, Alan contacted Roger and began whining. “The work was lousy,” Alan asserted. “The bills were too high,” Alan complained. “You did not do what you were supposed to do,” Alan grumbled.

These missives continued every few months. Year after year. At first, Roger responded to Alan, point by point, detailing everything he had done and showing how he had done exactly what the contract said. But Alan continued to gripe.

Finally, Alan filed an arbitration demand, in accordance with the arbitration provision that Bob had drafted, and sought direct damages, indirect damages, special damages and consequential damages. Roger did not know that there were so many kinds of damage. But Roger was relieved. The demand would bring everything to a head.

Then Bob stepped in. “Too late. We will win for sure.” As Bob explained, the statute of limitations in a contract action is four years and Alan filed his arbitration demand more than four years after the parties signed the contract, more than four years after Roger completed the work, and more than four years after Alan paid the final amount due.

In response to the arbitration demand, Bob insisted on a preliminary case management conference with the arbitrator. Bob explained he wanted to file a motion to dismiss, based on the applicable statute of limitations, as quickly as possible. The parties agreed on a briefing schedule, and Bob then filed a two-page motion that stated the obvious: (a) as reflected in his own arbitration demand, Alan filed more than four years after Roger completed the work and Alan paid for the work; and (b) the applicable statute of limitations in a contract action is four years.

A month later, the arbitrator denied the motion. Yes, the arbitrator agreed, Alan filed the demand more than four years after Roger completed the work and more than four years after Alan paid for the work; there was no contested issue of fact on those points. Plus, the arbitrator agreed, the statute of limitations applicable to a breach of contract action is four years. Except, the arbitrator continued, this was not a breach of contract action; it was a breach of contract proceeding. An arbitration proceeding to be exact. And, the arbitrator concluded, a state statute of limitations does not apply to an arbitration proceeding absent the agreement of the parties.

Was the arbitrator off base? Does the statute of limitations apply in an arbitration proceeding? What are Roger’s chances of vacating any arbitration award that the arbitrator enters in favor of Alan?

In Raymond James Financial Services v. Phillips, 2013 Fla. LEXIS 977 (May 16, 2013), the Florida Supreme Court considered whether Florida’s statute of limitations applies in an arbitration proceeding. The court noted that the applicable Florida statute of limitations applies to a “civil action or proceeding,” and that an arbitration “is a type of proceeding.” The court said all the right things about the purpose of a statute of limitations — that it protects defendants from unfair surprise and stale claims, and that these considerations apply with equal force in an arbitration proceeding. The court concluded that applying the statute of limitations in an arbitration proceeding makes perfect sense; if the statute of limitations did not apply, a party could — as Alan did here — “wait to bring an arbitration claim until documents or witnesses are difficult to locate — a situation that would significantly increase the time, effort, and expense to resolve a dispute.” For these reasons, the court held that “the legislature intended to subject arbitration proceedings to the statute of limitations.”

This opinion calmed Bob’s unsettled nerves and convinced him that he would be able to vacate any arbitration award against Roger. In fact, the applicable Pennsylvania statute of limitations, 42 Pa. Cons. Stat. Ann. § 5525, refers to “actions and proceedings” and, therefore, the statutory language is on Bob’s side.

However, not so fast. The Florida Supreme Court squarely held that the Florida statute of limitations applies in an arbitration proceeding brought in Florida. But what about an arbitration proceeding brought in Pennsylvania? Although Bob could not find any Pennsylvania law on this issue, he better not overlook Broom v. Morgan Stanley DW, 169 Wash. 2d 231, 236 P.3d 182 (2010). There, the Washington Supreme Court held that “state statutes of limitation may not apply to arbitrations absent the parties’ agreement [and, therefore, that] arbitrators [are] not authorized to apply those limits to [a claimant's] claims.” Unlike the statute of limitations in Florida and Pennsylvania, the Broom court considered a statute of limitation that referred only to “actions,” and did not mention “arbitration” or “proceedings.” In view of the more limited statutory language, the court concluded “that arbitration is not an ‘action’ subject to state statutes of limitations in these circumstances.”

The Washington Legislature was so upset by the Broom decision that it revised the Washington Uniform Arbitration Act, R.C.W. § 7.04A.090, to expressly provide that the statute of limitations applies in an arbitration proceeding: “A claim sought to be arbitrated is subject to the same limitations of time for the commencement of actions as if the claim had been asserted in a court.”

But the legislature’s action does not undermine the rationale of the Broom decision — that a court should look to the statutory language to determine whether the legislature intended the statute of limitations to apply to an arbitration proceeding.

In drafting arbitration agreements, therefore, Bob may well want to take an easy step to reduce the chance that an arbitrator — or a court upon review of the arbitration award — will disregard a statute of limitations. The Broom court provided an easy road map: “If desired, parties may agree contractually to the applicability of state statutes of limitations, in which case those limits would be applied by the arbitral panel.”

With more and more arbitrations involving multistate transactions and parties from different states, a contract drafter may not be able to identify, in advance, the state law that the arbitrator will apply. The result: The drafter cannot always say, with certainty, that the applicable state statute of limitation covers both “actions” and “proceedings.” If the applicable state statute of limitation makes no mention of arbitration or proceedings, the arbitrator may well refuse to apply a state statute of limitation and there is no chance a court will vacate the decision. So why not avoid this result in the arbitration provision? Do you want to end up like Bob? 

Charles F. Forer is a member in the Philadelphia office of Eckert Seamans Cherin & Mellott, where he practices all types of alternative dispute resolution, both as a neutral and as counsel to parties engaged in ADR. He is a former co-chair of both the Philadelphia Bar Association’s alternative dispute resolution committee and the fee disputes committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings. You can reach him at 215-851-8406 and cforer@eckertseamans.com.