May 10, 2012 Articles

    Waiver of Right to Compel Arbitration Does Not Bind Agent

    By Nicholas K. Holmes and Cori Phillips Palmer

    It is well established that a party with a contractual right to arbitration may waive that right through express words or active participation in litigation. Few courts, however, have analyzed whether a principal's waiver of its arbitration rights precludes the principal's agent from asserting a right to arbitration based on the same agreement.

    Lemon Drop Properties v. Pass Marriane, LLC
    Recently, the Mississippi Supreme Court addressed that issue and held that a principal's waiver of its arbitration rights had no effect on the arbitration rights of the principal's agent, even where those rights were derivative of the principal. Lemon Drop Properties v. Pass Marriane, LLC, 73 So.3d 1131 (Miss.2011), arose out of a construction-defects dispute relating to a condominium project. The contract between the purchaser and the contractor-seller required all disputes to be submitted to arbitration, and expressly recognized that the contractor-seller's real-estate broker would act as its agent. After the project was completed, the purchaser filed suit against the contractor-seller, claiming damages due to defects in the project's design and construction. In response, the contractor-seller filed an answer and a counterclaim, but failed to invoke arbitration. Six months later, the purchaser filed an amended complaint adding the real-estate broker as a defendant. The broker promptly moved to compel arbitration. The trial court granted the broker's motion, and the purchaser brought an interlocutory appeal on the grounds that the right to arbitration had been waived by the contractor-seller.

    The Mississippi Supreme Court held that the contractor-seller waived its right to arbitration by failing to raise it as an affirmative defense and actively participating in the lawsuit. The contractor-seller's waiver, however, had no impact on the broker's ability to assert its right to arbitration. The court rejected the purchaser's argument that as a non-signatory the broker had no right to arbitration. Instead, the court held that as an agent expressly recognized in the agreement, the broker had an independent right to assert arbitration over claims arising from the agreement.

    The court further rejected the purchaser's argument that the contractor-seller's waiver of arbitration was binding on the broker. For guidance, the court looked to an earlier Mississippi case, Am. Family Life Assurance of Columbus v. Ellison, 4 So.3d 1049 (Miss. 2009), which held that the decision to challenge venue was a personal decision that could not be waived by another defendant. In Lemon Drop, the court reasoned that the exercise of the right to arbitrate is a strategic decision and is therefore also personal in nature. The court concluded that the logic of Ellison was controlling, and the actions of one defendant could not operate as a waiver of the rights of another defendant.

    Lemon Drop Dissent
    One justice dissented; writing that the majority's reliance on Ellison was misplaced because arbitration is a purely contractual right that is governed by the laws of agency. Thus, the broker "stepping into the shoes of [the seller] had no right to assert a separate right to arbitration for actions taken solely as the agent of [the seller] where [the seller] had chosen to waive that right."

    Approach of Other Jurisdictions
    Courts in two other states have addressed this issue and reached the same result as Lemon Drop, but on different logical grounds. In Kiskadee Commc'ns v. Father, 2011 WL 1044241 (N.D. Cal. March 22, 2011), the Northern District of California relied solely on agency law in refusing to impute a principal's arbitration waiver to its agent. In sharp contrast to the Lemon Drop dissent, the Kiskadee court held that although the actions of an agent may bind a principal, the actions of a principal may not bind its agent. The decision of the Court of Appeals of Texas, in Garcia v. Huerta, 340 S.W. 3d 864 (Tex. App. 2011), focused on the legal requirements for the waiver of a right, holding that the waiver of any right may only be achieved through the personal acts and expressions of each defendant.

    Conclusion
    It is unclear whether other jurisdictions will reach the same conclusion as the Mississippi Supreme Court if they are confronted with the same issue. While there is extensive law establishing the circumstances under which a principal may be bound by the acts of its agent, the converse is not true; the Restatement (Third) of Agency provides no guidance on whether a principal may bind an agent. Additionally, as evidenced by the dissonance between the Lemon Drop dissent and the Kiskadee majority, the proper application of agency law to this issue is disputed.

    Keywords: litigation, alternative dispute resolution, agent-principal, arbitration, right to arbitration waiver, waiver