It is well established that courts generally enforce the strong federal policy in favor of arbitration. That is not to say, however, that a court will automatically dismiss a case subject to an arbitration clause in favor of alternate dispute resolution. Before doing so, the court must first determine whether a party has relinquished its right to arbitrate and what standard to use in making that determination. Section 3 of the Federal Arbitration Act (FAA), 9 U.S.C. § 3 , states that where there is an agreement to arbitrate, the court should stay the action pending arbitration "providing the applicant for the stay is not in default in proceeding with such arbitration." Default, however, is not defined by the FAA. Instead, the standard a court will use to determine whether a party is in default will vary depending upon jurisdiction.
Two recent federal circuit court cases interpreting default under the FAA appear facially inconsistent. Taken together, however, these cases reinforce the view that prejudice to the party opposing arbitration is the key factor; and they may offer litigants guidance in understanding what may constitute waiver of the right to arbitrate.