Demanding that Lienor Sue

Waives Arbitration Right

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             Parties under a contract with an arbitration clause can waive the right to this alternate dispute resolution if their case in court has gone far enough to evidence an implicit waiver. The issuance of substantive rulings by the court are such evidence. 

            Can the mere demand to go to court also evidence such a waiver? Section 34 of the Illinois Mechanic’s Lien Act provides that when an owner, seeking to resolve the issue of an incumbrance on the land, makes a written demand on a lienor to “fish or cut bait,” i.e., foreclose on the lien, the lienor must sue to foreclose within thirty days.  Should the lienor neglect to get to the courthouse by this deadline, the lien rights are forfeited.

            In Illinois Concrete-ICI v Storefitters, Inc. and Tom Nesbitt, Jr., --- N.E.2d ----, 2010 WL 298565 (Ill.App. 2 Dist.), Illinois Concrete was not paid for hauling dirt and related materials and related services and was served with a Rule 34 demand.  When Illinois Concrete thereafter foreclosed on its lien in court, Nesbitt and Storefitters moved to compel arbitration, citing an arbitration provision in the parties’ contract. The trial court denied their motion, reasoning that the act of making a Section 34 demand waived the right to arbitration.  Defendants took an expedited appeal.

            The court of appeals agreed with the trial court.  Although arbitration agreements are strongly favored, the right may be waived.  Distinguishing the often cited La Hood case, in which the Rule 34 demand succeeded a subcontractor’s demand for arbitration, the appellate judges ruled that the filing of a Rule 34 demand was an act inconsistent with the right to seek arbitration.  Although defendants contended that Section 34 conferred a right “not cognizable in an arbitration proceeding,” the court held that defendants could have sought arbitration or served a Section 34 demand.  A party cannot do both.  Defendants also brought up a rule from the American Arbitration Association that no judicial proceeding by a party shall be deemed a waiver of the right arbitrate.  The court pointed to other cases applying this rule and found that the parties’ intent, ascertainable through their conduct, was material to the rule’s application.  The AAA rule was construed to apply only with the intent, i.e., in this case to litigate, given great weight.

2/15/10