Unwritten Agreement to Arbitrate Enforceable, But Waived by Defendant's Assertion of Claims in Lawsuit

On February 19, 2014, the Second Department issued a decision in Willer v. Kleinman, 2014 NY Slip Op. 01164, reversing a trial court order compelling arbitration and instead finding that while the parties were bound by their oral agreement to arbitrate, the defendant had waived its rights under that oral agreement.

Willer was "an action to recover damages for breach of contract" relating to the renovation of a "residential property in Brooklyn." The parties' written contract

made no mention of arbitration. In a summons dated July 27, 2011, a rabbinical court summoned [the defendant] to appear before it on August 4, 2011, at the request of [one of the plaintiffs], to arbitrate a claim for $225,000 in damages allegedly incurred as a result of fraud, overcharging, damages to property, repairs. [The defendant] claimed that he appeared before the rabbinical court on August 4, 2011, and agreed to arbitrate the dispute. However, the parties did not proceed to arbitration, and approximately eight months later, the plaintiffs commenced this action to recover damages for breach of contract.

The defendants answered, "raising as an affirmative defense that" the parties had "agreed to arbitrate. The defendants also docketed a mechanic's lien against the property for $50,581.19, which they claimed was due and owing for work performed, and counterclaimed for that amount. Along with their answer, they submitted their first set of interrogatories, which the plaintiffs answered. Thereafter, the defendants moved to compel the plaintiffs to proceed to arbitration, and for a protective order, inter alia, striking the plaintiffs' discovery demands." The trial court granted the motion to compel arbitration with respect to the plaintiff who had initiated the arbitration.

The Second Department reversed, explaining:

Although there was no written agreement to arbitrate in this case, where one party demands arbitration, and the other party accepts the demand, an oral agreement to arbitrate may be formed. Oral agreements to arbitrate are not covered by CPLR article 75, and are referred to as "common-law arbitration" agreements. Here, it is undisputed that Justin Willer invited Kleinman to proceed to arbitration, and Kleinman accepted that invitation, forming an oral agreement to arbitrate, which was enforceable.

However, the defendants, by their conduct in this lawsuit, waived arbitration. There is no inflexible or mechanical rule as to what constitutes a waiver of the right to arbitrate. Rather, determination of the issue depends on the facts and circumstances of each particular case. Among the factors to be considered are the extent of the party's participation in litigation and conduct inconsistent with the assertion of a right to arbitrate, the delay in seeking arbitration, and whether the other party has been prejudiced.

While a party who commences an action waives arbitration, the same cannot be said for a defendant. A defendant who submits an answer, or submits a pre-answer motion to dismiss the action, does not waive arbitration, especially if the arbitrability of the controversy is asserted as a ground to dismiss the action. However, in the instant case, the defendants asserted counterclaims related to issues in the main action, against both plaintiffs, including Nadia Willer, who is united in interest with Justin Willer, but is not a party to any arbitration agreement. Further, the defendants sought and obtained discovery. Although it is not clear from the record why the parties never proceeded to arbitration in August 2001, after Kleinman agreed to do so, there is no indication that Kleinman took any steps to expeditiously proceed to arbitration. The delay in seeking to proceed to arbitration is another factor to consider.

(Internal quotations and citations omitted) (emphasis added).

This decision illustrates both the possibility of there being an unwritten arbitration agreement and the factors that can lead a court to decide that a defendant has waived its right to demand arbitration.