Claimant Did Not Waive Arbitration Provision By Bringing An Action But Dismissing it Less Than a Month Later

On January 21, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Alayev v. Hardoon, 2020 NY Slip Op. 30139(U), holding that a claimant did not waive an arbitration provision by bringing an action but dismissing it less than a month later, explaining:

On May 13, 2019, Mr. Alayev commenced an action in New York County Supreme Court captioned, The Shake and Burger Bar, Inc. and Sion Alayev v. 344 Restaurant Group LLC and Jeffrey Hardoon, Index No. 652862/2019 (the First Action). The complaint from the First Action asserted claims for (1) breach of contract, (2) breach of the April 2018 agreement, (3) promissory estoppel, (4) breach of fiduciary duty, (5) breach of the implied covenant of good faith and fair dealing, (6) conversion, (7) unjust enrichment, and (8) violation of RP APL § 853. The First Action was discontinued without prejudice on June 9, 2019 without any motion practice, discovery or other court action having taken place.

On June 11, 2019, after the First Action was discontinued, Mr. Alayev served Mr. Hardoon with a Demand to Arbitrate pursuant to sections 14.1 and 14.11 of the Agreement. By email, dated of even date therewith, counsel for Mr. Hardoon responded: "Client rejects your demand to arbitrate categorically." On June 19, 2019, Mr. Alayev served Mr. Hardoon with another Demand to Arbitrate pursuant to CPLR § 7503(c) and § 14.11 of the Agreement. On June 20, 2019, Mr. Alayev filed this Verified Petition to (i) compel arbitration, (ii) recover costs and attorney fees incurred in bringing the Petition, and (iii) stay this action in lieu of dismissal.

A contractual provision for arbitration may be waived or abandoned and such waiver may be evidenced by the pursuit of judicial relief rather than arbitration. A party's commencement of an action at law involving the same claim as that in arbitration may constitute a waiver of that party's rights to seek arbitration. However, as the Court of Appeals has noted, not every foray into the courthouse effects a waiver of the right to arbitrate. Rather, courts must consider the amount of litigation that has occurred, the length of time between the start of litigation and the arbitration requests, and whether prejudice has been established. Typically, waiver cannot be established in the absence of prejudice. Such prejudice may be substantive prejudice or prejudice due to excessive cost and time delay. Neither prejudice is established here. Moreover, the amount of litigation in the First Action was virtually nonexistence, and only a month passed between the start of litigation and arbitration request. Under such circumstances, waiver cannot be established. There are no alternative grounds to prevent arbitration.

Notwithstanding the hyper-technical point that the notice while sent to Mr. Hardoon directly as required by the notice provision set forth in the Agreement did not indicate that it was sent to the seller and not Mr. Hardoon personally (i.e., which specification was not required by the notice provision itself), the demand to arbitration unquestionably complied with the notice provision set forth in the Agreement.

(Internal citations omitted).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.