The New Jersey Appellate Division decided Delam Construction v. 15 Thornton Road on December 10, 2007.  The parties had entered into a contract for Delam to construct a building.  Defendant, Thornton, owed Delam a balance of $187,368 for Delam’s work on the project.  Delam filed suit for breach of contract and later added Thornton’s managing member as a defendant.

Thornton counterclaimed alleging construction deficiencies.

Discovery took place and trial was scheduled more than one year after the complaint was filed.  By then, defendant had obtained new counsel, trial was adjourned and the court sent the matter to arbitration after defendant’s new attorney raised for the first time an arbitration clause in the original contract.  Plaintiff alleged that defendant had waived its right to arbitration by participating in the litigation for over one year.  The court examined the competing interests between, on the one hand, favoring commercial arbitration as a speedy and inexpensive alternative to litigation, particularly in construction contract disputes, and on the other hand, whether the active and prolonged litigation resulted in a waiver of the right to compel arbitration.

The court noted an earlier decision where a trial judge’s compelling arbitration nearly five years after the original complaint, was rejected.

After wrestling with the issue of when a waiver has occurred, the court ruled in favor of allowing the matter to proceed to arbitration.

The court relied upon “prejudice” as the “touchstone” for determining when a waiver has occurred.  The court was influenced by the perceived lack of prejudice to plaintiff given that much of the same information generated through discovery would be admissible in the arbitration.  The court was also persuaded by the assumed knowledge by plaintiff that by filing in court, plaintiff was ignoring the mandatory contractual arbitration provision.  Finding neither side blameless, the court directed the matter to arbitration.

The court recognized this was a difficult choice.  Parties litigating in this area should be mindful that there are federal cases which hold otherwise.  As always, the ultimate outcome was somewhat case specific and fact sensitive.