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The Alabama Supreme Court Allows a Second Bite at the Arbitration Apple

The Alabama Supreme Court Allows a Second Bite at the Arbitration Apple[1]

Could a failure to participate in a court-ordered arbitration be enough to waive a party’s right to arbitration?  A recent decision of the Alabama Supreme Court suggests it is not.

In 2010, Yan Chen entered into a lease agreement with Russell Realty to lease property located in Greenville, Alabama. The lease, drafted by Russell Realty, included an arbitration clause which provided that any dispute or controversy that arose out of the lease agreement must first be mediated, and if not resolved in mediation, then submitted to binding arbitration.

In June of 2012, Russell Realty sued Chen, and others, for breach of contract. After Chen failed to answer the complaint, Russell Realty filed a motion for default judgment. Chen then answered and later filed a motion to compel arbitration pursuant to the lease agreement. The trial court stayed all matters for 180 days pending the outcome of arbitration. None of the parties made any effort to seek arbitration during the stay.

The trial court then ordered the parties to mediation pursuant to the terms of the lease. Chen was the only defendant to participate in the mediation, through her attorney. The mediation failed and Russell Realty filed a motion for sanctions against the other defendants for failing to appear at the mediation. The trial court denied the motion for sanctions, but entered a default judgment against the other defendants and set the matter for “final hearing.” The trial court subsequently entered judgment against all the defendants in the amount of $682,050.10 and Chen appealed.

On appeal, the Alabama Supreme Court determined that Chen, despite making no efforts to arbitrate the dispute during the stay, never waived her right to arbitration. When the mediation failed, the trial court improperly reinstated the case and entered default judgment, instead of ordering the parties to arbitration, pursuant to the terms of the lease. As such, the Alabama Supreme Court reversed the $682,050.10 judgment as to Chen and remanded the case for the trial court to enter an order requiring arbitration. In conclusion, this case is a good reminder that not only do courts tend to favor alternative dispute resolution, they also strictly adhere to the terms of a contract.

Matthew A. Barley

Claims for Spoliation of Evidence

[1] Chen v. Russell Realty, LLC, 2015 Ala. LEXIS 114 (Ala. Sept. 18, 2015).