The common practice of inserting mandatory binding arbitration clauses into commercial contracts may have the unintended consequence of precluding the assertion of a statute of limitations defense in the arbitration itself.
Indeed, several courts have held that statutes of limitations do not apply in arbitration proceedings which, by their nature, are creatures of contracts between private parties rather than “actions” in a court of law. The reasoning is that statutes of limitation typically preclude the filing of an “action” after a certain period of time has expired. Additionally, the term “action” is sometimes statutorily defined, or even commonly understood, to include proceedings in a court of law. Because arbitrations are not proceedings in a court of law, arbitrators and reviewing courts are oftentimes reluctant to apply statutes of limitations periods to arbitration proceedings.
OHIO STATUTES DEFINE “ACTION” AS A PROCEEDING IN A COURT OF LAW
Ohio’s statutes of limitations are illustrative of this point. For example, Ohio’s securities fraud statute of limitations provides: “No action for the recovery of the purchase price as provided for in this section, and no other action for any recovery based upon or arising out of a sale or contract for sale made in violation of Chapter 1707 of the Revised Code, shall be brought more than two years after the plaintiff knew, or had reason to know, of the facts by reason of which the actions of the person or director were unlawful, or more than five years from the date of such sale or contract for sale, whichever is the shorter period.” O.R.C. §1707.43 (emphasis added).
Ohio’s statute of limitations for torts such as fraud and breach of fiduciary duty also applies expressly to the commencement of “actions.” O.R.C. §2305.09. Similarly, O.R.C. §2305.06 provides that “actions” based upon written contracts must be commenced within eight (8) years after the cause of action accrues.
In Ohio, the term “action” is defined by statute. It means a “proceeding in a court of justice, involving process, pleadings, and ending in a judgment or decree, by which a party prosecutes another for the redress of a legal right, or the punishment of a public offense.” O.R.C. §2307.01 (emphasis added). Given its function and composition, clearly an arbitration proceeding is not a “proceeding in a court of justice.” It often does not involve the formal service of process or the filing of pleadings as would occur in a court proceeding.
Ohio courts have held in several instances that proceedings occurring outside a courthouse are not “actions” and that statutes applicable to actions are therefore not applicable to non-court proceedings. Gregory v. Ohio Bureau of Workers Compensation, 115 Ohio App.3d 798, 686 N.E.2d 347 (10th Dist.1996) (“the term ‘action’ has ‘acquired a technical and particular meaning,’ as plaintiff asserts and the trial court found: it involves proceedings in a court of law.”).
OTHER JURISDICTIONS HAVE REFUSED TO APPLY LIMITATIONS PERIODS TO ARBITRATIONS
While the argument is somewhat untested in Ohio, decisions interpreting similar language have refused to apply statutes of limitations pertinent to “actions” in arbitration proceedings. For example, in Cameron v. Griffith, 91 N.C.App. 164, 370 S.E.2d 704 (1988), the court held that the applicable statute of limitations applies only to an “action” or “judicial proceeding” and an arbitration is “neither an ‘action’ nor a ‘judicial proceeding,’ but a non-judicial, out-of-court proceeding which makes an action or judicial proceeding unnecessary.”
Similarly, in Har-Mar, Inc. v. Thorsen & Thorshov, Inc., 300 Minn. 149, 218 N.W.2d 751 (1974), the Minnesota Supreme Court held that the relevant statute of limitations did not apply to arbitration because arbitration fell outside the statutory and common law meaning of the term “action.”
However, not every jurisdiction refuses to qualify arbitration as an action. In Raymond James Fin. Servs. v. Phillips, 126 So.3d 186 (Fla. 2013), the Florida Supreme Court held that Florida’s statute of limitations did apply in arbitration proceedings. The court reasoned that “action” was defined by Florida law to include a “civil action or proceeding.” The court determined that arbitrations fall within the meaning of “proceeding” and held that Florida’s limitations period should apply.
In Washington, the legislature amended the state arbitration laws to make it expressly clear that statutes of limitation should apply in arbitration proceedings. The legislature reacted to a decision from the Washington Supreme Court, Broom v. Morgan Stanley DW, Inc., 169 Wash.2d 231, 236 P.3d 182 (2010), which held that the relevant statute of limitations did not apply to arbitrations because arbitrations are not “actions.”
CONTRACTING PARTIES MUST CAREFULLY WORD THEIR ARBITRATION AGREEMENTS
Contracting parties must carefully consider whether they want statutory limitations periods to apply to future disputes. In many jurisdictions, freedom of contract principles allow parties to establish their own limitations periods. In others, parties can simply expressly agree that the statute of limitations established by the relevant state and federal laws will apply in any arbitration proceeding.
In order to avoid the nuisance and cost of stale claims down the road, parties must address the potential application of statutes of limitations to their agreements to arbitrate. This will give clarity and finality to your commercial business endeavors, and eliminate indefinite risk should issues arise in the future.