Statutes of limitations provide peace of mind for many attorneys and clients, knowing previous conduct cannot lead to liability after a prescribed time period. But, do statutes of limitations apply to arbitration proceedings? The answer is: not necessarily. Because of that, advocates and parties need to know when statutes of limitation may apply as well as how they can revise their arbitration clauses to avoid this confusion.
The benefits of applying the statute of limitations to arbitration procedures are clear. However, it is often unclear whether a state will apply a time bar to arbitration actions. Neither the Federal Arbitration Act (FAA) nor the Revised Uniform Arbitration Act (RUAA) has a statute of limitations, so the arbitrator must look to state law to apply a time bar. When drafting the arbitration clause, or preparing for arbitration, there are three sources to review to determine whether a statute of limitations applies:
- The state’s relevant statute of limitations, to see if it expressly applies to arbitration proceedings;
- The case law in the relevant jurisdiction, deciding whether the statute of limitations applies in arbitration; and
- The Uniform Commercial Code.
1. State Statutes Expressly Applying the SOL to Arbitration Proceedings
Only three states have passed laws expressly applying the statute of limitations to arbitration. These states are New York (N.Y. C.P.L.R. § 7502 (McKinney 2016)), Georgia (Ga. Code Ann. § 9-9-5 (2016)), and Washington (Wash Rev. Code § 7.04A.090(3) (2016) (overturning Broom v. Morgan Stanley DW Inc., 236 P.3d 182 (Wash. 2010))). All three states prohibit an arbitration action if the same claim could not be brought in court.
Washington’s statute, for example, reads, “A claim sought to be arbitrated is subject to the same limitations of time for the commencement of actions as if the claim had been asserted in a court.” Clearly, these statutes of limitations apply to arbitration proceedings governed by the state law of those states.
2. State or Federal Decisions Regarding Whether to Apply the SOL to Arbitration
If the relevant statute does not explicitly apply to arbitration proceedings, it is important to see how the common law has treated this question. Some state courts have already decided whether arbitrations should have a limitations period. These states include: California, Connecticut, Florida, Idaho, Indiana, Maine, Massachusetts, Michigan, Minnesota, North Carolina, and Ohio. All of these states, except Florida, do not apply the statute of limitations to arbitrations.
The courts’ rationale for refusing to apply the time bar usually notes the simplicity of arbitrations compared to judicial proceedings. One purpose of arbitration is quick and simple resolutions without as many formal rules. Many courts view the statute of limitations as one of the formal, rather than substantive, rules that is lost when deciding to arbitrate.
For example, the court in NCR Corp. v. CVS Liquor Control, Inc., 874 F. Supp. 168, 172 (S.D. Ohio 1993) found the relevant statute of limitations did not apply to arbitration claims. It reasoned the “statute of limitations is to bar an action at law, not arbitration.” Similar to other decisions on this issue, the court said an arbitration is not an “action.” The opinion noted how parties could have included a provision in the arbitration clause limiting the time to bring an arbitration proceeding.
Florida, however, took the opposite stance in Raymond James Financial Services, Inc. v. Phillips, 126 So. 3d 186 (Fla. 2013). In this case, the court held the statute of limitations applied in arbitration. The lower court granted the plaintiff’s motion declaring the arbitration was not time barred. The Florida Supreme Court reversed, finding the term “action” in the statute of limitations includes arbitration because arbitration is considered a “civil action or proceeding.” Along with statutory interpretation, the court also relied on principles of fairness, noting a statute of limitations protects the defendant from being at a disadvantage due to untimely claims.
3. The UCC’s Statute of Limitations
The UCC bars bringing an “action” after four years. It defines action in § 1-201(b)(1) as a judicial proceeding and “any other proceeding in which rights are determined.” There is a strong argument that an arbitration is a “proceeding in which rights are determined,” thereby allowing the application of the limitations provisions. No courts discuss the Uniform Commercial Code’s statute of limitations provision in the context of arbitration. However, if the law in the governing jurisdiction is not clear, it may be beneficial to consider arguing for the UCC’s four-year limitation provision, if your dispute is governed by the UCC.
In order to qualify for this time bar, the dispute must revolve around a contract governed by the UCC. The UCC has three statutes of limitations provisions: §§ 2-725, 2A-506, and 3-118. Section 2-725 applies to contracts for the sale of goods, section 2A-506 applies to lease contracts, and section 3-118 governs negotiable instruments.
Practice Tip – Including a Limitations Period in the Arbitration Clause
Because many states have not addressed this issue, it can be very difficult to predict whether the general statute of limitations in the applicable state will apply to your dispute. The easiest and most effective way to stay out of this confusion is to include a limitations provision in the arbitration agreement itself. With the only qualification that the time limit be “reasonable,” this practice ensures there is some time limit applicable to the arbitration.
Here are two examples of limitation provisions for the arbitration clause:
“Any demand for arbitration under this Agreement must be made before the statute of limitations applicable to such a claim has run.”
“Any demand for arbitration must be made within one year of discovery, or the claim will be deemed waived.”
Don’t be SOL! Always check whether the statute of limitations applies to your arbitration proceeding, and always put a time limit for bringing an action in your arbitration clause. There are no hard and fast rules to know when they apply and when they do not, but a simple search could save you from losing your action and your client’s money.