Many business contracts include arbitration clauses, as arbitration offers several possible advantages over the traditional litigation process, like control over the nature, length and cost of the proceedings, and more finality over the outcome. The case of Bassem v. M.G.C.C. Group, Inc., et al., Superior Court of New Jersey, Docket No. L-1634-09, rev'd, Docket No. A-2311-12T4 (App. Div. Feb. 5, 2014), serves as a reminder that, if you find yourself in the middle of a lawsuit first wondering whether to invoke a contractual arbitration clause, it is likely already too late.

The facts were straightforward. Homeowners bought a home from a developer under an agreement of sale that contained an arbitration clause. Because of soil drainage issues, the homeowners sued the developer in state court. After three-plus years of litigation, the homeowners, with little explanation why, invoked the arbitration clause in the agreement of sale. The developer resisted on the grounds that the homeowners had waived their arbitration rights by availing themselves of the state court litigation process. The trial court disagreed, holding that the contract "calls for arbitration and the courts should enforce an arbitration provision."

Despite New Jersey's "strong preference to enforce arbitration agreements," the appellate division reversed, finding that the plaintiffs had waived their contractual right to arbitrate by engaging in litigation conduct "tangibly" inconsistent with an intent to invoke an agreement to arbitrate. It noted that the plaintiffs filed their complaint with a jury demand and without reference to arbitration; the defendant filed its answer to the complaint without seeking to enforce arbitration; the parties engaged in extensive fact and expert discovery; and the trial court monitored discovery and decided various discovery motions. This "skein of events" bespoke "plaintiffs' firm commitment to the litigation process, to the exclusion of other forms of compulsory dispute resolution."

Bottom Line: Bassem provides a good reminder that both plaintiffs and defendants should weigh the pros and cons of the arbitration process under the facts of a particular case as soon as a dispute develops.