Supreme Court of Vermont Holds That Contractor Waived its Right to Challenge the Validity of Arbitration Agreement by Actively Participating in the Arbitration for Six Months Before Raising an Objection

Adams v. Barr, 2018 VT 12, 2018 Vt. LEXIS 10 (VT 2018)

On February 24, 2016, Barr Law Group (“Barr”) filed a demand for arbitration with the American Arbitration Association to recover $40,000 in unpaid legal fees from its client, Adams Construction VT, LLC (“Adams”).  Adams responded by filing an answer and counterclaim, seeking to recover $97,000 in damages from Barr.  Thereafter, Adams and Barr each actively participated in the arbitration, including arbitrator selection, preliminary conferences, extensive discovery and motion practice over a period of more than five months.  At the request of Adams, the matter was set for a three day hearing.

In October of 2016, just one week before the three day hearing was set to begin, Adams filed an objection and motion to dismiss the arbitration, arguing that the arbitration clause in its fee agreement with Barr was unenforceable.  Specifically, Adams argued that Barr, as Adams’ counsel, owed a fiduciary duty and ethical obligations that required it to disclose to Adams the rights it would forego by signing the agreement.  According to Adams, Barr had failed to explain the legal implication of the arbitration clause and failed to advise Adams to obtain independent counsel before signing the agreement.  However, Adams’ objection and motion to dismiss was the first time it had raised any objection to the arbitration proceedings.  

The arbitrator denied the motion and, after a hearing on the merits, awarded damages to Barr.  Adams then filed an action with the superior court to vacate the award on the basis that the arbitration agreement was unenforceable.  The court, however, agreed with Barr that Adams’ active participation in the arbitration proceedings over the course of several months was a waiver of Adams’ challenge to the validity of the arbitration agreement.

On appeal to the Supreme Court of Vermont, Adams emphasized that the Vermont Arbitration Act permits a court to vacate an award where there is no valid arbitration agreement “and the party did not participate in the arbitration hearing without raising the objection.”  Accordingly, Adams argued that the challenge is preserved if it is raised at any time before the hearing.

The Supreme Court denied Adams’ appeal, reasoning that its active participation in the arbitration proceedings over the course of several months constituted a waiver of its objection.  The Supreme Court relied on its decision in Joder Building Corp. v. Lewis, 153 Vt. 115 (1989), where it had declined to vacate an arbitration award because the homeowner failed to object to the arbitration until after the claimant filed an action in court to confirm the award.  While noting that Joder was not directly on point, the Supreme Court reasoned that Joder supports the proposition that a party should not be entitled to “raise threshold objections to the validity of the arbitration proceeding itself only after substantial participation in the proceeding.”  The Court also cited to several cases from other states that have “likewise invoked waiver or estoppel principles to preclude challenges to arbitration agreements raised after some participation in the proceedings, but before the actual arbitration hearing.”

Ultimately, the Court held that the trial court had the discretion to determine when a party has waived its challenge to arbitration through active participation in the proceedings.  In this case, Adams’ “participation in the selection of arbitrators, filing of an answer and counterclaims, and active participation in extensive discovery and motion practice over a period of nearly six months was more than sufficient to give rise to a waiver.”

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Kristopher Berr

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