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The Enforceability and Applicability of a Statute of Limitations in Arbitration Craig P The Enforceability and Applicability of a Statute of Limitations in Arbitration Craig P. Miller and Laura Danysh rbitration clauses within Given that the stated purpose of arbitration is to promote franchise agreements typ- speed and efficiency, and not to be preoccupied with formal A ically identify the forum rules, it should not come as a surprise that statute of limita- in which future disputes will be tions defenses are not presumptively enforceable in arbitra- resolved. Although many fran- tion. As discussed more thoroughly below, a statute of chise agreements contain choice limitations may only apply in arbitration in limited circum- of law provisions, they rarely con- stances, such as when (1) a state statute expressly provides for tain language specifying which their applicability, (2) a state statute implicitly provides for state statute of limitations, if any, their applicability, or (3) the parties expressly agree, by con- will apply to the dispute. The tract, that they will be applied in arbitration. Further, because absence of such language, much of the strong policy favoring arbitration, it is also not surpris- to the surprise of the parties to Craig P. Miller ing that, absent a clear intent from the parties otherwise, the these agreements, may lead to a arbitrator is the decision maker on the applicability of statute court or arbitral ruling that stat- of limitations. utes of limitations do not apply to This article will discuss and examine (1) whether statute of the parties’ dispute. limitations issues are presumptively arbitrable, (2) whether the Equally surprising to the par- arbitrability of a statute of limitations issue is affected by a ties may be who is determined to choice of law clause selecting the law of a state that provides be the decision maker on statutes for judicial determination of statute of limitations issues, of limitations. Specifically, before (3) the limited circumstances in which a statute of limitations the issue of whether a party can defense may be applied and enforced in arbitration, and rely on a statute of limitations as a (4) whether a provision in a franchise agreement that attempts defense in arbitration is decided, a to modify a statutory limitations period is enforceable. determination must be made as to whether a court or the arbitrator Laura Danysh Who Decides the Applicability of Statute will resolve the issue. of Limitations Periods? Why is a statute of limitations defense enforceable in court One of Congress’s stated purposes in enacting the Federal but not in arbitration? And why is there conflict over whether Arbitration Act (FAA) was to move parties “out of court and a court or an arbitrator determines the enforceability of a into arbitration as quickly and easily as possible.”1 Since the statute of limitations defense in arbitration? To answer these enactment of the FAA, the Supreme Court has without questions, a review of the significant differences that exist exception supported arbitration, which has led to a dramatic between the court process and the arbitration process is increase in the number and scope of arbitrations. Corre- appropriate. The key features of the arbitration process can spondingly, however, there has been an increase in the amount be summarized as follows: of litigation over whether parties have agreed to arbitrate cer- • The purpose of arbitration is to promote speed and effi- tain issues, such as the timeliness of claims. Although arbitra- ciency; tion is intended to provide an efficient mechanism for resolving • Arbitrators are not bound by formal rules of procedure disputes, too often the parties engage in extensive litigation and evidence; over the proper forum for resolving their dispute. This trend is • Discovery is generally limited in arbitration (e.g., depo- evidenced by the increasing number of disputes that arise sitions are often not permitted or are limited in number, over whether parties have agreed to arbitrate the applicability and written interrogatories are generally not allowed); of time bars or have instead intended those decisions to be • Arbitrators are not required to sacrifice speed and/or made by a court. The conflicts over statute of limitations informality in order to permit a party to introduce every issues have undermined Congress’s goal of moving parties piece of relevant evidence; and into arbitration, as parties often spend substantial time and • Arbitrators will often favor the broad principles of “jus- money in court litigating this and other preliminary issues. tice and equity” at the expense of the “law.” Although the Supreme Court has long had a liberal policy favoring arbitration agreements, the question of whether the Craig P. Miller is a principal in the Minneapolis office of Gray Plant parties have submitted a particular dispute to arbitration— Mooty. Laura Danysh is a Senior Counsel of Dispute Resolution that is, the question of arbitrability (the threshold issue that with Hilton Worldwide in McLean, Virginia. must be decided by a court before there can be any arbitra- 26 Franchise Law Journal ■ Summer 2012 Published in Franchise Law Journal, Volume 32, Number 1, Summer 2012. © 2012 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. tion)—is an issue for a court to decide.2 “Unless the parties ing dispute. Parties who have agreed to arbitrate a given subject clearly and unmistakably provide otherwise, the question of most likely intended and expected that the arbitrator will whether the parties agree to arbitrate is to be decided by the resolve all issues that arise concerning that subject. If the par- Court, not the arbitrator.”3 ties intended otherwise, presumably they would have clearly An area of uncertainty, however, is whether the applicability expressed their contrary intent in the franchise agreement.16 of a statute of limitations or time bar defense in arbitration is From a common sense perspective, where the parties have an issue that is presumptively arbitrable. The Supreme Court clearly agreed to arbitrate the subject of the underlying dis- has stated that “the FAA’s primary purpose [is to] ensur[e] that pute, it is unlikely that they intended other issues related to private agreements to arbitrate are enforced according to their the dispute, such as the timeliness of the submission of the terms.”4 Thus, in deciding whether the timeliness of a claim in claim, to affect the “arbitrability” of the dispute. Such intent arbitration is an issue for a court or an arbitrator to decide, the is particularly unlikely where the arbitration clause is broad in fundamental question is whether the parties intended the time bar to be an “arbitrability” issue.5 After all, the intent of the parties generally controls what is to be arbitrated.6 If the parties clearly intend that a particular issue be resolved by the courts before there is any duty to submit to If the parties clearly intend that a arbitration, then the courts should respect that intent by particular issue be resolved by the deciding the issue.7 Therefore, if an arbitration agreement clearly and unequivocally states that any statute of limitations courts before there is any duty defense shall be determined by a court, and not an arbitrator, to submit to arbitration, then the intent of the parties should be honored. On the other hand, if it is ambiguous whether the parties intend a given the courts should respect that issue to be an “arbitrability” issue, the court should attempt intent by deciding the issue. to make a sensible determination about their intent.8 In mak- ing such an inquiry, the court should construe the parties’ intentions “generously” in favor of arbitrability.9 In other words, any ambiguity regarding the parties’ intent should be resolved in favor of arbitration.10 scope.17 In addition, statute of limitations issues are often Case law demonstrates that there is a presumption that it is inextricably intertwined with the underlying facts of the case. up to an arbitrator, and not a court, to decide time bars and This can make it difficult to resolve a statute of limitations statute of limitations issues.11 Illustrative of this presumption is defense except in the context of the final arbitration hearing.18 Conticommodity Services v. Philipp & Lion, where Conticom- Therefore, it makes sense to have an arbitrator, and not a modity moved to stay arbitration on the ground that Philipp’s court, decide issues of timeliness. demand for arbitration was untimely under the one-year limita- tion period incorporated in the parties’ agreement. Philipp Choice of Law Provisions May Affect the responded that the timeliness of its demand for arbitration was Arbitrability of Statutory Time Bars an issue for the arbitrator, and not the court, to decide.12 Rely- As noted, franchise agreements are often silent or unclear as ing upon the strong public policy favoring arbitration, the Sec- to the scope of the parties’ intention to arbitrate a statute of ond Circuit agreed, holding that “the arbitrator, not the court, limitations defense. In such instances, parties often attempt to should determine the effect of the one-year limitation.”13 rely on a contractual choice of law provision to demonstrate Under Conticommodity, if (1) the parties have entered into that the parties intended, through their general choice of a a valid arbitration agreement and (2) the arbitration agree- state’s law, to adopt law requiring that a court, and not the ment covers the subject matter of the underlying dispute, it arbitrator, decide the issue of whether statute of limitations will be presumed that the parties agreed to have an arbitrator are applicable in arbitration.19 This has the potential effect of decide all the remaining issues necessary to reach a decision creating tension between the franchise agreement’s arbitra- on the merits of the dispute, including any issues regarding tion provision and its choice of law provision.
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