Are You SOL In Trying to Enforce a Statute of Limitations in Arbitration?

Does the statute of limitations apply at all?

There is a growing trend upsetting the certainty of statutes of limitations in arbitration. Multiple courts have held that statutes of limitations simply do not apply in an arbitration proceeding without some contractual provision expressly stating the applicable statute of limitations applies in an arbitration proceeding. One of the earliest cases came out of Connecticut, where the court in Skidmore, Owings and Merrill v. Connecticut General Life Insurance Co. held that filing a claim in arbitration did not constitute an "action" as that term was used in the applicable statute of limitations. The court found that "[a]rbitration is not a common-law action" so "the institution of arbitration proceedings is not the bringing of an action under any statute of limitations." As a result, despite a defective-design claim allegedly expiring four years prior to an arbitration demand, the court refused to enjoin the arbitration proceeding, which proceeded forward. 

Courts in other states and jurisdictions have followed Skidmore's reasoning. A few states have expressly addressed this issue by statute. For example, New York has enacted a statute stating arbitrators can apply a statute of limitations. The New York statute is not robust, however, giving an arbitrator sole discretion on whether to apply a statute of limitations at all, and that decision is not reviewable or appealable. Washington's Supreme Court held statutes of limitation do not apply in arbitration in 2010, but Washington has since enacted a statute expressly making statutes of limitation applicable to arbitrations.

Which statute of limitations should apply?

There is a further wrinkle: even if a statute of limitations applies in arbitration, which state's statute of limitation applies? In many states, a contract's standard choice-of-law clause will not incorporate the chosen state's procedural law. And more often than not, courts have found that statutes of limitation are procedural rather than substantive. For this reason, your contract's choice-of-law clause alone will not ensure claims are governed by your chosen state's statutes of limitations. This can lead to dramatically different results than originally anticipated--for example, the statute of limitations for a breach-of-contract claim in Illinois is ten years, compared to four years in Texas.

If you are faced with this dilemma, your arbitrator will have to engage in some kind of choice-of-law analysis to make a decision. We have not located any courts that have addressed how an arbitrator should conduct a choice-of-law analysis. The most logical approach would be for an arbitrator to apply the same analysis used by federal district courts sitting in diversity, which apply the choice-of-law rules of the forum state. 

In the arbitration context, it would make sense to consider the "forum state" to be the state in which the final arbitration hearing will be held. However, this raises another potential stumbling block. While many contracts contain forum-selection clauses stating where dispute-resolution proceedings should occur, sometimes the arbitration hearing proceeds in a different forum. For example, the parties might by agreement move the hearing to a more convenient location. Because the forum state's choice-of-law rules might apply, they should be considered before any agreement to move the final hearing's location. 

One other issue to consider is borrowing statutes. Many states have "borrowing statutes" that "borrow" the statute of limitations of another state in certain circumstances. For example, in Illinois, the borrowing statute applies where (1) the cause of action accrued in another jurisdiction; (2) the limitations period of that jurisdiction has expired; and (3) all parties were non-Illinois residents at the time the action accrued and remained so until the foreign limitations period expired. In that circumstance, Illinois will borrow the foreign jurisdiction's limitations period to bar the claim. Thus, when either drafting forum-selection clauses or agreeing to change the location of an arbitration proceeding, you should also examine whether a borrowing statute will change the limitations period you expected would apply.

We have experienced this situation first hand. We represented a party in a dispute related to an Illinois wind farm, where the underlying contract required arbitration in New York. The parties by agreement moved the dispute to Illinois for convenience. Months later, one party sought dismissal of a claim allegedly barred by New York's six-year statute of limitations for contract disputes. But because the arbitration was now being held in Illinois, the arbitrator applied Illinois's 10-year statute of limitations and preserved the claim. Thus, the decision to move locations for convenience months prior saved a claim that otherwise might have been barred.

How do you preserve the applicability of the statute of limitations in arbitration?

How do companies protect themselves from these limitations pitfalls? The best practice is to incorporate the statute of limitations you want applied expressly in your contract's arbitration clause. For example: "Any demand for arbitration under this Agreement shall be made before the applicable statute of limitations to a claim under Texas law has run." Or, the parties could make up their own statute of limitations: "Any demand for arbitration under this Agreement shall be made within two years of accrual of any claim hereunder, or the claim is waived." 

What if you can't agree on such language? A good practice is to choose a forum for your arbitration that has a favorable statute of limitations, and then resist the urge to deviate from that forum. If moving is unavoidable, raise these issues and seek agreement on how the choice-of-law issues will play out. Silence may be your enemy, potentially leading to claims either surviving much longer than expected or being yanked out from under you.