Saturday, May 5, 2012

Kumar v. Dhanda (Ct. of Appeals)

Filed May 2, 2012
Opinion By Judge Clayton Greene, Jr.

While nonbinding arbitration, mandated by the contract, may have constituted a condition precedent to litigation, pursuing arbitration neither postponed the accrual of the underlying breach of contract claims nor otherwise tolled the statute of limitations applicable to maintaining an action in court.

Petitioner and Respondent entered into an employment agreement on August 28, 2001. The contract contained a non-compete clause which prohibited Respondent from practicing within a specified radius of Petitioner’s multiple offices or soliciting or accepting Petitioner’s patients for three years following the expiration of the contract, or through August of 2005. The contract also included a standard mandatory, non-binding arbitration clause.

The agreement was not renewed upon termination on August 31, 2002. Soon thereafter, Respondent filed an initial suit for breach of contract against Petitioner in the Circuit Court for Anne Arundel County seeking damages for a breach of contract based on Petitioner’s refusal to grant Respondent partner status and the withholding of certain monies.

Four months later, on February 26, 2003, Petitioner filed a motion to compel arbitration and to dismiss the action. The judge presiding in Anne Arundel County dismissed the action without prejudice on April 24, 2003, stating that the “claims are subject to mandatory arbitration,” but noting that “[t]he case may be reopened to enforce the arbitration.”

On April 29, 2005 Petitioner filed, in the Circuit Court for Baltimore City, a petition to compel arbitration and to appoint an arbitrator. The petition also included separate counts concerning the substantive claims for breach of contract and breach of the non-compete provision. On March 9, 2006, Respondent filed both a response to Petitioner’s petition to compel arbitration and his own motion to dismiss the substantive counts for improper venue and as claims subject to mandatory arbitration. Petitioner then filed a response to the motion to dismiss, offering to withdraw the substantive counts if the Circuit Court would compel arbitration in order to resolve the issues. The court dismissed the substantive counts on April 28, 2006, but did not order arbitration. On August 25, 2006, Petitioner filed a motion for summary judgment, urging the Circuit Court for Baltimore City to grant the earlier petition to compel arbitration. Following a bench trial on November 20, 2006 the  judge granted the petition to compel arbitration.

Petitioner submitted the matter to the arbitrator in March of 2008. The arbitrator denied all relief to Petitioner and also denied relief to Respondent, save for an award of $868.00 as reimbursement for certain disability insurance premiums.

Finally, on March 16, 2009, almost a year after the arbitration award was issued, Petitioner filed the instant action in the Circuit Court for Montgomery County. The complaint stated that “[t]he Agreement requires arbitration as a requirement before Plaintiff can pursue a remedy in court . . . [t]he matter went to arbitration, and a decision in favor of the Defendant was rendered in June of 2008. This matter is brought de novo.” Respondent filed a motion to dismiss, arguing that the applicable three-year statute of limitations barred the action because the alleged breaches of contract occurred between 2002 and 2005. Petitioner filed in opposition, contending that, because completion of arbitration was a condition precedent to filing a claim, the statute of limitations had not begun to run until the arbitration decision of June 20, 2008. After a hearing and supplemental briefing by the parties, Judge McGann, of the Circuit Court for Montgomery County dismissed the action with prejudice.

The applicable statute of limitations is encompassed in § 5-101 of the Courts and Judicial Proceedings Article, which states: “[a] civil action at law shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.” In the context of the statute of limitations, “[t]he law is concerned with accrual in the sense of testing whether all of the elements of a cause of action have occurred so that it is complete.” St. Paul Travelers v. Millstone, 412 Md. 424, 432 (2010). In the instant case, although not specifying the particular dates, both parties agree that the alleged breaches of contract occurred more than three years prior to the filing of the complaint in the Circuit Court for Montgomery County.

The cases Petitioner cites in order to assert that the statute of limitations does not begin to run until a plaintiff can “maintain his action to a successful result” all concerned whether the necessary elements of a cause of action had arisen under the facts that were presented. In the instant case, neither party disputes that all of the elements of Petitioner’s breach of contract claims existed, at the very latest, as of the dates upon which the applicable contractual provisions terminated.  Like the situation in Arroyo v. Board of Educ. of Howard County, 381 Md. 646 (2004), while resolution of the legal action must wait until the satisfaction of the condition precedent, the court’s jurisdiction may be maintained and the claim properly stayed prior to that time.

The court could find no applicable exception to § 5-101, or language within the Maryland Uniform Arbitration Act, §§ 3-201 to 3-234, that would toll the statute of limitations in this case. In Philip Morris v. Christensen, the court explicated for the first time two factors that continue to guide  consideration of whether to apply a judicial tolling exception in a particular case. In order for an exception to be applied the court must find that: “there is persuasive authority or persuasive policy considerations supporting the recognition of the tolling exception, and, recognizing the tolling exception is consistent with the generally recognized purposes for the enactment of statutes of limitations.” Philip Morris, 394 Md. at 238 (2006).  While, to be sure, arbitrating parties are on notice of any possible claims against them, thereby guarding them from stale claims, another purpose of the statute of limitations would be threatened by tolling in this situation. The court has repeatedly touted the value of statutes of limitations as not only ensuring fairness between the parties, but also as essential to judicial economy and the pursuit of diligence in litigation. Petitioner’s pursuit of his legal claims was not vigilant.

The full opinion is available in PDF.

Tuesday, May 1, 2012

College Park Pentecostal Holiness Church v. General Steel Corp. (Maryland U.S.D.C.)

Filed January 19, 2012.
Opinion by Judge Peter Messitte

Held: An arbitration clause in a contract may be unconscionable, and thus unenforceable, if there is stark inequality of bargaining power between the parties and the terms unreasonably favor one side over the other. 

Note: In this case, the court applied Colorado law pursuant to the terms of the contract (which is substantively similar to Maryland law).

Facts: This case arises from a contract dispute between a church and a building supplies company.  The church was located in Maryland; supplier was located in Colorado.  The church was presented with a contract and told they had one day to sign because a pricing special would no longer be available.  The church signed the contract with supplier which included an arbitration clause.  The arbitration clause provided 1) that any arbitration hearing shall be held in Denver, 2) any challenge that relates to whether claims are arbitrable shall obligate the challenging party to pay the attorney's fees and costs of defense to the non-challenging party, and 3) the party initiating arbitration shall advance all costs thereof. 

The church filed a breach of contract claim.  The supplier filed a motion to dismiss and sought to enforce the venue clause, thus forcing the church into arbitrating the matter in Colorado.  The church claimed that portions of the arbitration clause were unconscionable, specifically the venue and cost allocation provisions. 

Analysis: Under Colorado law, unconscionability requires an overreaching on the part of one party (i.e. inequality of bargaining power or an absence of meaningful choice by the second party) and contract terms which unreasonably favor the first party.  Factors relevant to an unconscionability analysis include:

"[A] standardized agreement executed by the parties of unequal bargaining strength; lack of opportunity to read or become familiar with the document before signing it; use of fine print in the portion of the contract containing the provision; absence of evidence that the provision was commercially reasonable or should reasonably have been anticipated; the terms of the contract, including substantive unfairness; the relationship of the parties, including factors of assent, unfair surprise and notice; and all the circumstances surrounding the formation of the contract, including its commercial setting, purpose and effect." quoting Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo. 1986).

The Maryland case law governing unconscionability is similar to the Colorado law.  In Walther v. Sovereign Bank, the Maryland Court of Appeals held that unconscionability requires both a procedural and substantive unfairness.  386 Md. 412 (2005).   Procedural unfairness is evident by one party's lack of meaningful choice or unfair bargaining power.  Substantive unfairness is evident by contractual terms that unreasonably favor the other party.  Id. 

In this case, the court, following Colorado law, found that the church was in an unfair bargaining position because the church representative who reviewed and signed the contract did not have business acumen or benefit of counsel.  The court also found that the pressure to sign within one day added to the lack of meaningful choice.  The court also found the terms of the arbitration clause unreasonably favored the supplier because of the economic hardships the church would incur by arbitrating in Colorado rather than in Maryland.  The court also found the provision requiring the church to pay up front all costs of the arbitration and attorney's fees for the supplier was extremely unfair. 

The full opinion is available in PDF