Non-Binding Arbitration May Be A Condition Precedent, But It Does Not Toll Your Statute of Limitation

Maryland’s highest court recently affirmed the dismissal of an employer’s non-compete claims as time-barred, even though the employer argued that the parties’ arbitration excused the untimely filing.  Kumar v. Dhanda, __ A.3d ___, 2012 WL 1521567 (Md. May 2, 2012).

The employee, a urologist, had signed a contract calling for all disputes to be “resolved pursuant to arbitration,” but noting “both parties can go to Court if not satisfied by the decision” of the arbitrator.  [The Court commented that the agreement was prepared "without the assistance of counsel," as if to explain why such a useless provision was drafted in the first place.]  The employee’s contract was terminated in 2002, and the employee had a three year non-compete provision, which  extended through 2005.  In 2005, the employer sued the employee, alleging a breach of the non-compete and other claims.  The district court judge dismissed all counts (because they were subject to arbitration) and compelled arbitration.

Inexplicably, the employer waited two years to begin the arbitration. In June of 2008, the arbitrator denied all relief to either party (except a nominal $868 of insurance premiums).   The employer waited another nine months and  filed a lawsuit in the Maryland trial court in March of 2009.  The employee successfully moved to dismiss all claims based on Maryland’s three year statute of limitation on breaches of contract.

Maryland’s highest court affirmed that result.  In response to the employer’s argument that its action had not “accrued” until after the arbitration was complete, the court noted that claims accrue once all the elements of the claim have occurred.  Since arbitration is not an element of the breach of contract claim, the employer’s breach claim had accrued at the time of the breach.  In response to the employer’s argument that the arbitration tolled the statute of limitation, the court found that Maryland law did not support a tolling exception for non-binding arbitration.

Critical to the court’s analysis was this question: Why didn’t the employer avail itself of one of the many options it had to preserve its claim?  The court pointed out that the employer could have: negotiated for a tolling agreement with the employee, or asked the court hearing its 2005 claim to stay the case during the arbitration (instead of dismissing it), or just gotten off its rear and pursued its claims in a more timely fashion.

The lesson for litigators is this: do not rely on arbitration to toll any statute of limitation that may be running.  (The flip side is also true — do not rely on your court case to toll a statute of limitation that may apply in arbitration.)  Instead, file a placeholder suit in the alternative venue, and ask for a stay.

Published In: Alternative Dispute Resolution (ADR) Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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