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N.J.R. Associates v. Tausend

Issue Discussed: Statute of Limitations

Submitted by Elizabeth V. Kniffen, Dennis Anderson

Date Promulgated: June 27, 2012

N.J.R. Assocs. v. Tausend, 19 N.Y.3d 597, 973 N.E.2d 730 (2012)

Court: Court of Appeals of New York

Issue Decided: Can a party that initiated and participated in arbitration petition the court for a stay of counterclaims asserted in the same arbitration, on the grounds that such claims are barred by a statute of limitations?

In a dispute between a partnership and one of its members, the member (“Tausend”) initiated a legal action to obtain financial information from the partnership (“NJR”). NJR demanded arbitration pursuant to an arbitration clause included in the partnership agreement, and Tausend petitioned to stay the arbitration. The Supreme Court denied the stay and ordered the parties to proceed to arbitration. The Appellate Division affirmed.

When Tausend asserted counterclaims in the arbitration, NJR petitioned the court for a stay of arbitration of the counterclaims, arguing that they were barred by applicable statutes of limitations. Tausend countered that the timeliness challenge must be raised before the arbitrator, but the Supreme Court granted NJR’s petition and stayed arbitration of Tausend’s counterclaims. The Appellate Division vacated the stay, reasoning that NJR was not entitled to a stay because NJR had initiated the arbitration in the first place, and actively participated in it. NJR moved for leave to appeal, and the Court of Appeals granted the motion.

The Court of Appeals noted the interplay between the Federal Arbitration Act (“FAA”) and New York arbitration law on statute of limitations issues, which it summarized it as follows:

Under the [FAA], resolution of a statute of limitations defense is presumptively reserved to the arbitrator, not a court. New York law, in contrast, allows a threshold issue of timeliness to be asserted in court. A contract may be governed by the FAA yet subject to the New York rule if the agreement between the parties so provides. We have explained that a contract specifying that “New York law shall govern both ‘the agreement and its enforcement’ adopts” the New York rule that threshold statute of limitations issues are resolved by the courts and not arbitrators.

Against that backdrop, the court concluded that it was not necessary to decide whether the contract at issue was subject to the FAA or New York law because arbitration was the proper forum for the timeliness issue either way.

If the partnership agreement was governed by the FAA, then the New York rule would only apply if the agreement included “critical enforcement language.” But the agreement lacked such language, providing only that “[t]his Agreement shall be governed by, and construed in accordance with, the laws and decisions of the State of New York.” Thus, the New York rule did not apply, and FAA principles required the arbitrator to address timeliness.

On the other hand, if the FAA did not apply, and New York law was controlling, the outcome would be the same because the statute expressing the New York rule, Civil Practice Law and Rules 7503(b), provides that an application to stay arbitration based on a statute of limitations defense may be raised in state court by “a party who has not participated in the arbitration and who has not made or been served with an application to compel arbitration.” The court concluded that NJR was barred from asking a court to stay arbitration on timeliness grounds because NJR had initiated the arbitration, successfully defended against Tausend’s petition to stay the arbitration in court, received an application to compel arbitration in connection with Tausend’s counterclaims, and then sought a court order to prevent the same counterclaims from being considered by the arbitrator.

The court summarized its reasoning as follows: “[A] party cannot compel arbitration of its own causes of action, prevent its adversary from obtaining judicial relief, and then ask a court to block the adversary’s counterclaims from being arbitrated by raising a statute of limitations defense.”