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$682,000 Breach of Contract Reversed Due to Arbitration


This is a breach of contract case from Butler County, Alabama, Chen v. Russell Realty, LLC. Chen, held a monetary interest in an Asian restaurant, entered into a 10-year lease with Russell Realty and MRT. The drafted lease document by Russell Realty contained an arbitration clause. The arbitration clause, like so many standard commercial agreements today, called for the parties to mediate and then arbitrate any disputes. Russell Realty and MRT sued Chen along with other defendants, alleging breach of contract.

The plaintiffs filed for a default judgment against the defendants stating that Chen had failed to answer the complaint. Chen filed a response, stating that she had been in China for an extended period and also not been personally served with the complaint. Next, Chen filed a motion to dismiss, citing the arbitration clause. The trial court denied the motion for default judgment and the motion to dismiss. Chen then filed a motion to compel arbitration. The trial court granted the arbitration giving the parties 180 days to resolve the matter.

Chen later filed a second motion to dismiss, alleging that the plaintiffs had refused to mediate or arbitrate. The plaintiffs contended that it was Chen who had made no effort to seek arbitration. The trial court ordered the parties to mediate pursuant to the terms of their contract. The mediation was not successful. The plaintiffs filed a motion for sanctions against the defendants.

The trial court entered a judgment against Chen and the other defendants in the amount of $682,050. Chen appealed the judgment and the case was reversed for not ordering arbitration.

The Court treated the appeal as one from an order denying a motion to compel arbitration. It did so because after the trial court determined that the arbitration clause provided that the parties must mediate first and then proceed to arbitration, it ultimately reinstated the plaintiffs’ case after mediation, which had the effect of denying arbitration.

The Supreme Court in its analysis added that a party seeking to prove a waiver of a right to arbitrate carries a heavy burden. The Court added it could not say that Chen waived her right to arbitrate. Further, that Chen had asserted her right to arbitrate throughout the proceedings. It also pointed out that the trial court’s final hearing could have been construed as a final hearing on Chen’s arbitration request because the terms of the arbitration clause had not been met. According to the arbitration clause, there had been no answer, no discovery, no witness lists, etc., to indicate that Chen was to appear at the hearing for a trial on the merits.

I am not in favor of arbitration agreements, but try to purchase a car without one today. Arbitration clauses are a fairly standard practice in consumer and commercial practice. Arbitration can produce an alternative to a courtroom and sometimes is more efficient in terms of legal costs and time. I guess the takeaway from this case is that be careful what you ask for. The one who drafted the document is held to a higher standard.

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