July 22, 2010, in a 5-4 decision, the Washington Supreme Court ruled that Washington state statutes of limitations do not apply to claims brought in arbitration, absent specific contractual language to the contrary. In particular, the Court found those statutes, which specifically require that “actions” be commenced or parties “sue” within a certain time, do not apply in the context of arbitration proceedings, which are not “actions” or “suits,” unless the parties expressly provide for such applicability in their arbitration agreement. Broom v. Morgan Stanley DW, Inc., No. 82311-1 (7/22/10).

This decision may allow parties to bring claims under existing Washington arbitration agreements long after those same claims would be time-barred if brought in state court. Companies whose contracts contain agreements to arbitrate governed by Washington law should consider modifying or amending existing agreements to provide that Washington statutes of limitations apply in any arbitration, and should include similar language in the arbitration provisions in future agreements.

Background

Broom involved claims of mismanagement relating to retirement investment accounts that Mr. Broom kept with Morgan Stanley. In connection with those accounts, the parties executed an arbitration agreement that required the parties to submit disputes to the National Association of Securities Dealers (NASD) for resolution under its Code of Arbitration Procedure (“NASD Code”).

Mr. Broom died in 2002. In 2005, Mr. Broom’s children, the beneficiaries of the retirement accounts, commenced arbitration against Morgan Stanley with the NASD. In the arbitration, Morgan Stanley moved to dismiss the Brooms’ claims, asserting among other things that they were barred by the applicable statutes of limitations. The arbitration panel agreed.

The Brooms moved to vacate the arbitration award in state superior court. The trial court vacated the award for “facial legal error,” finding that the state statutes of limitations did not apply in arbitration. The Washington Court of Appeals upheld that ruling, and Morgan Stanley appealed the case to the Washington Supreme Court.

Facial legal error as ground for vacation of arbitration award

The Supreme Court first addressed the threshold issue of whether the trial court had acted properly under the Washington Arbitration Act (WAA) in vacating the arbitration panel’s ruling on the grounds of “legal error on the face of the award.” The Supreme Court recognized that the WAA, which was in effect when the parties executed their arbitration agreement and submitted their claim to arbitration, sets forth specific grounds on which a court may vacate an arbitration award, which do not expressly include legal error (the current law, the Revised Uniform Arbitration Act, has identical provisions). However, relying on prior case law, the Court found that one of the listed grounds for vacation of awards—“where the arbitrators exceeded their powers”—includes facial errors of law.

The NASD rule

Morgan Stanley argued the NASD Code the parties had adopted to govern their arbitration granted the arbitrators (not the courts) the authority to determine whether a particular state statute of limitations applied to the Brooms’ claims. The Supreme Court agreed with Morgan Stanley that the arbitrators were responsible for interpreting the NASD Code, but found this issue was not dispositive because “we determine independently whether our state statutes of limitations may apply to arbitral proceedings.”

The Court ultimately found the arbitrators’ right to interpret the NASD Code is limited by Washington case law and statutes, on the grounds that arbitrators cannot interpret a state statute in contravention of state law.

Washington’s statutes of limitations do not automatically apply to arbitrations

The Supreme Court then considered whether the arbitral panel’s ruling concerning the applicability of the state statutes of limitations was a facial legal error. The Court began by noting in other situations it had held that arbitration proceedings were not “actions” under Washington statutes and that Washington’s catchall statute of limitations does not apply to arbitration.

The Court then looked at the language of the applicable statutes of limitations, which discuss “actions” and parties “suing,” but do not mention arbitrations. It compared this terminology with the language of the WAA, which consistently refers to arbitrations as “arbitration,” “hearing,” or “proceeding,” while discussing lawsuits as “civil actions,” “actions,” or “suits.” The Court relied on this distinction, as well as its rulings in prior cases, to hold arbitrations are not “actions” subject to state statutes of limitations.

Parties may agree to apply state statutes of limitations in arbitration

Recognizing the concern that its ruling would expose parties to stale and untimely claims, the Supreme Court noted that state statutes of limitations will apply in arbitration where parties make express provision for those statutes to apply in their arbitration agreement. The Court found that the parties’ agreement to apply the NASD Code—which contains specific provisions about limitation periods and which arbitrators are empowered to interpret—was not sufficiently explicit to meet this standard.

Conclusion

This decision will require companies to add specific language to any Washington arbitration agreements in their contracts, both going forward and, if possible, as amendments or modifications to existing contracts, to avoid facing stale and untimely claims.  Unless the parties’ agreement expressly provides for application of state statutes of limitations in arbitration, those statutes do not apply to bar stale claims.

Reposted from Davis Wright Tremaine's Corporate Finance Blog located at:

http://www.corpfinblog.com/