Date: August 23rd, 2010
Categories: Contracts

A new Washington State Supreme Court decision will likely have tremendous implications for the construction industry. In the recent case of Broom v. Morgan Stanley DW, Inc., the court ruled that an arbitration panel committed legal error by dismissing claims asserted in an arbitration based on application of Washington state statute of limitations. The court overturned the arbitration award and held that unless the parties insert a specific statute of limitations in their contractual arbitration agreement, or agree that state statutes of limitations apply, that claims in arbitration cannot be barred even if asserted after the applicable state statute of limitations had expired.

The Broom case involved a claim by children of a man who kept a retirement investment account with Paine Weber. The investor’s name was Dick Broom. Mr. Broom’s children were the beneficiaries of the account after he passed away. The allegations in the case were that Paine Weber had improperly sold off Mr. Broom’s investment in blue chip stocks and purchased high tech stocks. As a result, Mr. Broom’s portfolio declined in value dramatically. The Broom’s children filed a claim against Morgan Stanley (the accounts had been transferred from Paine Weber to Morgan Stanley in June, 2000). Both parties agreed that the claims were subject to arbitration.

In arbitration, Morgan Stanley moved to dismiss Broom’s claims asserting that the claims were barred by the applicable state and federal statutes of limitations. In May of 2006, the arbitration panel ruled that all of Brooms’ claims (except for a Consumer Protection Act claim) were barred by the state and federal statutes of limitations. The panel’s ruling dismissing the claims was set forth in a written decision.

The Brooms filed a complaint in Superior Court and moved to vacate the arbitration award. They argued that the award contained facial legal error because state statutes of limitations do not apply to arbitration. The trial court agreed and vacated the award. Morgan Stanley appealed to the Court of Appeals, which affirmed the trial court. Morgan Stanley then petitioned the Supreme Court for review of the decision, which was granted. However, the Supreme Court ultimately affirmed the Court of Appeals decision that state statutes of limitations cannot be a bar to claims in arbitration, and that the arbitrators had erred, as a matter of law, in holding that they were a bar to the Brooms’ claims.

In so ruling, the court was primarily focused on the old Washington state arbitration act, which was applicable to the Brooms’ case, but had since been repealed and replaced by the Revised Uniform Arbitration Act (“RUAA”). However, the court made clear in its ruling that state statutes of limitations are also not bars to claims that are subject to the RUAA. The Broom court essentially removed statutes of limitations as defenses to claims brought in arbitration in Washington state based on a contractual agreement to arbitrate, unless the parties arbitration agreement provides that claims are subject either to a contractual statute of limitation or are subject to applicable state statutes of limitation. The court stated:

This result does not subject parties to the burden of facing stale and untimely claims, as Morgan Stanley argues. If desired, parties may agree contractually to the applicability of state statutes of limitation, in which case those limits would be applied by the arbitral panel. But here, no such agreement existed. The arbitrators exceed their powers by applying statutes of limitations inapplicable to arbitral proceedings.

The decision is controversial in that there were five justices in the majority and four justices that dissented. Under Washington law, a 5-4 decision is binding. Although the decision is surprising, it appears that unless the legislature amends the RUAA in response to this decision, claims subject to contractual arbitration agreements (that do not expressly provide that they are subject to statutes of limitation) cannot be barred by a statute of limitations defense and in theory can be brought at anytime, even decades after the event arose upon which the claim is based.

As a result of this decision, contractors should immediately:

1. Review their existing contracts to determine if a statute of limitation clause is included
2. Consider whether to insert language that either subjects arbitration claims to a contractual limitations period or to insert language that says that arbitration claims are subject to the applicable state statutes of limitation
3. Consider whether contracts should include a clause allowing the arbitrator to enforce statutes of limitation.