Maryland Court of Appeals Opinion Illustrates the Importance of Timeliness Provisions in Contractual Arbitration Clauses

In the recent March 25, 2022 decision by the Court of Appeals in the case of Park Plus, Inc. v. Palisades of Towson, LLC and Encore Development Corp., the Court held that when a contract containing an arbitration clause is silent on the timeliness to demand arbitration, the statute of limitations provided in the Maryland Code does not limit the time within which a party may petition to compel arbitration based on the clause. See Maryland Code, Courts and Judicial Proceedings Article, §5-101.

By way of background, the parties had entered into a contract for Park Plus to furnish and install a parking system in the Palisades, a luxury apartment building complex. The contract included an arbitration provision that did not contain any limitations period for demanding arbitration. 

Following issues with the parking system, and hurdles to initiate arbitration, Palisades petitioned the circuit court for order to enforce their arbitration agreement to require Park Plus to proceed with arbitration. Park Plus argued the petition to compel arbitration was subject to the three-year statute of limitations under § 5-101 upon accrual of their breach of contract claim rendering the request for arbitration untimely. The lower court and found Palisades petition to compel arbitration timely. Park Plus appealed.

The question before the Court of Appeals was purely legal: whether petitions to compel arbitration are subject to the limitations period in CJ § 5-101. The Court held, after extensive analysis of legislative history, that when a contract is silent on timeliness, a petition to compel arbitration is not subject to the statute of limitations in § 5-101 and that Palisades did not waive their right to arbitrate.

To arrive at this decision, the Court discussed the narrow role of the circuit court in enforcing arbitration agreements: the court’s enforcement power is limited to compelling or staying arbitration. In doing so, the court must preliminarily determine whether an arbitration agreement exists, which also includes assessing whether the agreement applies to the dispute and whether the right to arbitrate was waived. Thus, any decision on the timeliness of an arbitration petition is for a court to decide only insofar as it requires a determination of whether an agreement to arbitrate still exists based on a possible waiver.

Turning to the issue of potential waiver of arbitration with Maryland Code, Courts and Judicial Proceedings Article, § 5-101 statute of limitations as the basis, the Court explained that based on the traditional understanding of statutes of limitations as procedural mechanisms, the expiration of the three years under § 5-101 prior to assertion of arbitration did not extinguish Palisades’ right to arbitrate and did not act as a waiver of that right. Thus, the Court of Appeals affirmed the lower court’s ruling compelling arbitration.

The inclusion of an arbitration provision in a contract can be useful for parties to structure their agreement to suit their needs. Parties can specify the nature and details of the arbitration, should the need arise, including how to initiate the arbitration process, the number of arbitrators, the scope of discovery, and other matters. 

When an arbitration agreement specifically provides that a statute of limitations applies, Maryland courts have barred actions as untimely. The explicit application of a statute of limitations to a contract’s arbitration provision will control a dispute over whether a party waived its right to demand arbitration based on the prescribed limitation in a contract.

However, if an arbitration agreement does not contain a time limitation on demanding arbitration, a petition filed to compel arbitration outside of the (current) three-year statute of limitations period imposed under § 5-101, is not time-barred, and does not operate as that party’s waiver of their right to arbitrate. In that circumstance, a court is permitted to decide whether an agreement to arbitrate the dispute exists, and to enforce it with an order compelling arbitration. This is consistent with honoring the parties’ agreement to arbitrate. The Park Plus decision is favorable to a party seeking to enforce an arbitration clause that did not contemplate timeliness in initiating arbitration, where the other party to the contract opposes arbitration. However, the case does not decide when, if ever, initiating arbitration would be considered untimely or waived where there is no timeliness provision in the arbitration clause.

Companies facing a legal challenge involving this issue should contact MacDonald Law Group, LLC, to protect their rights and interests.