Sixth Circuit Holds that Demand Letter Did Not Waive Right to Arbitration

On October 29, 2020, the U.S. Court of Appeals for the Sixth Circuit held that the owner of residential apartments did not waive its right to compel arbitration in a dispute with the property manager by sending a demand letter threatening litigation. 
 
In Borror Property Management, LLC v. Oro Karric North, LLC, et al., the Court of Appeals declared that pre-litigation demand letters are not binding on a party in litigation, and that even if they could be binding, there was no clear waiver of the right to arbitration and prejudice to the other party sufficient to constitute a waiver of the right to arbitration on the facts presented. Given the strong presumption in favor of arbitration under the Federal Arbitration Act, the Court of Appeals concluded that the lower court had erred in denying the owner’s motion to compel arbitration.
 
In Borror, the owner sent a letter accusing the property manager of breach of contract and indicating that the owner planned to proceed with litigation. A week after receiving the owner’s letter, the property manager filed litigation in federal court, asserting its own claims for breach of contract. In response, the owner moved to compel arbitration.
 
In holding that the owner’s demand letter did not waive its right to arbitration, the Court of Appeals noted:

• Demand letters serve a variety of purposes, including encouraging settlement, which would be diminished if such letters were determined to be binding like representations made by a party in litigation;
• The demand letter at issue in Borror was not completely inconsistent with the owner’s right to arbitrate;
• The property manager was not prejudiced by the owner’s actions, since the owner immediately sought to compel arbitration once litigation was filed; and
• The owner did not expressly waive its right to arbitration in the demand letter.

Given the foregoing, couple with the strong federal policy favoring arbitration when any ambiguity exists, the Court of Appeals found the lower court erred in refusing to compel arbitration. Thus, while parties should be careful what demands are made in pre-litigation letters, waiver of arbitration will not be implied simply from a letter making reference to planned litigation. As the Court of Appeals noted, plans can change.