Right to arbitrate dispute waived

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A car dealer and its sales manager implicitly waived their right to arbitrate a dispute with a disgruntled customer after not asserting the right until after responding to the customer’s complaint and after the trial court had granted the customer a default judgment, the Court of Appeals of Virginia has held.

“This record establishes an implied waiver by clear and convincing evidence,” Chief Judge Marla Graff Decker wrote. “The appellants had notice of their right to arbitration. Nonetheless, they waited three months after service of process to assert that right.”

Judges Mary B. Malveaux and Doris Henderson Causey joined Decker’s opinion in City-to-City Auto Sales, et al. v. Harris (VLW 023-7-335).

Background

In August 2020, Ronald Harris purchased a truck from City-to-City Auto Sales for his upstart car hauling business, for which he needed “a reliable diesel commercial truck.”

The dealer’s sales manager recommended a specific truck and “falsely [told] the appellee that he would get a ‘diagnostic done on the engine and transmission.’”

Following the bidding process, the sales manager told Harris the diagnostic check only indicated an issue with the air conditioning system. Harris then signed a contract to purchase the vehicle for approximately $43,000.

The contract included an arbitration provision. Any dispute between the parties shall “be resolved by binding arbitration and not in court,” with disputes defined as “any contract, tort, statutory or other claim … between [buyer] and [s]eller arising out of or relating to … this contract.”

Harris experienced issues with the truck almost immediately, including issues with the vehicle’s wheel alignment, suspension and emission system. The truck’s engine failed less than a month after purchase.

Harris filed a complaint in circuit court in April 2021, alleging fraud in a transaction for the purchase of a vehicle. The complaint did not mention the parties’ sales contract.

Harris moved for default judgment after the appellants did not file a responsive pleading. Counsel for the appellants argued against the motion and asked for a motion for leave to file a late answer, which was denied. The Henrico County Circuit Court accepted the motion for default judgment.

The appellants later filed a motion to set aside the default judgment, and then filed a motion to compel arbitration. They presented the sales contract to the circuit court, arguing the arbitration provision was governed by the Virginia Uniform Arbitration Act.

The circuit court denied the motion to set aside the default judgment and proceeded with a jury trial. The jury returned a verdict in favor of Harris, awarding him $33,000 in compensatory damages and $50,000 in punitive damages. The court granted Harris’s motion for attorneys’ fees, awarding him $6,450.

Waived

The appellants claimed the trial court erred in not enforcing the arbitration provision in the sales contract. The contract at issue provided that any dispute between the parties would be resolved through arbitration at a party’s request.

But Decker pointed out that the appellants knew of their contractual right to compel arbitration before Harris filed his complaint.

“[T]he appellants waited until August 13, 2021, after the circuit court had granted the appellee’s motion for default judgment, to assert its contractual right to arbitration,” she wrote.

In the months between service of process and when they asserted the right to arbitration, the appellants “acquiesced to and participated in court proceedings, demonstrating the intent not to pursue arbitration,” the judge added.

“Consequently, the circuit court did not abuse its discretion in denying the motions to set aside the default judgment and send the matter to arbitration,” Decker said.

Citing Va. Code § 8.01-581.02 — which authorizes proceedings to compel arbitration — the appellants further argued that the circuit court should have ordered arbitration on the question of damages.

Decker was unpersuaded.

“Liability and damages are both essential components of the case and are therefore generally decided in the same forum,” she wrote. “Consequently, once the right to arbitration is waived without a specific reservation of the right in regard to ancillary issues such as damages, it is waived for the entire case.”

Because of this, Decker said the appellants did not preserve the right to arbitrate over damages because of their waiver of their arbitration rights. Thus, the circuit court acted appropriately in sending the damages issue to the jury.

Additional claims

The appellants also argued that the circuit court erred in approving the damages awards from the jury, saying the amounts of compensatory and punitive damages weren’t supported by evidence.

On the issue of compensatory damages, Decker noted that Harris paid $6,000 towards the truck at the time of the breakdown, as well as $6,300 to rent another truck and more than $3,600 in towing and repair costs.

Harris also sustained lost business revenue because he wasn’t able to fulfill car-hauling contracts for a period of more than five months. Per the opinion, Harris’ business sustained more than $64,000 in losses during its first eight months of operation.

The $33,000 in compensatory damages was awarded after the jury was instructed that Harris bore the burden of proof for damages; Decker noted there is “no indication” the jury failed to follow instructions.

“Viewing the record in the light most favorable to the appellee, it contains a sufficient basis supporting the jury’s assessment of $33,000 in compensatory damages,” she wrote.

As for punitive damages, Decker said Harris “established that the appellants fraudulently sold him a truck,” noting the diagnostic workup that wasn’t complete before sale.

“These facts support the inference that the appellants either had not completed diagnostic testing on the truck or knew that the truck had extensive mechanical problems at the time of the sale,” Decker wrote. She added that the jury determined the evidence “merited punishing the appellants,” which the record supported.

Finally, the appellants’ contention that the circuit court erred in awarding attorney fees was barred under Rule 5A:18.

“The pages that the appellants’ brief cites as showing where they preserved this objection do not in fact do so,” she explained. “Although the appellants objected to the damages, they did not object to the award of attorney fees.”