Discussion

CPLR 204(b) provides:

"Where it shall have been determined that a party is not obligated to submit a claim to arbitration, the time which elapsed between the demand for arbitration and the final determination that there is no obligation to arbitrate is not a part of the time within which an action upon such claim must be commenced. The time within which the action must be commenced shall not be extended by this provision beyond one year after such final determination."

The statute thus tolls the applicable period of limitation between the time a demand for arbitration is made and a final determination that the dispute is not the proper subject of arbitration. CPLR 204(b) , however, prohibits any extension of such period beyond one year after the final determination of nonarbitrability.

Reading CPLR 204(b) literally, and assuming that the "final determination" of nonarbitrability here was the Appellate Division's order affirming the stay of arbitration (an issue we address below), plaintiff was entitled to the benefit of the toll provided in 204(b) and its action was thus timely commenced. The Appellate Division, however, applied its precedent, Watkins v Holiday Drive-Ur-Self (29 2 810), to superimpose a requirement that a plaintiff invoking 204(b) must show that the demand for arbitration was under a "color of right." The court held that plaintiff failed to demonstrate any color of right or "objective support for plaintiff's claim that it proceeded in the good- faith, albeit mistaken, belief that arbitration was an available forum" (263 2 at 584).

Whether a plaintiff seeking to invoke the benefit of CPLR 204(b) must demonstrate that the demand for arbitration was under a color of right is a matter of first impression for this Court. Adding that requirement, however, appears to be inconsistent with our reading, in Gaines v City of New York (215 NY 533), of the predecessor of a sister statute -- section 405 of the former Code of Civil Procedure, now found in CPLR 205 . That provision permits the recommencement of an action, notwithstanding the running of the period of limitations, within six months after termination of an earlier action on the same claim where that timely commenced action was dismissed "not on the merits but on a basis that keeps the claim alive and enables a later suit to be brought on it" (Siegel, NY Prac § 52, at 68 [3d ed.]).

In Gaines, the plaintiff had initially brought an action against the City of New York in the City Court. That court lacked statutory subject matter jurisdiction in suits against the City. Despite the complete absence of any jurisdictional basis for the selection of that specific forum, this Court gave the plaintiff the benefit of the statutory "grace period" in former Code of Civil Procedure § 405. Thus, the plaintiff's subsequently commenced action in the Municipal Court, the appropriate forum, was saved from dismissal for untimeliness.

As we have already noted here, in Gaines the Court pointed out: "[t]hat the plaintiff's case is within the letter of the [tolling] statute is hardly doubtful" (id., at 539) . Accordingly, the Court placed the burden of proof on the defendant to demonstrate why the protection afforded by the literal wording of the statute should be denied to the plaintiff, perhaps by showing that the selection of the forum was made in bad faith "with knowledge of the lack of jurisdiction, and in fraud of the statute" (id., at 541) . In the absence of such demonstrated bad faith, the Court noted that "[t]he statute is designed to insure to the diligent suitor the right to a hearing in court till he reaches a judgment on the merits. Its broad and liberal purpose is not to be frittered away by any narrow construction" (id., at 539). An important factor relied upon by the Court in Gaines was that, by virtue of the previously (although erroneously) commenced action, the "litigant [gave] timely notice to his adversary of a present purpose to maintain his rights before the courts" (id.).

No reason has been advanced here why we should not similarly reject a narrow construction of CPLR 204(b) in order to effectuate its purpose. The District has not shown any bad faith or fraudulent intent on plaintiff's part in demanding arbitration, especially in light of the fact that references to arbitration remained in the contract. Furthermore, the Watkins rule has been criticized by practice commentators (see, McLaughlin, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C204:2, at 303 [characterizing the rule as "questionable," and opining that the Watkins case should not have been excluded from within the reach of 204(b) "absent a clear showing that the statute was not designed to cover this situation"] ; 1 Weinstein-Korn-Miller, NY Civ Prac ¶ 204.06, at 2- 190 [noting that the Watkins decision "has been criticized * * * on the theory that the plaintiff had relied on CPLR 204(b) and was entitled to relief under a literal reading"]).

An additional factor leading us to reject the Watkins rule is that it would discourage parties from selecting arbitration as an efficient and inexpensive means of resolving disputes (see, 1 Weinstein-Korn-Miller, supra, ¶ 204.06, at 2-191 ["Watkins might deprive CPLR 204(b) of some of its intended vitality, and may conflict with the general state policy to encourage arbitration"] ). Moreover, here, just as in Gaines, defendant was on timely notice of the plaintiff's claims as a result of the demand for arbitration. Thus, the underlying purpose of imposing a limitations period is not undermined by application of 204(b) under these circumstances (see, 1 Weinstein-Korn-Miller, supra, ¶ 204.06, at 2-190; McLaughlin, Practice Commentaries, supra, at 303).

Alternatively, the District argues that even if CPLR 204(b) applies here, the commencement of this action was still not timely. The basis for that contention is that, according to the District, the "final determination" of nonarbitrability, for purposes of CPLR 204(b) , was the May 9, 1994 Supreme Court order staying arbitration on that ground. We hold, however, that the final determination was the November 10, 1994 order of the Appellate Division.

While this also is an issue of first impression in our Court, another precedent construing the companion tolling provision of CPLR 205 is instructive. In Lehman Bros. v Hughes Hubbard & Reed (92 2 1014), for purposes of determining when the six month period in which to commence a new action begins to run under CPLR 205 , this Court held that it is upon the determination of any non-discretionary appeals concerning the dismissal of the earlier action and, in the event that we granted leave to appeal, upon final determination by this Court (id., at 1016). Practical considerations dictate that the finality rule of Lehman Bros. should apply equally in the context of the 204(b) tolling provision. Not until all nondiscretionary appeals have been decided can it reasonably be concluded that a party has been finally barred from having a claim resolved by arbitration. To hold otherwise -- that an initial trial court's determination is "final" -- would preclude parties seeking to have their claims submitted to arbitration from pursuing nondiscretionary appeals for fear that doing so would deprive them of the protection of 204(b) in the event that they were to lose on appeal (see also, 1 Weinstein-Korn-Miller, supra, ¶ 204.06, at 2-191 ["The 'final determination' should be construed to embrace appeals; the pertinent date would then be that of the final determination of the last appellate court to which an appeal was taken"] [comparing the provision addressing the final determination within the meaning of CPLR 205 ]).

Thus, although there is no dispute that the limitations period began to run on July 27, 1993, when the District terminated the contract with plaintiff, it was tolled from the time the demand to arbitrate was served (September 15, 1993) until the final determination of nonarbitrability by the Appellate Division on November 10, 1994. Therefore, plaintiff timely commenced the instant action on April 20, 1995.

Accordingly, the order of the Appellate Division should be reversed, with costs, and defendant's motion for summary judgment denied.