Almost every contract now contains some sort of an arbitration clause. In fact, it is one of the first clauses an attorney looks for in an agreement when a dispute between the parties arises. This week, the Dallas Court of Appeals’s decision in Ideal Roofing, Inc., et al. v. Armbruster, et al. serves as a reminder that, at some point, proceeding with litigation of a dispute in court can result in a waiver of an applicable and otherwise enforceable arbitration clause.
In this case, Ideal Roofing and Ambrusters entered into a construction contract containing an arbitration clause. When Ambrusters’ roof started leaking, they filed a lawsuit against Ideal Roofing. Although the defendant could have compelled arbitration almost immediately, it proceeded to litigate the case for eighteen and a half months before filing a motion to compel arbitration. The trial court denied the motion and the Court of Appeals affirmed, providing an useful overview of the waiver standard.
In general, a party seeking to compel arbitration under the Federal Arbitration Act (FAA) must establish: (1) the existence of a valid, enforceable arbitration agreement and (2) that the claims at issue fall within that agreement’s scope. The party seeking to avoid arbitration must then establish an affirmative defense to enforcement of the otherwise valid arbitration agreement. Since Ambrusters had conceded on appeal that the arbitration agreement was enforceable, only one question remained – whether Ideal Roofing had waived its arbitration rights by participating in the litigation.
Under both federal and state law, there is a strong presumption against waiver of contractual arbitration. A party waives its contractual arbitration rights when it “substantially invokes judicial process.” According to the Court of Appeals, a party does so when “it has taken specific and deliberate actions, after the filing of the suit, that are inconsistent with the right to arbitrate or has actively tried, but failed, to achieve a satisfactory result through litigation before turning to arbitration.”
What constitutes a “substantial” litigation conduct depends on the context, but a court must consider the following factors when deciding whether a party moving to compel arbitration has waived its contractual arbitration rights:
when the movant knew of the arbitration clause
how much discovery has been initiated and who initiated it
the extent to which discovery related to the merits rather than arbitrability or standing
how much of the discovery would be useful in arbitration
whether the movant sought judgment on the merits
whether the movant sought to compel arbitration on the “eve of the trial”
While the Court of Appeals emphasized that that delay (in moving to compel arbitration) alone does not establish waiver, in this case, the following five out of six factors supported the finding of a waiver:
Ideal Roofing was aware of the arbitration agreement at least four months after answering the lawsuit, but it did not move to compel arbitration until the case has been pending for 18 1/2 months and the case had been set for trial three times
Ideal Roofing both propounded and answered written discovery, took several expert witnesses’ depositions, and inspected the Ambrusters’ roof
None of the discovery conducted in this case related to arbitrability or standing
Ideal Roofing asserted affirmative defenses in court, filed a counter-claim, attended a two-day mediation, and filed a motion for summary judgment and set it for hearing twice
Ideal Roofing filed its motion to compel four months before the trial date
In addition to the burden of showing that a party seeking to compel arbitration has substantially invoked the judicial process, the party seeking to avoid arbitration must also show prejudice or “inherent unfairness in terms of delay, expense, or damage to its legal position that occurs when the party’s opponent forces it to litigate an issue and later seeks to arbitrate that same issue.” Prejudice is more easily shown when a party delays his request for arbitration and in the meantime engages in pretrial activity inconsistent with an intent to arbitrate.
The Court of Appeals found that the following evidence was sufficient to establish prejudice to Ambrusters: (1) plaintiffs’ attorney, whom they hired on contingency, would have to travel from Dallas to Houston to arbitrate; (2) plaintiffs had already paid for two days of mediation and over $3,500 in expert fees; (3) the arbitration agreement was silent as to whether discovery conducted during litigation could be used during arbitration; and (4) the Ambrusters had completed their discovery and were ready to proceed with trial when Ideal Roofing filed it motion to compel arbitration.
CONCLUSION: While answering a lawsuit and even conducting some discovery will probably not waive one’s arbitration rights, a party who is aware of an enforceable arbitration agreement, should proceed cautiously in court while it assesses whether to enforce the agreement or not and should avoid taking a position that is inconsistent with the intent to arbitrate.
For more information regarding enforcement of arbitration agreements in Texas, contact Leiza Dolghih.