Last November, the Dallas Court of Appeals upheld a trial court’s ruling that a party who substantially participated in litigation had waived its arbitration rights under an otherwise valid and enforceable arbitration clause. Yesterday, both the First Court of Appeals and the Fourteenth Court of Appeals in Houston reached a similar conclusion.
Like Ideal Roofing, decided last November, the lawsuit in Tuscan Builders, L.P. v. 1437 SH6 L.L.C, et al., involved a construction contract. The First Court of Appeals applied the same five-factor test used by the Dallas Court of Appeals, with the addition of one more criterion – whether the movant for arbitration was the plaintiff (who chose to file in court) or the defendant (who merely responded). The Court of Appeals affirmed the trial court’s order finding that the defendant had substantially invoked the litigation process and his actions were inconsistent with the intent to arbitrate, as demonstrated by the following:
When determining whether a party has waived its arbitration rights, a court must look at “the totality of circumstances.” In addition to the individual factors described above, the Court of Appeals found that Tuscan’s overall litigation strategy, such as bringing its subcontractors into the lawsuit in order to have access to discovery responses obtained by them as aligned parties, and obtaining a building inspection, allowed Tuscan to take advantage of litigation strategies that would not have been available in arbitration. Therefore, such a deliberate tactical approach was inconsistent with any intent to arbitrate.
The Court of Appeals also found that Tuscan’s invocation of the litigation process prejudiced the plaintiff who, not knowing that an arbitration clause existed, spent a significant amount of time and money litigating the case in what it considered to be a proper forum.
The same day that the First Court of Appeals found that the defendant in Tuscan Builder waived its arbitration rights, the Fourteenth Court of Appeals reached a similar result in RSL Funding LLC v. Chaveze D. Pippins, et al., which involved an assignment of annuity contracts.
In this case, three individual defendants bought annuity from MetLife and subsequently executed contracts assigning their rights to RSL. The original annuity contracts between the individuals and MetLife did not contain an arbitration clause, but the assignment agreements with RSL did. When MetLife refused to pay RSL under the annuity contracts, RSL filed a lawsuit against both MetLife and the individuals.
Initially, RSL’s and the individuals’ interests seemed to be aligned since both wanted MetLife to pay RSL on the annuity contracts. However, once MetLife deposited the funds due under the annuity contracts in the court’s registry, the RSL and the individual defendants seemed to disagree as to who should receive such money and the individuals moved to withdraw the funds. RSL promptly filed an arbitration demand against the individuals based on the arbitration clause in their assignment contract and moved to stay the litigation.
The Fourteenth Court of Appeals upheld the trial court’s denial of the stay of litigation on the grounds that RSL substantially invoked the litigation process and the individual defendants were prejudiced by such invocation, thus resulting in a waiver of RSL’s arbitration rights under the assignment contract. Justice Kem Thompson Frost dissented.
The Court noted that all of the waiver factors are rarely present in a single case, thus a waiver could be established based only on a few or even a single factor. Instead of addressing each of the criteria, it concluded in broad strokes that RSL had invoked the litigation process because of the following actions:
Furthermore, RSL’s invocation of the litigation process substantially prejudiced the individual defendants because they were forced to file numerous pleadings and motions in the trial court that they would not have needed to do had the case proceeded to arbitration. Furthermore, RSL’s failure to pay the individual defendants the amount that it owed under the assignment contracts while the litigation was proceeding put a significant financial constraint on them.
What makes this case different from Ideal Roofing and Tuscan Builders, however, is that in both of those lawsuits, the parties’ pattern of litigation activities established rather clearly that they took full advantage of discovery and other litigation procedures before seeking arbitration in the eleventh hour before trial. In RSL Funding, however, as pointed out in the dissenting opinion, RSL’s litigation tactics were directed at MetLife, with whom it did not have an arbitration agreement, and not at the individual co-defendants. Moreover, at the time RSL filed the lawsuit there were no disputes between itself and the individuals under any of the assignment agreements, and RSL added them as defendants only to obtain a full resolution of the rights under the Declaratory Judgment Act. The arbitrable claims between RSL and the individual defendants did not arise until after the defendants had filed a motion to withdraw funds from the court registry, at which point RSL promptly filed an arbitration demand.
CONCLUSION: While Ideal Roofing and Tuscan Builders suggest that a party has to conduct extensive discovery, participate in motion practice, and delay an arbitration demand until the eve of trial in order to cause a waiver of its arbitration rights, RSL Funding indicates that a waiver can occur far earlier in the litigation process and be caused by far less rigorous participation in a lawsuit.
Thus, anytime a party finds itself pursuing or defending a lawsuit involving claims that might be covered by an arbitration clause, the party should plan its litigation strategy very carefully so as to avoid a waiver of its arbitration rights.
For more information regarding enforcement of arbitration agreements in Texas, contact Leiza Dolghih.