Friday, April 10, 2015

Texas Supreme Court Allows General Contractor to Compel Arbitration Against Developer Despite Asserting Counterclaims and Participating in Discovery

In a recent decision involving a dispute over a construction project, the Texas Supreme Court held that the developer had to arbitrate its claims against the general contractor, even though the general contractor filed counterclaims and responded to discovery requests. G.T. Leach, LLC v. Sapphire V.P., LP, 2015 Tex. LEXIS 273 (Tex. 2015).

Sapphire V.P., LP (“Developer”) contracted with G.T. Leach, LLC (“General Contractor”) for the development of luxury condominiums (the “Project”) on South Padre Island. In July 2008, Hurricane Dolly tore through the island causing significant damage to the Project. Developer filed suit against its insurance brokers, alleging claims for negligence and breach of contract. Developer alleged that, eight days before the hurricane hit, the brokers allowed a builder’s risk insurance policy to expire and be replaced by a permanent insurance policy, even though construction of the Project had not yet been completed. More than two years later, the brokers designated several other responsible third parties. These parties included the project general contractor, General Contractor, two subcontractors, and an engineering contractor. Developer amended its petition to name these parties and defendants, also alleging their negligence and contractual breaches resulted in construction defects that caused the Project to sustain water damage that resulting in uncovered losses.

After pursuing pretrial motions and participating in discovery, General Contractor moved to compel arbitration and stay the litigation. General Contractor relied on an arbitration agreement in its general contract with Developer. The brokers, subcontractors, and engineer (collectively, the “Other Defendants”) also moved to compel arbitration, relying on the general contract (even though they never signed that contract) and their own subcontracts with General Contractor.

The trial court denied all of the motions. The defendants pursued an interlocutory appeal, the court of appeals affirmed, and defendants subsequently petitioned the Supreme Court for review.

The Texas Supreme Court took up several issues. First, the Court analyzed whether General Contractor could compel arbitration. Specifically, the Court examined whether General Contractor had waived its right to compel arbitration by participating in pretrial proceedings and discovery. In Texas, a party may waive its right to enforce an arbitration agreement implicitly, though conduct inconsistent with an intent to enforce the right. See Perry Homes v. Cull, 258 S.W.3d 580, 590-91, 594 (Tex. 2008); Moayedi v. Interstate 35/Chisam Rd., LP, 438 S.W. 3d 1, 6 (Tex. 2014). A party asserting implied waiver as a defense to arbitration has the burden to prove that the other party “substantially invoke the judicial process,” which is conduct inconsistent with a claimed right to compel arbitration, and the inconsistent conduct caused the non movant detriment or prejudice. Perry Homes, 258 S.W. 3d at 593-94. Whether a party has “substantially invoked the judicial process depends on the totality of the circumstances.” Id. at 589-90. Relevant factors include: (1) how long the party waited to move to compel arbitration; (2) how much discovery it conducted before moving to compel arbitration; and (3) whether the party asserted affirmative claims for relief in court. Id. at 590-91. “Merely taking part in litigation” was not enough to rise to the level of substantially invoking the judicial process.

Here, General Contractor’s counterclaims were compulsory and purely defensive in nature–that is, “use it or lose it” type claims. Moreover, General Contractor never sought judgments on the merits of the case. General Contractor sought to transfer venue, but venue challenges do not relate to the merits of the case. See Richmont Holdings v. Superior Recharge Sys., LLC, 2014 Tex. LEXIS 1211 (Tex. 2014). In addition, General Contractor filed motions for continuance, to quash depositions, and to designate responsible third parties (a procedure available to tort defendants in Texas that does not involve adding any parties). The Court found these actions were defensive rather than offensive in nature. A party’s litigation conduct aimed at defending itself and minimizing its litigation expenses, rather than taking advantage of the judicial form, does not amount to substantial invocation of the judicial process. Finally, Developer complained of an excessive delay in seeking arbitration. However, General Contractor moved to compel arbitration three months after it had been joined. The Court found that three months, while lengthy, was not an unreasonable delay amounting to waiver.

The Court then examined whether Developer proved it suffered unfair prejudice as a result of General Contractor’s litigation conduct. In this context, detriment or prejudice referred to an “inherent unfairness caused by a party’s attempt to have it both ways by switching between litigation and arbitration to its own advantage.” In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 635 (Tex. 2008). Here, General Contractor did not serve a single request for production, interrogatory, or deposition notice, therefore not giving it any more of an advantage that it otherwise would have obtained by switching back and forth. In summary, the Court held that General Contractor did not implicitly waive its right to compel arbitration.

The Court analyzed several other interesting issues in the case, including whether the issue of whether the General Contractor’s claims were timely under the language of the arbitration provision had to be resolved by arbitration (it did), and whether subcontractors and other parties who had not signed the arbitration agreement could compel arbitration (a complex issue, but they could not in this case).

Thanks to Ian Fullington at Griffith Davison & Shurtleff, P.C. for his assistance with preparing this post.

No comments:

Post a Comment