In another of several recent intermediate appellate opinions dealing with motions to compel arbitration, the El Paso Court of Appeals has ruled that party that substantially invoked the litigation process waived its right to arbitration under a construction contract.
F.T. James Construction, Inc. v. Hotel Sancho Panza, LLC and Jordan Foster Construction, LLC (No. 08-20-00096-CV) arose from a dispute over the construction of the Courtyard Marriott Downtown/Convention Center hotel in El Paso. The hotel hired James to build the hotel on a cost-plus basis, construction to be substantially completed within 420 days after commencement. When the project was not substantially completed within that time, the hotel sued for breach of contract. James responded that the hotel issued numerous change orders that delayed the project and counterclaimed against the hotel for breach of contract and to foreclose a mechanic’s lien. James also filed a third-party claim for breach of contract against a concrete subcontractor, Jordan Foster. Foster answered James’s suit and filed a counterclaim against the hotel for breach of contract and quantum meruit. The hotel counterclaimed against Foster challenging its mechanic’s lien. The original complaint was filed in February 2019. The trial court initially set a trial date for June 2020. In August 2019 the hotel served its first set of requests for admissions.
The facts get a bit more convoluted from here. James first demanded arbitration in a letter to the hotel’s counsel in September 2019. Two days later the hotel deposed the James’s owner on the arbitration issue. The owner stated that he didn’t know anything about James’s demand for arbitration or whether James’s contract with the hotel permitted it. He further testified that he did know whether James preferred arbitration or a civil proceeding to resolve the dispute, but that he saw no problem in litigating the matter in court. Two months later, in November, Foster filed a motion to compel arbitration, seeking to send the entire matter to arbitration, though its contract was with James, not the hotel. The hotel objected to the motion. Simultaneously, James sent a letter to the consulting architect on the project invoking the dispute resolution process in the project management contract, which required disputes between the hotel and James to be submitted to the architect for resolution, followed by mediation and arbitration, if necessary. When the architect did not respond (it turns out the architect had already been retained by the hotel as an expert), James sent a demand for mediation to the hotel. The hotel responded that James had waived any right to the dispute resolution process in the contract. The parties agreed to continue the trial date until December 2020.
In January 2020, James filed a motion to compel arbitration. The hotel objected, arguing that James had provided no authenticated arbitration agreement to the trial court and that there was no such arbitration agreement between the hotel and James. While the motion was pending, additional discovery requests were made to subcontractors on the project. The trial court eventually held a hearing on the motion to compel, which it denied in an order without findings of fact or conclusions of law.
This somewhat laborious recitation of the facts is necessary to follow the court of appeals’ reasoning. First, the court made an assumption, without deciding, that a valid arbitration agreement existed, a fact issue “heavily disputed” by the parties. It did so to avoid arbitrating “contentious” facts where the hotel had demonstrated a viable affirmative legal defense: that James had “waived arbitration by litigation conduct that is detrimental to the other party.” Noting that “public policy favors the enforcement of contracts, including those related to arbitration, . . . the law imposes a strong presumption against waiver” (citations omitted). Waiver “depends on the totality of the circumstances” (citing Perry Homes v. Cull, 258 S.W.3d 580, 591 (Tex. 2008)) based on a variety of factors, which the court of appeals grouped into “three topics: first, those related to the procedural posture of the case; second, those related to [James’s] delay in demanding arbitration; and third, those related to discovery, time, and expense” (citations omitted)
Applying the Perry Homes factors, the court concluded that they predominated in favor of waiver. These include: (1) James’s counterclaim against the hotel and third-party claim against Foster, which invoked the jurisdiction of the court and brought a new party into the lawsuit; (2) the somewhat lengthy delay in James’s demand for arbitration and subsequent motion to compel, as measured from the time of the original date to the trial date agreed by the parties; (3) James’s claim that the reason for delay was that it didn’t know about the arbitration clause, although its lawyer sent a letter to the hotel requesting arbitration two days before James’s owner testified that he had no idea about the arbitration clause (i.e., parties are assumed to have read their contracts); (4) James’s failure to follow the claims procedure laid out in the contract in a timely manner; (5) James’s active engagement in discovery as part of its counterclaim against the hotel and third-party claim against Foster; and (6) the substantial time and expense the hotel spent on James’s discovery requests before its motion to compel.
Having determined that James’s waived its right to arbitration by substantially invoking the judicial process, the court had to decide whether the hotel suffered any prejudice, which “may be shown by considerable delay, expense, or damage to the nonmovant’s legal position” (citations omitted). The facts of prejudice most persuasive to the court was James’s bringing Foster into the lawsuit against the hotel, especially since Foster and the hotel had no contract. Considering James’s delay in trying to compel arbitration, the hotel had incurred significant costs to defend both actions. Asking the hotel to now arbitrate the dispute with the hotel, while leaving it with an ongoing lawsuit with the subcontractor, was a bit too much for the court. The court thus affirmed the trial court order denying the motion to compel.
As you can see, holding open the question of whether to litigate or arbitrate too long can result in waiver, especially if a party has been a bit too cute in its pre-motion to compel litigation tactics. There is also another important factor to consider: wasting the trial court’s time. While the Perry Homes test focuses largely on how much time and expense the nonmovant has already incurred in litigation, the flip side of that issue is how much time the movant has already asked the trial court to invest in the case. That was pretty significant here, and it appears that the court of appeals was not amused.
