For the first time, the Texas Supreme Court has vacated an arbitration award on the basis that a plaintiff substantially invoked the litigation process and thereby waived the right to arbitration.

Texas law has permitted parties to a dispute to choose arbitration rather than litigation since 1846.[1] As made clear in Cull, however, a party that abuses that choice by substantial invocation of the litigation process resulting in prejudice to the other party will waive its right to arbitrate. Texas law continues to recognize a strong presumption against waiver of arbitration;[2] however, the presumption is not irrebuttable.

In Cull, the plaintiff homeowners sued Perry Homes and the warranty companies after years of suffering structural and drainage problems to their home. The warranty companies immediately requested arbitration, under the terms of the underlying warranty agreement, and the Culls then filed a 79-page response opposing arbitration, and sought extensive discovery in the litigation from all defendants. None of the parties requested a ruling on the arbitration request, and the litigation proceeded for approximately 14 months. After 14 months of active litigation, however, the Culls changed their minds and, shortly before the trial setting, requested arbitration.

While expressing reservations based upon the amount of litigation conducted, the trial court signed the order granting arbitration just 4 days before the case was set for trial. After a year in arbitration, the Culls were awarded $800,000 in an arbitration award.[3] The trial court then confirmed the award, and the court of appeals affirmed.

The Texas Supreme Court agreed with the plaintiffs that sending them back to the trial court after the full arbitration process would result in a waste of the time and money spent in arbitration, as well as deprive them of a substantial arbitration award. The court determined, however, that they knew the risk when they requested arbitration at the last minute.[4] The Cull court clarified that the test to be applied in determining whether the litigation process has, in fact, been “substantially invoked” for purposes of waiver of arbitration will be the “totality-of-the-circumstances” test applied on a case-by-case basis. Under this test, the courts are to consider a “wide variety of factors,” such as when the movants knew of the arbitration clause, how much discovery has been conducted, who initiated it, whether it related to the merits rather than arbitration or standing, how much of it would be useful in arbitration, and whether the movants sought judgment on the merits.[5] The court further clarified that just how much litigation conduct will be “substantial” will depend upon the context — while 3 or 4 depositions may be all the discovery needed in one case, it may be only preliminary in another.[6]

The Cull court, however, further confirmed that waiver of arbitration still requires a showing of “prejudice” — substantially invoking the litigation process alone is not enough to cause a waiver of arbitration. While acknowledging that Texas law generally does not require a showing of prejudice for waiver — as only the intentional relinquishment of a know right is required — the court noted the importance of keeping federal arbitration law and state arbitration law consistent, and further reasoned that waiver of arbitration by litigation conduct is akin to Texas estoppel law, which does include a prejudice requirement.[7] The Cull court applied the prejudice requirement to the case, finding that the Culls had prejudiced the other parties by obtaining extensive discovery under one set of rules (for civil litigation) and then seeking arbitration under another, by delaying disposition of the matter through the switch to arbitration when trial was imminent and arbitration was not, and by getting the court to order discovery for them and then limiting their opponents rights to appellate review.[8] The court found that such manipulation of litigation for one’s advantage and another’s detriment is just the kind of inherent unfairness that constitutes “prejudice” under federal and state law.

As this decision makes clear, when the right to arbitrate exists, the decision to forego or oppose arbitration, and to pursue litigation, should be made carefully and on an informed basis. Once the choice is made, it might be binding, no matter the time and costs involved.

Hirsch & Westheimer provides litigation and arbitration services to its clients, and welcomes any request for additional information.

[1] Perry Homes v. Cull, No. 05-0882, — S.W.3d — , 2008 WL 1922978, *1 (Tex. May 2, 2008) (citing L.H. Lacy Co. v. City of Lubbock, 559 S.W.2d 348, 351 (Tex. 1977)).
[2] Id. at *1 (citing multiple cases).
[3] The award included restitution of the purchase price of the Culls’ home, mental anguish damages, exemplary damages, and attorney’s fees. Cull, 2008 WL 1922978, at *2.
[4] Id. at *1.
[5] Id at *5.
[6] Id. (footnotes omitted).
[7] Id. at *6.
[8] Id. at *8.