Tuscan Builders, LP v. 1437 SH6 L.L.C. D/B/A Sweetwater Aesthetic Spa & Wellness Center, Shelena C. Lalji, M.D., P.A. D/B/A Dr. Shel Wellness & Medical Spa and Lalji Dental, P.C. D/B/A Lake Pointe Dental and Specialty

• Court: Court of Appeals of Texas
• Decided: May 15, 2014
• Docket: 01-13-00685-CV
• Status: Published

Opinion

Opinion issued May 15, 2014

In The

Court of Appeals For The

First District of Texas ———————————— NO. 01-13-00685-CV ——————————— TUSCAN BUILDERS, LP, Appellant V. 1437 SH6 L.L.C. D/B/A SWEETWATER AESTHETIC SPA & WELLNESS CENTER, SHELENA C. LALJI, M.D., P.A. D/B/A DR. SHEL WELLNESS & MEDICAL SPA AND LALJI DENTAL, P.C. D/B/A LAKE POINTE DENTAL AND SPECIALTY, Appellees

On Appeal from the 151st District Court Harris County, Texas Trial Court Case No. 2012-33706

OPINION ON REHEARING

Appellant Tuscan Builders, LP has moved for rehearing and en banc

consideration. We grant rehearing, withdraw our opinion and judgment of January 30, and issue the following in their stead. We dismiss as moot Tuscan’s motion for

en banc consideration. Our disposition of the appeal remains unchanged.

In this construction dispute, a builder appeals the trial court’s order denying

its motion to compel arbitration against the building’s owners. The builder

contends that the trial court erred in finding that the builder had waived

enforcement of an arbitration clause by invoking the judicial process and delaying

its effort to compel arbitration for more than a year. Finding no error, we affirm.

Background

The contract dispute

The commercial building owners, 1437 SH6 L.L.C. d/b/a Sweetwater

Aesthetic Spa & Wellness Center, Shelena C. Lalji, M.D., P.A. d/b/a Dr. Shel

Wellness & Medical Spa, and Lalji Dental, P.C. d/b/a Lake Pointe Dental and

Specialty (collectively, Sweetwater) sued Tuscan, the builder, for breach of

warranty associated with alleged construction defects. Sweetwater had contracted

with a construction design team, the Mirador Group, Inc., and an architect, Todd

Blitzer, to design a building suitable for a dental office, a wellness clinic, and other

health-related businesses. Sweetwater’s design services agreement with Mirador

provides that venue for any suit “shall be in a Texas State District Court in Harris

County, Texas.” The design agreement incorporates by reference specific

provisions of the “Standard Form of Agreement between Owner and Architect

2 (AIA Document B141–1997),” but it expressly excludes “Sections 1.3.4,

Mediation and 1.3.5, Arbitration.”

Sweetwater hired Tuscan to construct the building according to Mirador’s

design specifications. Tuscan prepared the construction contract using AIA

Document A101–1997, the “Standard Form of Agreement between Owner and

Contractor where the basis of payment is a stipulated sum.” The parties’

construction contract incorporates by reference an industry form document—AIA

Document A201–1997, the “General Conditions of the Contract for Construction”

[General Conditions]—but it does not attach a copy of that document. Like AIA

Document B141–1997, incorporated into the design agreement, A201–1997 calls

for mediation in the first instance, followed by arbitration. Unlike the design

agreement, the construction contract does not exclude the AIA Document’s

arbitration provisions that were incorporated by reference, but not attached to the

contract. The pertinent sections of A201–1997 provide:

Claims not resolved by mediation shall be decided by arbitration which, unless the parties mutually agree otherwise, shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect. The demand for arbitration shall be filed in writing with the other party to the Contract and with the American Arbitration Association, and a copy shall be filed with the Architect. After it moved in, Sweetwater noticed water leaking into the building. It

informed Mirador and Tuscan of the problem, and they attempted to repair the

3 leaks. During a rainstorm in July 2010, however, significant water leaks appeared

in the exterior walls and roof, causing substantial damage to the structure and

interior walls. Sweetwater again sought to have Mirador and Tuscan repair the

building, but Sweetwater was not satisfied with the results.

Course of proceedings

In June 2012, Sweetwater sued Mirador, Tuscan, and Blitzer for negligence,

breach of contract, and breaches of express and implied warranties, as well as

statutory claims under the Texas Deceptive Trade Practices Act. Tuscan answered

the suit on June 29. Tuscan denied Sweetwater’s allegations, raised several

specific defenses, and made a verified denial; it did not mention arbitration in the

filing. In November, Tuscan sued its five subcontractors, seeking indemnification

under the indemnification provisions in each subcontractor agreement. Tuscan

sued each subcontractor for negligence, breach of contract, and breach of warranty.

Sweetwater later amended its petition to include its own claims against the

subcontractors. The subcontractors answered, and several demanded a jury trial.

In addition to pursuing written discovery, the subcontractors also sought to inspect

the Sweetwater property, pursuant to Texas Rule of Civil Procedure 196.7. Tuscan

participated with the third-party defendants in the inspection.

The trial court’s docket control order called for the discovery period to end

in March 2013 and trial to commence in April 2013. In January 2013, Tuscan

4 joined Sweetwater in filing an agreed motion for continuance. The joint motion

requested the continuance for the “opportunity to conduct discovery and identify

the relevant issues.” Tuscan did not mention arbitration. The trial court granted

the motion and extended the discovery, motion, and pleading deadlines. It set trial

to commence on September 16, 2013.

On June 6, 2013, Tuscan, the other defendants, and the third-party

defendants moved to extend the mediation deadline complaining that, before

mediating the dispute, they required additional information concerning the various

components of Sweetwater’s alleged damages, responses to additional

interrogatories, answers to requests for admissions they had propounded, and the

depositions of Sweetwater’s corporate representatives and management agents,

which, the motion represented, were scheduled for July 2 and 8.

By July 14, the expert witnesses had been designated and the expert

designation deadlines for all parties had passed; approximately one month

remained of the discovery period. The parties had completed their paper

discovery. On that date, Tuscan invoked the arbitration provision incorporated by

reference into the construction contract and included with its motion an unsigned

copy of the General Conditions form containing that provision.

The trial court held an evidentiary hearing on Tuscan’s motion to compel

arbitration and denied the motion on August 1.

5 Discussion

Tuscan challenges the trial court’s ruling, contending that it erred in denying

Tuscan’s motion to compel arbitration because the evidence does not establish that

Tuscan had waived its contractual right to arbitrate by substantially invoking the

judicial process.1

Applicable Law and Standard of Review

Waiver is the intentional relinquishment of a known right or intentional

conduct inconsistent with claiming that right. Jernigan v. Langley, 111 S.W.3d

153, 156 (Tex. 2003); Interconex, Inc. v. Ugarov, 224 S.W.3d 523, 533 (Tex.

App.—Houston [1st Dist.] 2007, no pet.). “[A] party waives an arbitration clause

by substantially invoking the judicial process to the other party’s detriment or

prejudice.” Perry Homes v. Cull, 258 S.W.3d 580, 589–90 (Tex. 2008) (footnote

omitted). A party substantially invokes the judicial process if it takes specific and

deliberate actions that are inconsistent with the right to arbitrate or if it actively

tries, but fails to achieve, a satisfactory result through litigation before turning to

arbitration. In re Christus Spohn Health Sys. Corp., 231 S.W.3d 475, 478–79

(Tex. App.—Corpus Christi 2007, orig. proceeding); see In re Vesta Ins. Grp., Inc.,

1 Tuscan also contends on appeal that it established the validity of the arbitration agreement. The trial court raised questions concerning the validity during the evidentiary hearing, but it but did not base its ruling on any specific ground. For purposes of this appeal, we assume that a valid arbitration agreement exists between Tuscan and Sweetwater.

6 192 S.W.3d 759, 763 (Tex. 2006) (orig. proceeding). Prejudice refers to the

inherent unfairness caused by “a party’s attempt to have it both ways by switching

between litigation and arbitration to its own advantage.” Perry Homes, 258

S.W.3d at 597.

Whether a party has participated in the litigation process and thus waived the

right to arbitrate is a question of law for the court. Id. at 587. We apply a strong

presumption against waiver of arbitration and resolve any doubt on the issue in

favor of arbitration. Id. at 584; see In re Bruce Terminix Co., 988 S.W.2d 702, 705

(Tex. 1998).

For a waiver to have occurred, the appellant “must, at the very least, [have]

engage[d] in some overt act in court that evince[d] a desire to resolve the [same]

arbitrable dispute through litigation rather than arbitration.” Haddock v. Quinn,

287 S.W.3d 158, 177 (Tex. App.—Fort Worth 2009, pet. denied). In assessing

whether Tuscan waived its right to arbitrate, we consider whether Tuscan’s

conduct in the litigation portrays the kind of “aggressive litigation strategy” that

substantially invokes the litigation process. See Okorafor v. Uncle Sam & Assocs.,

295 S.W.3d 27, 40 (Tex. App.—Houston [1st Dist.] 2009, pet. denied); see also In

re Christus Spohn Health Sys. Corp., 231 S.W.3d at 479 (explaining that actions

inconsistent with right to arbitrate may include “some combination of filing an

answer, setting up a counterclaim, pursuing extensive discovery, moving for a

7 continuance, and failing to timely request arbitration”) (citing Cent. Nat’l Ins. Co.

of Omaha v. Lerner, 856 S.W.2d 492, 494 (Tex. App.—Houston [1st Dist.] 1993,

orig. proceeding)). In determining whether a party waived an arbitration clause,

the courts can consider, among other factors: (1) whether the movant for arbitration

was the plaintiff (who chose to file in court) or the defendant (who merely

responded), (2) when the movant learned of the arbitration clause and how long the

movant delayed before seeking arbitration, (3) the amount of the movant’s pretrial

activity related to the merits rather than arbitrability or jurisdiction, (4) the amount

of discovery conducted, and (5) whether the movant sought judgment on the

merits. See Perry Homes, 258 S.W.3d at 591–92; In re Hawthorne Townhomes,

L.P., 282 S.W.3d 131, 141 (Tex. App.—Dallas 2009, no pet.). We analyze

whether waiver occurred based on the totality of the circumstances presented in

each case. See In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 625 (Tex.

2008); Okorafor, 295 S.W.3d at 38; Interconex, Inc., 224 S.W.3d at 533.

The Perry Homes Factors

Tuscan began as a defendant in the suit. Early in the litigation, however,

Tuscan also became a third-party plaintiff by suing its subcontractors. Although a

party invokes the judicial process when it sues in court, the filing of a third-party

action, standing alone, may not be enough to constitute waiver of an agreement to

arbitrate. In D.R. Horton-Tex., Ltd. v. Drogseth, for example, the Fort Worth

8 Court of Appeals held that the defendant did not waive its right to arbitrate by

filing a third-party action because the defendant concurrently had moved in the

trial court to abate the case and submit it to binding arbitration. No. 02–12–

00435–CV, 2013 WL 3377121, at *5–6 (Tex. App.—Fort Worth July 3, 2013, no

pet.) (mem. op.). In its motion to compel arbitration filed six weeks later, the

defendant explained that it had filed the third-party petition before the hearing on

its motion to compel to preserve its claims against the third-party defendants and

did not intend a waiver of right to arbitration. Id. at *5. In contrast to the movant

in D.R. Horton, Tuscan did not accompany its answer or its third-party claims with

any notice of an intent to pursue arbitration, nor did Tuscan seek an abatement of

the case pending resolution of its claim to arbitration.

Based on the record, the trial court reasonably could have found that Tuscan

knew of the arbitration clause before it answered Sweetwater’s suit, but that it did

not reveal the existence of the arbitration agreement to Sweetwater until after

Tuscan had sued third parties and the parties had conducted a property inspection

and completed written discovery, including expert designations. 2 The owner-

contractor agreement, prepared by Tuscan for Sweetwater’s execution,

2 On rehearing, Tuscan contends that we should disregard counsel’s statements concerning the status of discovery in the proceedings because they are not evidence, only argument. Tuscan, however, waived any complaint about their evidentiary value by failing to object in the trial court. See Banda v. Garcia, 955 S.W.2d 270, 272 (Tex. 1997).

9 incorporates a construction industry form that incorporates by reference another

clause, contained in the General Conditions form, that allows for arbitration.

The “General Conditions” form containing the arbitration clause declares

that, “The Contract Documents consist of the Agreement between Owner and

Contractor . . ., Conditions of the Contract (General, Supplementary, and other

Conditions), Drawings, Specifications, Addenda issued prior to execution of the

Contract, other documents listed in the Agreement and Modifications issued after

execution of the Contract.” It further provides that “[t]he Contract Documents

shall be signed by Owner and Contractor.” Tuscan, however, did not provide a

signed copy of the form with its motion, nor did it deny Sweetwater’s assertion that

it had no actual knowledge or notice of the form’s contents until it received

Tuscan’s motion to compel.

If Tuscan’s failure to attach the industry form to the construction contract

did not render the arbitration provision invalid, the record, at a minimum,

demonstrates that Tuscan understood the reference to its own industry form and

was aware that it contained an arbitration provision, yet did not enlighten

Sweetwater that its claims were subject to arbitration until Tuscan moved to

compel arbitration more than a year after filing third party actions and proceeding

with discovery.

10 Sweetwater’s contract with Mirador expressly excludes any obligation to

arbitrate and requires litigation in Harris County district court. As a result,

Tuscan’s belated invocation of the arbitration clause to conduct arbitration would

delay the resolution of the dispute between Tuscan and Mirador, and would make

for an inefficient, piecemeal adjudication, to the expense of Sweetwater, who has

prepared its case against the defendants in a single forum. Had Tuscan promptly

moved for arbitration, Sweetwater and the other defendants would have been

entitled to a stay of proceedings pending arbitration; instead, the parties engaged in

considerable time and expense on the road to a court trial. These circumstances

make the timing of Tuscan’s motion to compel more consistent with a late-game

tactical decision than an intent to preserve the right to arbitrate.

Tuscan joined in motions that prolonged the discovery period and postponed

the trial date and mediation deadline to allow the parties to pursue additional

discovery on the merits. By the time Tuscan moved to compel arbitration—more

than a year after Sweetwater filed suit—the parties had completed written

discovery, designated their experts for trial, and physically inspected the building,

and the trial setting was less than a month away. The need for further merits

discovery served as the basis for the parties’ successful requests for both the trial

continuance and the extension of the mediation deadline. In opposing Tuscan’s

11 motion to compel arbitration, Sweetwater pointed out that Tuscan would not have

been likely to obtain a building inspection in an arbitral forum.

Tuscan responds that its own discovery activities were limited to written

discovery. Tuscan’s litigation strategy, however, enhanced its discovery efforts.

By suing its subcontractor-indemnitors, Tuscan benefited from the discovery

sought by these additional parties, who are aligned with it against Sweetwater. For

example, Tuscan availed itself of the opportunity, made possible by the

subcontractors’ discovery request, to inspect the building. By bringing the

subcontractors into the suit, Tuscan accomplished indirectly what it did not do

directly. The record supports the trial court’s conclusion that these tactics, taken

together, were inconsistent with any intent to arbitrate these claims, and caused

some prejudice to Sweetwater.

The purpose of the presumption against finding a waiver of contractual

arbitration is to preserve the purpose of the parties’ agreement to obtain a speedy

and inexpensive final disposition of the disputed matter. See Porter & Clements,

L.L.P. v. Stone, 935 S.W.2d 217, 221 (Tex. App.—Houston [1st Dist.] 1996, no

pet.). Tuscan’s year-long delay in invoking or even mentioning the arbitration

clause gave Tuscan litigation advantages it would not have had in an arbitration

proceeding. We hold that the trial court properly denied Tuscan’s motion to

12 compel arbitration because Tuscan had substantially invoked the judicial process,

to Sweetwater’s prejudice.

Conclusion

We hold that the trial court did not err in denying Tuscan’s motion to

compel arbitration. We therefore affirm the trial court’s order and remand the

cause for further proceedings.

Jane Bland Justice

Panel consists of Chief Justice Radack and Justices Bland and Huddle.