northwest-construction-company-inc-v-the-oak-partners-lp-morgan ( 2008 )

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 2-07-293-CV
NORTHWEST CONSTRUCTION APPELLANT
COMPANY, INC.
V.
THE OAK PARTNERS, L.P., APPELLEES
MORGAN DEVELOPMENT
AND SUPPLY, INC.,
METROPLEX MASONRY, INC.,
ARI-TEX, INC., MAX PLUMBING
CONTRACTORS, INC.,
S & S TILE, LTD., AND
KENT-ANDERSON CONCRETE, L.P.
D/B/A ANDERSON CONCRETE
CONSTRUCTION
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FROM THE 355TH DISTRICT COURT OF HOOD COUNTY
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AND
NO. 2-07-328-CV
IN RE NORTHWEST RELATOR
CONSTRUCTION COMPANY, INC.
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ORIGINAL PROCEEDING
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OPINION
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This consolidated mandamus proceeding and interlocutory appeal arise
from the trial court’s order denying relator and appellant Northwest
Construction Company, Inc.’s motion to compel arbitration in the underlying
suit involving construction of an assisted living center in Granbury, Texas. In
both the appeal and mandamus proceeding, Northwest raises the following four
issues: (1) whether there is a valid arbitration clause binding the parties that
encompasses the dispute; (2) whether the trial court had jurisdiction to
determine if Northwest waived its right to arbitrate the dispute; (3) whether the
trial court erred by ruling that Northwest waived its right to arbitrate by
substantially invoking the judicial process to the detriment of the other parties;
and (4) whether appellees have waived their right to rely on mediation as a
2
condition precedent to the enforceability of the arbitration clause. We affirm
the trial court’s order in part and reverse it in part. We also dismiss
Northwest’s petition for writ of mandamus.
Background Facts
On April 27, 2004, Northwest entered into a construction contract with
The Oak Partners, L.P., an appellee and real party in interest, to design and
construct an assisted living facility in Granbury, Texas. The contract referenced
the facility to be constructed as “more particularly described in the design
development plans and specifications and design criteria identified in Exhibit B”
attached to the contract. Exhibit B, in turn, provided that the project
specifications were the “Project Manual for The Courtyards at Lake Granbury,
Granbury, Texas, prepared by GSR Andrade Architects dated April 16, 2004.”
The April 16, 2004 Project Manual included a provision incorporating into it
“[t]he ‘General Conditions of the Contract for Construction’, AIA Document
A201, Fourteenth Edition, 1997, Articles 1 through 14 inclusive.” A new
Project Manual dated May 28, 2004 contained the same language.
AIA Document A201-1997 contains an arbitration clause, which reads as
follows, in pertinent part:
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
3
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.
The term “Claim” is defined as
a demand or assertion by one of the parties seeking, as a matter of
right, adjustment or interpretation of Contract terms, payment of
money, extension of time or other relief with respect to the terms
of the Contract. The term “Claim” also includes other disputes and
matters in question between the Owner and Contractor arising out
of or relating to the Contract.
After entering into the contract with Oak Partners, Northwest entered into
subcontractor agreements with S & S Tile, Ltd., Morgan Development and
Supply, Inc., Metroplex Masonry, Inc., Ari-Tex, Inc., Kent-Anderson Concrete
L.P. d/b/a Anderson Concrete Construction, and Max Plumbing Contractors, Inc.
Each of the subcontract agreements contained the following provisions:
The terms of the dispute resolution and claims procedure contained
in the General Contract shall be binding upon Subcontractor,
whether or not Subcontractor records or files a mechanic’s lien,
stop notice or prosecutes suit thereon or against any bond posted
by Contractor; and Subcontractor hereby acknowledges that this
Subcontract waives, affects, and impairs rights it would otherwise
have in connection with such liens, stop notices and suits on said
bonds.
....
Any disputes or controversies not resolved or settled by the parties
under the previous provisions shall be submitted to binding
arbitration in accordance with the Construction Industry Rules of
the American Arbitration Association and any judgment upon the
4
award by the arbitrators may be entered by any court having
jurisdiction. The venue for any hearing under this arbitration
provision shall be in Dallas County, Texas.
After Northwest constructed the facility, Oak Partners sued Northwest
on August 30, 2005, in the 355th District Court of Hood County, alleging that
Northwest had breached the contract; Oak Partners claimed that the facility had
failed to pass inspections by the Texas Department of Aging and Disability
Services because certain parts of the design and construction were not in
accordance with the Department’s applicable rules and regulations. Northwest
filed its original answer in the suit on December 12, 2005.
S & S Tile and Max Plumbing sued Oak Partners and Northwest in
separate suits in the 355th District Court, claiming they were owed money on
the project. On January 11, 2006, Northwest filed a motion to consolidate the
Max Plumbing and Oak Partners cases. The trial court granted the motion the
next day and consolidated the cases. On January 19, 2006, Northwest filed
a motion to consolidate the S & S Tile case with the two consolidated cases.
Before the trial court ruled on the motion to consolidate, S & S Tile filed a
motion for summary judgment. While that motion was pending, the trial court
granted Northwest’s motion to consolidate the S & S Tile case with the other
two cases on February 2, 2006.
5
Northwest filed a counterclaim against Oak Partners on February 3, 2006,
alleging that Oak Partners breached the contract by failing to pay for change
orders, causing delays, and refusing to release retainage. Northwest also
brought causes of action for quantum meruit, promissory estoppel, and
foreclosure of statutory and constitutional liens; a Prompt Payment Act claim;
and a claim for attorneys’ fees.
Northwest and Oak Partners filed responses to S & S Tile’s motion for
summary judgment on March 10, 2006. The motion was set for a hearing on
March 17, 2006, but S & S Tile and Northwest entered into a rule 11
agreement to remove the motion from the court’s docket.1 The motion was
never reset.
On February 17, 2006, Kent-Anderson filed a separate suit against
Northwest and Oak Partners, which the trial court consolidated with the other
three cases upon Northwest’s motion. Oak Partners then filed a first amended
petition adding GSR as an additional defendant and alleging causes of action for
breach of contract and negligence. After the addition of GSR as a defendant,
subcontractors Morgan Development and Supply, Inc., Metroplex Masonry, Inc.,
and Ari-Tex, Inc. intervened in the suit.
1
The copy of the agreement in the record is signed only by counsel for
S & S Tile and Northwest.
6
Northwest filed a motion for partial summary judgment on May 2, 2007.
In it, Northwest sought a ruling that Oak Partners could not recover damages
arising from design flaws or errors or omissions in the project design.
Northwest asserted the affirmative defenses of estoppel, contractual bar,
violation of the express negligence rule, and waiver. Oak Partners filed a
response on May 30, 2007. GSR also filed a response and an affidavit in
opposition to the motion.
On June 25, 2007, Northwest filed a First Amended Original
Counterclaim and Original Cross-Claim, re-alleging its claims against Oak
Partners, adding declaratory and unjust enrichment claims, and alleging cross-
claims against GSR and the subcontractors. On July 9, 2007, Northwest filed
a “Motion to Compel Arbitration” and a “Motion for Leave to Designate
Responsible Third Parties,” which it expressly made contingent upon the trial
court’s denial of its motion to compel arbitration.
The trial court denied Northwest’s motion to compel arbitration on the
ground that Northwest had waived its right to arbitration by substantially
invoking the judicial process to the detriment of all of the opposing parties in
the case.2 Before this court, Oak Partners is the only party opposing
2
At trial, the only parties who opposed Northwest’s motion to compel
arbitration were Oak Partners, Kent-Anderson, and Ari-Tex. Kent-Anderson has
7
Northwest’s request for arbitration. Accordingly, we will review whether the
trial court properly denied Northwest’s motion to compel arbitration.
This Court’s Jurisdiction
To determine whether we have jurisdiction over the interlocutory appeal
in addition to the mandamus petition, we must decide whether the trial court
denied Northwest’s motion to compel pursuant to the Federal Arbitration Act
(FAA), the Texas General Arbitration Act (TGAA), or both. See 9 U.S.C.A. §§
1-16 (West 1999 & Supp. 2007); T EX. C IV. P RAC. & R EM. C ODE A NN. §§
171.001-.098 (Vernon 2005); In re Citigroup Global Mkts., Inc., 202 S.W.3d
477, 480 (Tex. App.—Dallas 2006, orig. proceeding). In Texas, a trial court’s
denial of arbitration under the FAA may be challenged only by mandamus and
not by interlocutory appeal. In re D. Wilson Constr. Co., 196 S.W.3d 774, 779
(Tex. 2006) (orig. proceeding); Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266,
272 (Tex. 1992) (orig. proceeding). But a party may seek to enforce an
arbitration agreement under both the FAA and TGAA if, like the agreement
here, it does not say whether the FAA or TGAA applies. D. Wilson Constr. Co.,
196 S.W.3d at 778-79. Texas appellate courts have jurisdiction over
indicated in both the appeal and mandamus proceeding that it no longer
opposes arbitration, and Ari-Tex has not filed any documents in either cause in
our court.
8
interlocutory appeals from the denial of arbitration under the TGAA only or
under both the FAA and TGAA. T EX. C IV. P RAC. & R EM. C ODE A NN. §
171.098(a)(1); D. Wilson Constr. Co., 196 S.W.3d at 778-79.
Here, the agreement upon which Northwest relies does not purport to be
governed by either the FAA or the TGAA. In its motion to compel, Northwest
sought arbitration under both the FAA and TGAA. Oak Partners contends in its
response to the petition for writ of mandamus that Northwest did not bring
forward any evidence of interstate commerce showing that the agreement is
enforceable under the FAA; thus, according to Oak Partners, enforceability of
the agreement is governed by the TGAA only.
The trial court’s order denying arbitration does not specify whether the
denial was under the FAA or TGAA. Northwest filed both a petition for writ of
mandamus and an interlocutory appeal in this court, contending that the
agreement is enforceable under the TGAA as well as the FAA. Accordingly, we
have jurisdiction over both the appeal and the mandamus unless the FAA
pre-empts the TGAA in this instance. See id. at 779-80.
To determine whether an agreement that does not purport to be under
either the FAA or TGAA is governed only by the FAA (i.e., whether the FAA
pre-empts the TGAA), thus precluding an appellate court’s jurisdiction over an
interlocutory appeal, we must determine whether (1) the agreement is in
9
writing, (2) it involves interstate commerce, (3) it can withstand scrutiny under
traditional contract defenses, and (4) state law affects the enforceability of the
agreement. 9 U.S.C.A. § 2; D. Wilson Constr. Co., 196 S.W.3d at 780; In re
Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex. 2005) (orig.
proceeding). For the FAA to pre-empt the TGAA, state law must refuse to
enforce an arbitration agreement that the FAA would enforce, either because
(1) the TGAA has expressly exempted the agreement from coverage, or (2) the
TGAA has imposed an enforceability requirement not found in the FAA. D.
Wilson Constr. Co., 196 S.W.3d at 780. In other words, the FAA pre-empts
only contrary state law, not consonant state law. Id. at 779.
We conclude that the FAA does not pre-empt the TGAA here. Northwest
has not directed us to, nor have we found, any evidence of interstate
commerce in the record. Likewise, Northwest did not direct the trial court to
any such evidence. Because this suit involves a construction project, it is
possible that materials may have come from out of state, but Northwest has
not directed us to anything in the record to support that conclusion, nor have
we found any evidence in the record that would support such a conclusion.
See, e.g., In re Nasr, 50 S.W.3d 23, 25-26 (Tex. App.—Beaumont 2001, orig.
proceeding) (holding that construction contract involved interstate commerce
because list of subcontractors in record included Wal-Mart). We hold that
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Northwest has failed to prove that the arbitration agreement involves interstate
commerce; thus, the FAA does not pre-empt the TGAA in this instance, and we
have jurisdiction over Northwest’s interlocutory appeal. For the same reason,
we do not have jurisdiction to grant relief on Northwest’s petition for writ of
mandamus. See In re D. Wilson Constr. Co., 196 S.W.3d at 779. Because we
have jurisdiction over the interlocutory appeal only, we will address Northwest’s
issues within the context of that proceeding.
Existence of Valid Arbitration Agreement
In its first issue, Northwest contends that it proved the existence of a
valid arbitration agreement and that all of the claims asserted against it in the
underlying suit are within the scope of that agreement. Oak Partners responds
that Northwest failed to prove that all claims were within the scope of a valid
arbitration agreement because
Northwest . . . did not present any evidence at the hearing on its
Motion to Compel. The only documents presented were unsworn
and unauthenticated exhibits to its Motion to Compel, and even
those exhibits do not contain enough information to make an
informed decision regarding whether the documents refer to each
other or are all a part of the construction contract at issue in this
case.
In Jack B. Anglin Co. v. Tipps, the Texas Supreme Court held that “the
trial court may summarily decide whether to compel arbitration on the basis of
affidavits, pleadings, discovery, and stipulations”; the trial court is not required
11
to conduct an evidentiary hearing unless the “material facts necessary to
determine the issue” are controverted. 842 S.W.2d 266, 269 (Tex. 1992).
Northwest attached the contract, and the pertinent documents that were
incorporated into it by reference, to its motion to compel. The trial court clearly
reviewed these documents at the hearing on the motion to compel. 3 See T EX.
R. E VID . 201; Barnard v. Barnard, 133 S.W.3d 782, 786 (Tex. App.—Fort
Worth 2004, pet. denied) (“[T]he trial court may take judicial notice of its file
at any stage of proceedings and is presumed to have done so with or without
a request from a party.”). At the conclusion of the hearing, the trial court
concluded, “Well, of course, it appears that there’s an arbitration provision here
in this contract. The issue would certainly seem to be whether or not there has
been a waiver.”
We conclude that the trial court properly determined, based on the
procedure promulgated in Tipps, that a valid arbitration existed and that the
3
For example, during a discussion between Northwest’s counsel and the
trial court regarding the exhibits attached to the motion to compel, the
following exchange occurred:
THE COURT: Where are you again?
[NORTHWEST’S COUNSEL]: The very first page.
THE COURT: All right. I see it.
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claims in the underlying suit were included within the scope of that agreement.4
We sustain Northwest’s first issue; however, we must address its remaining
issues relating to whether the trial court properly determined that it waived its
right to arbitrate.
Subject Matter Jurisdiction of Trial Court
Northwest argues in its second issue that the trial court did not have
subject matter jurisdiction to decide whether it waived its right to arbitration
because, once a trial court decides that a dispute is subject to arbitration, the
arbitrator must determine any defenses to arbitration raised by an opposing
party, including waiver.
In support of its contention, Northwest relies on Howsam v. Dean Witter
Reynolds, Inc., 537 U.S. 79, 123 S. Ct. 588 (2002). In that case, the United
States Supreme Court held that “‘procedural’ questions which grow out of the
dispute and bear on its final disposition’ are presumptively not for the judge, but
4
Oak Partners attached to its response to Northwest’s motion to compel
an affidavit from Teresa Shook, a Director of Assisted Living Consultants, Inc.,
which is a managing member of the general partner of Oak Partners. In her
affidavit, Shook asserted that “Oak Partners did not agree to be bound by
arbitration, and does not agree it is bound by arbitration.” But this conclusory
statement, without more, does nothing to controvert the evidence of the
agreement as attached to Northwest’s motion to compel. Moreover, Oak
Partners never challenged the existence of an arbitration agreement in its
response, which was premised solely on its contention that Northwest waived
its right to arbitrate.
13
for an arbitrator, to decide. . . . So, too, the presumption is that the arbitrator
should decide ‘allegation[s] of waiver, delay, or a like defense to arbitrability.’”
Id. at 84, 123 S. Ct. at 592 (citations omitted). The issue in Howsam was not
whether the trial court had subject matter jurisdiction to determine such
procedural questions; rather, it was whether the presumption in favor of
arbitration should be employed when determining which “forum-based
decisionmaker”—an arbitrator or trial court judge—is the more appropriate
choice “to decide forum-specific procedural gateway matters.” Id. at 84-86,
123 S. Ct. at 592-93. In Howsam, the petitioner had instituted an arbitration
proceeding under the National Association of Securities Dealers (NASD) rules,
and the respondent filed suit in federal court asking for a declaration that the
arbitration could not proceed because NASD’s rules prohibited arbitrations after
“six (6) years ha[d] elapsed from the occurrence or event giving rise to
the . . . dispute.” Id. at 81-82, 123 S. Ct. at 590-91. In determining that the
arbitrator was the more appropriate “forum-based decisionmaker” to decide
whether the NASD rule operated to bar arbitration of the dispute, the Supreme
Court noted that “NASD arbitrators, comparatively more expert about the
meaning of their own rule, [would be] better able to interpret and to apply it.”
Id. at 85, 123 S. Ct. at 593. The Court also relied on its prior decision in
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Moses H. Cone Memorial Hospital v. Mercury Construction, in which it stated
that
[t]he Arbitration Act establishes that, as a matter of federal law,
any doubts concerning the scope of arbitrable issues should be
resolved in favor of arbitration, whether the problem at hand is the
construction of the contract language itself or an allegation of
waiver, delay, or a like defense to arbitrability.
460 U.S. 1, 24-25, 103 S. Ct. 927, 941 (1983) (emphasis added); see also In
re Serv. Corp. Int’l, 85 S.W.3d 171, 173 (Tex. 2002) (quoting above passage
from Moses, yet going on to address merits of trial court’s decision on waiver).
After carefully considering the Court’s precise language and holding in
Howsam, and the Moses H. Cone case which it cites, we conclude that the
issue here is not one of subject matter jurisdiction; rather, it is whether the
presumption in favor of arbitrability should apply to the determination of which
“forum-based decisionmaker” 5 is better suited to decide the procedural
questions, such as “waiver, delay or a like defense to arbitrability.” 6 Because
5
See In re Neutral Posture, Inc., 135 S.W.3d 725, 728 (Tex.
App.—Houston [1st Dist.] 2003, orig. proceeding) (discussing Howsam and
holding that trial court was proper forum for determining issue of substantive
arbitrability).
6
Thus, we need not decide whether this court should follow Howsam in
the context of reviewing a trial court’s decision under the TGAA. See Grand
Homes 96, L.P. v. Loudermilk, 208 S.W.3d 696, 703 (Tex. App.—Fort Worth
2006, pet. filed); see also In re Global Constr. Co., 166 S.W.3d 795, 798 (Tex.
App.—Houston [14th Dist.] 2005, orig. proceeding) (conditionally granting writ
15
the issue is not one of subject matter jurisdiction, Northwest was required to
raise it in the trial court; it did not. See T EX. R. A PP. P. 33.1(a); Mack Trucks,
Inc. v. Tamez, 206 S.W.3d 572, 577 (Tex. 2006). In fact, at the hearing on
the motion to compel, Northwest told the trial court that it would have to
decide the issue, arguing that
the court must consider three questions; was there an agreement
or set of agreements to arbitrate, whether the dispute . . . is
subject to those agreements to arbitrate? If you answer . . . those
first two questions, ‘Yes,’ then you must abate the action and
must order the case to arbitration, unless Oak Partners or one of
the other parties is able to prove waiver.” [Emphasis added.]
Northwest and Oak Partners both devoted the majority of their arguments at
the motion to compel hearing to whether Northwest had substantially invoked
the judicial process to Oak Partners’ detriment. Accordingly, we conclude and
hold that Northwest failed to preserve its complaint that the arbitrator, rather
than the trial court, should have determined whether it waived its right to
arbitrate by substantially invoking the judicial process to its opponents’
detriment. We overrule Northwest’s second issue.
of mandamus after holding, based on Howsam, that arbitrator rather than trial
court should decide waiver issue in FAA-controlled case).
16
Whether Northwest Waived its Right to Arbitrate by Substantially Invoking
the Judicial Process to Oak Partners’ Detriment
Northwest contends in its third issue that the trial court incorrectly
concluded that Northwest had waived its right to arbitrate any part of the
dispute by substantially invoking the judicial process to its opponents’
detriment.
Because public policy favors arbitration, there is a strong presumption
against finding that a party has waived its right to arbitration; the burden to
prove waiver is thus a heavy one. In re Bank One, N.A., 216 S.W.3d 825, 827
(Tex. 2007); In re Bruce Terminix Co., 988 S.W.2d 702, 704-05 (Tex. 1998);
Jones v. Citibank (South Dakota), N.A., 235 S.W.3d 333, 340 (Tex.
App.—Fort Worth 2007, no pet.). Any doubts regarding waiver are resolved
in favor of arbitration. Bruce Terminix Co., 988 S.W.2d at 705; Jones, 235
S.W.3d at 340; Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730, 735
(Tex. App.—Eastland 2006, orig. proceeding). Waiver may be express or
implied, but it must be intentional. EZ Pawn Corp. v. Mancias, 934 S.W.2d 87,
89 (Tex. 1996); Jones, 235 S.W.3d at 340; Southwind Group, Inc., 188
S.W.3d at 735. Whether waiver occurs depends on the individual facts and
circumstances of each case. Jones, 235 S.W.3d at 340; Southwind Group,
17
Inc., 188 S.W.3d at 735; Williams Indus., Inc. v. Earth Dev. Sys. Corp., 110
S.W.3d 131, 135 (Tex. App.—Houston [1st Dist.] 2003, no pet.).
A party does not waive arbitration merely by delay; instead, the party
urging waiver must establish that any delay resulted in prejudice. In re Vesta
Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex. 2006); Prudential Secs. Inc. v.
Marshall, 909 S.W.2d 896, 898-99 (Tex. 1995) (orig. proceeding); Jones, 235
S.W.3d at 340. Therefore, the test for determining waiver is two-pronged: (1)
did the party seeking arbitration substantially invoke the judicial process, and
(2) did the opposing party prove that it suffered prejudice as a result. Jones,
235 S.W.3d at 340.
Substantial Invocation of Judicial Process
Merely taking part in litigation does not constitute substantial invocation
of the judicial process. See In re Vesta Ins. Group, 192 S.W.3d at 763; Bruce
Terminix Co., 988 S.W.2d at 704; Jones, 235 S.W.3d at 340. To substantially
invoke the judicial process, a party must make a specific and deliberate act after
suit is filed that is inconsistent with its right to arbitrate, such as engaging in
extensive discovery or requesting a jury. Nationwide of Bryan, Inc. v. Dyer,
969 S.W.2d 518, 522 (Tex. App.—Austin 1998, no pet.). Substantially
invoking the judicial process may occur when the party seeking arbitration
actively has tried, but failed, to achieve a satisfactory result in litigation before
18
turning to arbitration. Jones, 235 S.W.3d at 340; Southwind Group, Inc., 188
S.W.3d at 736; Williams Indus., Inc., 110 S.W.3d at 135. Examples include
moving for summary judgment or seeking a final resolution of the dispute.
Williams Indus., Inc., 110 S.W.3d at 135. Another factor to consider is how
much activity has taken place in the suit. Vireo, P.L.L.C. v. Cates, 953 S.W.2d
489, 497 (Tex. App.—Austin 1997, pet. denied). Actions constituting waiver
may include the movant’s engaging in some combination of the following: filing
an answer, setting up a counterclaim, pursuing discovery, and moving for a
continuance prior to moving for a stay pending arbitration. Cent. Nat’l Ins. Co.
of Omaha v. Lerner, 856 S.W .2d 492, 494 (Tex. App.—Houston [1st Dist.]
1993, orig. proceeding); see also In re Vesta Ins. Group, 192 S.W.3d at 764
(holding, in FAA-controlled case, “We agree that allowing a party to conduct
full discovery, file motions going to the merits, and seek arbitration only on the
eve of trial defeats the FAA’s goal of resolving disputes without the delay and
expense of litigation.”).7
The evidence here shows that during the approximately nineteen months
from the time it filed its answer in the suit to the time it filed its motion to
7
The standard for determining waiver of the right to arbitrate is the same
under the TGAA and the FAA. Southwind Group, Inc., 188 S.W.3d at 735;
Brown v. Anderson, 102 S.W.3d 245, 250 (Tex. App.—Beaumont 2003, pet.
denied).
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compel arbitration, Northwest served four sets of interrogatories, and one set
each of requests for production and requests for admissions, to Oak Partners;
served one set each of interrogatories, requests for disclosure, and requests for
production on the subcontractors; filed four subpeonas for production of
documents from third parties; filed a counterclaim and amended counterclaim
against Oak Partners; filed cross-claims against the subcontractors; filed a
motion for partial summary judgment seeking to preclude Oak Partners from
seeking any damages related to design defects in the facility; agreed to
extensions of the expert designation deadlines; and agreed to at least one
extension of the trial setting. Northwest points out that it never received a
ruling on its partial motion for summary judgment and that the motion did not
request a final ruling on all of Oak Partners’ claims; it also characterizes its
discovery as “minimal.”
Northwest focuses on its various activities in the suit in isolation;
however, when viewed together, all of Northwest’s actions in the suit indicate
an intention to avail itself of the judicial process. Northwest admitted at the
hearing on the motion to compel that it sought discovery to aid in mediation
and that the failure of mediation was the impetus for its motion to compel
arbitration. In other words, it appears that Northwest was prepared to avail
itself of the judicial process so long as it was able to achieve the results it
20
desired. When Northwest finally filed its motion to compel in July 2007, trial
was set for September 24, 2007. We conclude and hold that Northwest’s
activity in the suit constituted substantial invocation of the judicial process.
See In re Vesta Ins. Group, 192 S.W.3d at 764; Lerner, 856 S.W.2d at 495;
see also Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1159, 1162
(5th Cir. 1986).
Prejudice to Opposing Parties
Northwest claims that even if it substantially invoked the judicial process,
Oak Partners and the other parties to the suit, i.e., the subcontractors, failed
to show prejudice as a result; thus, the trial court erred by finding that
Northwest had waived its right to arbitrate the dispute. According to
Northwest, the discovery it sought and obtained in the suit is also discoverable
in arbitration under the Construction Industry Arbitration Rules of the American
Arbitration Association, and Oak Partners cannot show that its attorneys’ fees
would not have been available to it in arbitration. Further, Northwest contends
that even if Oak Partners is able to show prejudice, the subcontractors did not
bring forward any evidence of prejudice; thus, the trial court erred in
determining that Northwest waived arbitration as to all of the parties in the suit.
The prejudice on which courts focus includes such things as (1) the
movant’s access to information that is not discoverable in arbitration and (2)
21
the opponent’s incurring costs and fees due to the movant’s actions or delay.
Williams Indus., Inc., 110 S.W.3d at 135. Although delay alone does not
necessarily show prejudice, it is a material factor to consider. Sedillo v.
Campbell, 5 S.W.3d 824, 828 (Tex. App.—Houston [14th Dist.] 1999, no
pet.). Showing prejudice is generally an evidentiary burden. Williams Indus.,
Inc., 110 S.W.3d at 135.
Northwest contends that all of the discovery it propounded would be
available to it in an arbitration proceeding under the AAA’s construction-related
arbitration rules, which the parties agreed to employ in the event of arbitration.
Those rules provide that “[a]t the request of any party or at the discretion of the
arbitrator, consistent with the expedited nature of arbitration, the arbitrator may
direct (i) the production of documents and other information, and (ii) the
identification of any witnesses to be called.” They also compel the parties to
“exchange copies of all exhibits they intend to submit at the [arbitration]
hearing” at least five business days prior to the hearing. The rules further
provide that “[t]here shall be no other discovery, except as indicated herein or
as ordered by the arbitrator in extraordinary cases when the demands of justice
require it.”
Oak Partners correctly points out that the applicable arbitration rules do
not provide for requests for admissions or for interrogatories, which constituted
22
the bulk of the discovery Northwest sought from Oak Partners.8 Oak Partners
incurred legal fees for counsel and local counsel to review and respond to this
discovery.9 At the hearing on Northwest’s motion to compel, Oak Partners
offered as evidence an affidavit from its counsel averring that Northwest had
served on Oak Partners four sets of interrogatories and one set each of a
request for admissions, request for disclosure, and request for production. Oak
8
Northwest acknowledges that requests for admissions and interrogatories
are not available under the applicable rules except “in extraordinary cases when
the demands of justice require it.” However, Northwest contends that all of the
information included in those forms of discovery would be nevertheless
discoverable in arbitration via other forms of discovery. Regardless, Oak
Partners presented evidence of its expense and time related specifically to the
types of discovery that is unavailable in arbitration, and there is no evidence
that this is the type of extraordinary case in which an arbitrator would allow
additional discovery.
9
Northwest attributes any prejudice caused by Oak Partners’ engaging
local counsel to Oak Partners’ own decision to sue in its chosen forum. See
LJA Eng’g and Surveying, Inc. v. Richfield Inv. Corp., 211 S.W.3d 443, 446-47
(Tex. App.—Beaumont 2006, no pet.); Transwestern Pipeline Co. v. Horizon Oil
& Gas Co., 809 S.W.2d 589, 593 (Tex. App.—Dallas 1991, writ dism’d w.o.j.).
But it is clear from the billing records submitted by Oak Partners that local
counsel did not even begin to participate in the suit until Northwest filed its
counterclaim and began to participate in those activities that we have
determined substantially invoked the judicial process by indicating an intent to
litigate the suit in Hood County. Thus, Oak Partners presented evidence
directly relating its expenses to Northwest’s activity in the suit.
23
Partner’s counsel also averred that “Oak Partners has answered, responded,
and/or objected to all of this discovery sent by Northwest.” 10
Oak Partners also introduced evidence that it incurred attorney’s fees and
expenses in responding to Northwest’s motion for partial summary judgment.
Northwest did not cancel the partial summary judgment trial date until after Oak
Partners had filed its response and incurred these fees and expenses.
Moreover, Oak Partners contends that, regardless of the fees and expenses
involved in responding to the motion, it was prejudiced because Northwest
“now has in one document, forced Oak Partners to marshal its evidence, and
even more damaging, marshal the thought processes and legal analysis of Oak
Partners’ attorneys on these issues.”
Northwest responds that the construction industry arbitration rules
provide for summary dispositions by the arbitrator: “In addition to the final
award, the arbitrator may make other decisions, including interim, interlocutory,
10
Although Oak Partners did not include copies of its answers to discovery
in the appellate record, it did provide evidence that it answered the discovery
and incurred expenses in doing so, in the form of billing records from its lead
counsel and local counsel. Northwest did not present any evidence refuting
Oak Partners’ counsel’s sworn statement indicating that Oak Partners had
responded to all of Northwest’s discovery requests. Additionally, Northwest
admitted that it sought discovery for mediation purposes and that after the
initial mediation, it sought additional discovery for purposes of another
mediation.
24
or partial rulings, orders, and awards.” Thus, according to Northwest, Oak
Partners could not have been prejudiced by responding to the motion for partial
summary judgment when the same procedure would have been available to
Northwest in arbitration.
Again, Northwest focuses only on the effects of its actions in isolation.
Not only did it delay nineteen months before moving to compel arbitration,
during which time it actively pursued litigation in the trial court, Northwest also
sought discovery that cannot be characterized as only minimal. 11 It actively
sought relief from the trial court, forcing Oak Partners to respond and to incur
attorneys’ fees for lead counsel and local counsel that are directly linked to
Northwest’s actions in the suit, which fees Oak Partners documented in its
response to the motion to compel.12 Unlike in cases cited by Northwest, here,
11
See, e.g., In re Bruce Terminix Co., 988 S.W.2d at 704 (holding, when
movant’s “use of the judicial process was limited to filing an answer and
propounding one set of eighteen interrogatories and one set of nineteen
requests for production,” that prejudice was not shown because “when only a
minimal amount of discovery has been conducted, which may also be useful for
the purpose of arbitration, the court should not ordinarily infer waiver based
upon prejudice”) (emphasis added).
12
Northwest contends that Oak Partners cannot show prejudice due to its
incurring attorneys’ fees as a result of Northwest’s actions (1) because the
construction industry arbitration rules provide that an arbitration award “may
include . . . an award of attorneys’ fees if all parties have requested such an
award or it is authorized by law or their arbitration agreement” and because (2)
section 171.048 of the TGAA requires arbitrators to award attorneys’ fees if
25
Oak Partners introduced evidence supporting its claims of prejudice. Cf. In re
Vesta Ins. Group, 192 S.W.3d at 763 (“Because Cashion offered none of these
documents in the trial court and presented no details about any of them, the
record does not show whether these [discovery] requests were limited or
extensive, whether they sought information for affirmative claims or defensive
ones, or even whether they addressed the merits or merely the arbitration
issue.”); Granite Constr. Co. v. Beaty, 130 S.W.3d 362, 367 (Tex.
App.—Beaumont 2004, no pet.); Williams Indus., Inc., 110 S.W.3d at 139-41.
Accordingly, we conclude and hold that Oak Partners showed prejudice from
Northwest’s substantial invocation of the judicial process. See Price, 791 F.2d
at 1161-62 (“[W]here a party fails to demand arbitration during pretrial
proceedings, and, in the meantime, engages in pretrial activity inconsistent with
an intent to arbitrate, the party later opposing a motion to compel arbitration
they are provided for in the arbitration agreement or they are provided for by
law in a district court in a civil action. T EX. C IV. P RAC. & R EM. C ODE
A NN. § 171.048 (Vernon 2005). But the language of the construction industry
arbitration rules does not require an arbitrator to award fees even if a party
presents evidence supporting such an award. Additionally, Northwest’s claims
against Oak Partners include claims for breach of contract and negligence; Oak
Partners’ attorneys’ fees are recoverable only if it prevails on its breach of
contract action. See id. § 38.001(8) (Vernon 1997); Green Int’l, Inc. v. Solis,
951 S.W.2d 384, 390 (Tex. 1997).
26
may more easily show that its position has been compromised, i.e.,
prejudiced.”).
Northwest did not just move to arbitrate Oak Partners’ claims, however;
it also sought to arbitrate the claims involving the subcontractors. None of the
subcontractors presented evidence to the trial court regarding prejudice. Thus,
we cannot conclude that waiver was proved as to the subcontractors. See,
e.g., Granite Constr. Co., 130 S.W.3d at 367; Williams Indus., Inc., 110
S.W.3d at 139-41. Because the trial court’s order denied Northwest’s motion
to compel in its entirety as to all parties, we conclude and hold that the trial
court erred by refusing to compel arbitration of the claims between Northwest
and the subcontractors.13 We therefore sustain Northwest’s third issue in part
as to the claims involving the subcontractors; we overrule it in part as to the
claims between Northwest and Oak Partners.
13
We realize this results in the unfortunate possibility of trying these cases
in different forums but “considerations of efficiency and convenience cannot
override either a signatory’s arbitration agreement or a nonsignatory’s right to
a jury trial.” In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 192 (Tex.
2007) (orig. proceeding) (holding arbitration agreement must be enforced
regardless of presence of other people involved in the underlying dispute but
not signatories to the arbitration agreement); see also Kilroy v. Kilroy, 137
S.W.3d 780, 787-88 (Tex. App.—Hous. [1 st Dist.] 2004, no pet.) (reversing
trial court order staying arbitrable part of dispute pending determination of
issues in nonarbitrable part of dispute remaining in trial court).
27
Mediation as Condition Precedent to Arbitration
At the hearing on the motion to compel, one of the subcontractors, Ari-
Tex, argued that the arbitration agreement with the subcontractors required
Northwest to mediate before resorting to arbitration and that Northwest had
failed to mediate with the subcontractors;14 therefore, arbitration could not be
compelled until Northwest had attempted to mediate its disputes with the
subcontractors. Ari-Tex has not responded to Northwest’s appeal; however,
Northwest brings a fourth issue contending that appellees have waived their
right to rely on mediation as a condition precedent to enforceability of the
arbitration clause.
Although the AIA Document A201-1997 that was incorporated into the
parties’ agreements clearly states that mediation is a condition precedent to
arbitration with regard to at least some claims arising from the agreements,
none of the subcontractors allege any damages from Northwest’s failure to
mediate with them. See In re U.S. Home Corp., 236 S.W.3d 761, 764 (Tex.
2007). Moreover, the subcontractors initially filed suit against Northwest in
district court rather than seeking mediation pursuant to the agreements. Thus,
14
Ari-Tex alleged that the subcontractors were not allowed to attend the
mediation between Northwest and Oak Partners.
28
they waived their right to first proceed through mediation. See id.; Dallas
Cardiology Assocs., P.A. v. Mallick, 978 S.W.2d 209, 212-13 (Tex.
App.—Texarkana 1998, pet. denied).
Conclusion
Having overruled Northwest’s dispositive issues as to Oak Partners, we
affirm the part of the trial court’s order denying Northwest’s motion to compel
arbitration as to the claims between Northwest and Oak Partners. However,
having sustained Northwest’s dispositive issue as to the subcontractors, we
reverse the part of the trial court’s order denying arbitration as to the claims
between Northwest and the subcontractors and remand to the trial court with
instructions to compel arbitration as to those claims only. Having determined
that Northwest failed to bring forward any evidence of interstate commerce, we
dismiss its petition for writ of mandamus.
TERRIE LIVINGSTON
JUSTICE
PANEL B: LIVINGSTON, DAUPHINOT, and WALKER, JJ.
DAUPHINOT, J. filed a concurring and dissenting opinion.
DELIVERED: March 6, 2008
29
COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 2-07-293-CV
NORTHWEST CONSTRUCTION APPELLANT
COMPANY, INC.
V.
THE OAK PARTNERS, L.P., APPELLEES
MORGAN DEVELOPMENT
AND SUPPLY, INC.,
METROPLEX MASONRY, INC.,
ARI-TEX, INC., MAX PLUMBING
CONTRACTORS, INC.,
S & S TILE, LTD., AND
KENT-ANDERSON CONCRETE, L.P.
D/B/A ANDERSON CONCRETE
CONSTRUCTION
------------
FROM THE 355TH DISTRICT COURT OF HOOD COUNTY
------------
AND
NO. 2-07-328-CV
IN RE NORTHWEST RELATOR
CONSTRUCTION COMPANY, INC.
------------
ORIGINAL PROCEEDING
------------
CONCURRING AND DISSENTING OPINION
------------
I agree that Northwest’s petition for writ of mandamus should be
dismissed. I also agree that we should reverse the trial court’s order denying
arbitration as to the claims between Northwest and the subcontractors and
remand to the trial court with instructions to compel arbitration on those claims.
I dissent, however, from the majority’s conclusion that Oak Partners met
its heavy burden to show sufficient prejudice to overcome the strong
presumption against waiver of arbitration.15 I would therefore reverse in its
entirety the trial court’s order denying arbitration and remand this case to the
trial court with instructions to compel arbitration on all claims.
LEE ANN DAUPHINOT
JUSTICE
15
See In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006); In
re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex. 2006).
31
DELIVERED: March 6, 2008
32