ARBITRATION IS GOD – FIRST INSTALLMENT

by Rick Freeman

Two recent decisions by the Texas courts of appeals show how far the Courts have gone in enforcing arbitration agreements – no matter what the facts. In Southwind Group, Inc., v. Landwehr (No. 11-05-00247-CV, No. 11-05-00324-CV; 2006 Tex. App. LEXIS 896), decided February 2, 2006, the Eastland Court of Appeals reversed a trial court’s denial of arbitration and remanded the case to the trial court with instructions to compel arbitration of the claims.

In this case, Southwind entered into an employment contract with Landwehr in which there was an arbitration provision. The arbitration provision was broad, using the language “that arises out of or relates to this agreement.” Apparently, Southwind loaned Landwehr money to purchase a
home. (Landwehr moved from Arkansas to Texas to take the job. It is not explained in the opinion if the loan was a part of the employment deal or not.)

Disputes arose and Landwehr left the job and returned to Arkansas. Southwind then filed suit – in July of 2002 – against Landwehr seeking its loan back. Landwehr filed a counterclaim – in November of 2002 – alleging Southwind had breached the employment agreement.

Written discovery occurred, several depositions were taken, a number of trial settings were scheduled, Southwind moved for continuances, Landwehr moved for summary judgment on Southwind’s claims against him, Southwind responded, a hearing on the summary judgment was held and the court denied the summary judgment.

On June 1, 2005 – 3 years after filing suit – Southwind filed a motion to compel arbitration of Landwehr’s claims against Southwind. Landwehr responded by arguing that Southwind had waived its right to arbitration by its delay in seeking arbitration and by substantially invoking the judicial process. The trial court denied the motion to compel arbitration.

The Eastland Court of Appeals reversed the trial court and remanded with instructions to compel arbitration of the Landwehr claims. I will leave it to the reader to examine the details of the court’s ruling.

Suffice it to say, the Eastland Court ruled that delay alone cannot waive arbitration. There has to also be a showing of prejudice. The burden to show prejudice – and the Court highlights the fact that the burden is a HEAVY ONE – is on the party opposing arbitration.

The same is true with invoking the judicial process. The Court says there has be a showing by the party opposing arbitration of substantial invocation of the judicial process and also a showing that the party opposing the arbitration has suffered actual prejudice. (Again the Court highlights the HEAVY BURDEN that is on the opposing party to make this showing.)

In fact, the Court holds that substantial invocation of the judicial process means that the party seeking arbitration “actively tried, but failed, to achieve a satisfactory result in litigation before turning to arbitration.” Short of trying the case and losing, the Eastland Court apparently believes that the party seeking arbitration has not substantially invoked the judicial process.

Even if this had occurred, the Eastland Court puts an additional burden on the party opposing arbitration to show that there is ACTUAL PREJUDICE to that party. Apparently, even winning a trial is not enough. The Court says that the focus of the courts on prejudice should be on access to information not discoverable in arbitration and the costs and fees incurred by the opponent due to the movant’s actions or delay.

From this opinion, it can be argued that there is no res judicata with regard to the loss by the party who then moves to compel arbitration. Instead, it is the party who opposes arbitration, who has the heavy burden of proving waiver or substantial invocation of the judicial process and
THEN proving actual prejudice by showing lack of discovery or substantial litigation costs and expenses due to the delay in moving for arbitration.

I will discuss the second recent case in my next installment of ARBITRATION IS GOD.