Texas Supreme Court Orders Portions of Condo Construction Dispute to Arbitration

The Supreme Court of Texas has ordered a property developer to arbitrate its claims against a general contractor but refused to require it to submit the company’s claims against a number of other defendants to arbitration. In G.T. Leach Builders, LLC v. Sapphire V.P., L.P., No. 13-0497 (Tex., March 20, 2015), a South Padre Island luxury condominium project was damaged by Hurricane Dolly in July 2008. Unfortunately, the builder, G.T. Leach, allowed its risk insurance policy to lapse prior to the loss. Because of this, the company could not make the developer, Sapphire, whole again. As a result, Sapphire filed a breach of contract and negligence case against G.T. Leach, the architectural firm that designed the condo project, the builder’s insurance brokers, a group of engineers, and several subcontractors in Cameron County.

In response to the lawsuit, the builder sought to compel the dispute to arbitration based on a provision in G.T. Leach’s contract with Sapphire. After that, the remaining defendants also filed a demand for arbitration. The developer responded by claiming it only agreed to engage in arbitration with G.T. Leach. In addition, Sapphire argued the builder waived its right to arbitration by substantially engaging in the litigation process. Sapphire also claimed arbitration was not appropriate because a provision in the parties’ general contract stated neither company could demand arbitration after the statute of limitations expired.

The Cameron County court denied the defendants’ motion to compel arbitration and the Thirteenth District Court of Appeals in Corpus Christi later affirmed the trial court’s decision.  After that, the defendants filed a petition for review with the Supreme Court of Texas. The high court heard oral argument in the case on November 5, 2014. Additional background information on this dispute is available in a previous Disputing blog post.

On Friday, the Texas Supreme Court ruled that the builder did not waive its right to arbitration by substantially invoking the judicial process. The court said:

Considering the totality of the circumstances, we hold that G.T. Leach has not substantially invoked the litigation process in contravention of its contractual right to arbitration. See Perry Homes, 258 S.W.3d at 589-90 (adopting totality-of-the-circumstances test). As in several cases involving similar or greater participation in litigation than occurred here, we decline to find waiver under these circumstances. See Richmont Holdings, ___ S.W.3d at ___ (holding that movant did not waive arbitration rights by initiating lawsuit, invoking forum-selection clause, moving to transfer venue, propounding request for disclosure, and waiting nineteen months after being sued to move for arbitration); Fleetwood Homes, 257 S.W.3d at 694 (holding that movant did not waive arbitration rights by noticing deposition, serving written discovery, and waiting eight months to move for arbitration); Bruce Terminix, 988 S.W.2d at 703-04 (holding that movant did not waive arbitration rights by propounding requests for production and interrogatories and waiting six months to seek arbitration); Mancias, 934 S.W.2d at 88-89 (holding that movant did not waive arbitration rights by propounding written discovery, noticing deposition, agreeing to reset trial date, and waiting nearly a year to move for arbitration).

With regard to potential prejudice to Sapphire, the high court stated:

In summary, although we agree that G.T. Leach could have demanded waiver more promptly than it did, we hold that the totality of the circumstances do not establish that G.T. Leach substantially invoked the judicial process to the extent required to demonstrate a waiver of its right to arbitration, and its participation in the litigation has not caused Sapphire the kind of prejudice necessary to clear the “high hurdle” of waiver. We thus conclude that G.T. Leach has not impliedly waived its right to demand arbitration in this case.

Next, the Supreme Court of Texas held whether or not the arbitral provision included in G.T. Leach’s contract with Sapphire was expired was a question for an arbitrator to decide:

The court of appeals agreed with Sapphire that this deadline bars G.T. Leach’s demand for arbitration because the statute of limitations had run on Sapphire’s claims by the time G.T. Leach made its demand. G.T. Leach argues that the court should not have addressed the contractual deadline at all, because Sapphire’s contention that the deadline bars G.T. Leach’s arbitration demand is itself an issue that Sapphire agreed to resolve through arbitration. In other words, G.T. Leach argues that only the arbitrators—and not the courts—can decide whether the contractual deadline bars G.T. Leach’s demand for arbitration. In response, Sapphire asserts that G.T. Leach waived this argument by failing to raise it in the trial court or the court of appeals. We conclude that G.T. Leach did not waive the argument, and we agree that the courts must defer to the arbitrators to determine the meaning and effect of the contractual deadline.

As a result, the Supreme Court of Texas reversed the lower court’s order denying G.T. Leach’s motion to compel arbitration.

Next, the Texas high court addressed the other defendants’ motion to compel arbitration. According to the court, no valid agreement to arbitrate existed between Sapphire and the remaining defendants. The court said:

… we find no language in the general contract that gives the Other Defendants rights to enforce the general contract’s arbitration clause against Sapphire. We thus conclude that Sapphire did not agree in the general contract to arbitrate its claims against the Other Defendants.

In addition, the court dismissed the other defendants’ argument that Sapphire was equitably estopped from refusing to arbitrate its claims.

The Supreme Court of Texas then addressed the subcontractors’ assertion that “Sapphire agreed through the subcontracts to arbitrate its claims against the Subcontractors, or alternatively, that Sapphire is equitably estopped from denying its assent to the arbitration agreement in the subcontracts.” After examining the arbitral provisions included in the subcontracts, the court stated:

We conclude that there is no way to give full effect to both provisions, and that one must necessarily “nullify” the other at least to some extent. If we give effect to the agreement to arbitrate in section 11.1, for example, then we must necessarily conclude that the agreement does “contain a provision for the mandatory arbitration of disputes,” and thus nullify section 12.13’s disclaimer. The Subcontractors argue that we can give effect to both by construing the disclaimer to mean that arbitration is “mandatory” unless all parties mutually agree not to arbitrate, in which case arbitration would not be mandatory. But parties can always mutually agree not to do what they previously agreed to do, and in any event, section 11.1 already provides that the parties can “mutually agree” not to arbitrate.

The Texas high court continued:

But section 12.13 explicitly states that the Subcontract does not require mandatory arbitration “[n]otwithstanding any provision to the contrary” in any of the contract documents. Cf. In re Lee, 411 S.W.3d 445, 454 (Tex. 2013) (“The use of the word `notwithstanding’ indicates that the Legislature intended section 153.0071 to be controlling.”). Like the statute at issue in DeQueen, which expressly provided that any conflicting “rule of law, statute, or regulation . . . is ineffective,” the language of section 12.13 “specifically provide[s] the means for resolving conflicts” by providing that, in the event of any conflict, section 12.13 prevails. DeQueen, 325 S.W.3d at 632, 637. There is thus no ambiguity, and we need not rely on canons of construction like the rules that earlier or more specific provisions prevail. Id. Although these canons provide useful tools for resolving conflicting provisions, there is no conflict to resolve here because the plain language of section 12.13 resolves the conflict. Id. at 638. We therefore conclude that, even if Sapphire is equitably estopped from denying its assent to the agreements contained in the subcontracts, those agreements do not include a valid, enforceable agreement to arbitrate its claims against the Subcontractors. The court of appeals, therefore, did not err in affirming the trial court’s denial of the Subcontractors’ motions to compel arbitration.

Ultimately, the Supreme Court of Texas reversed the lower court’s order denying the builder’s motion to compel arbitration and affirmed its order denying the other defendants’ request.

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