Waiver of Right to Arbitration in Texas

If you have an arbitration clause in an agreement, you may need to rethink using litigation as a discovery device or pressure tactic prior to seeking arbitration; because by doing so, you may unintentionally waive your right to arbitration. The Texas Supreme Court recently ruled that a party can waive its right to arbitration by pursuing litigation. (Perry Homes v. Cull, 258 S.W.3d 580 (Tex.2008). In Perry Homes v. Cull, there was an arbitration clause in the warranty agreement purchased by the Culls. However, when problems arose, the Culls filed suit rather than seeking arbitration. Perry Homes requested arbitration which the Culls vigorously opposed. After fourteen months of discovery and right before the case was set for trial, the Culls, who had opposed arbitration all along, requested the Court to compel arbitration. The Court granted the Culls’ motion, and over objection of Perry Homes, the case was sent to arbitration. The Culls obtained a large award against Perry Homes in arbitration. Perry Homes argued that the Culls had waived their right to arbitration by substantially invoking the judicial process. Through appeals, the case went all the way to the Supreme Court. The Court used a two part test to determine whether the Culls’ right to arbitration had been waived. In order for a party to have waived its right to arbitration, it must be found that the party substantially invoked the judicial process and that the opposing party was prejudiced. A party is prejudiced when there is an inherent unfairness in the terms of delay, expense, or damage to a party’s legal position because the opposing party forced an issue to litigation but then later seeks to arbitrate the same issue. In this case, the Court found that Perry Homes was prejudiced because the Culls had opposed arbitration and engaged in extensive discovery, even using the Court to compel discovery, but then switched to arbitration right before trial.