G.T. Leach Builders, LLC v. Sapphire V.P., 2015 Tex. LEXIS 273 (Tex. Mar. 20, 2015)

This action arose after 2008’s Hurricane Dolly caused extensive damage to a luxury condominium project that Sapphire V.P., L.P. (“Developer”) was in the process of developing on South Padre Island (the “Project”).  In 2009, the Developer sued insurance brokers for negligence and breach of contract, alleging that they let the builder’s risk insurance policy expire eight days before the storm struck and be replaced by a permanent policy even though construction of the Project was not yet complete.  The Developer sought to recover millions of dollars for water damage and other increased building costs it alleged that the builder’s risk policy covered or should have covered but the permanent policy did not.

More than two and a half years after the storm, the insurance brokers designated general contractor G.T. Leach Builders, L.L.C. (“Builder”) and several subcontractors as responsible third parties and the Developer added them to the suit in May 2011.  After pursuing pretrial motions and participating in discovery, the Builder moved to compel arbitration and stay the litigation in November 2012, relying on an arbitration provision in its general contract with the Developer.

In the general contract, the Builder and Developer agreed that “[a]ny Claim arising out of or related to the Contract…shall…be subject to agreed private arbitration” and “shall be decided by binding arbitration.”  While conceding that this provision applied to its claims against the Builder, the Developer argued that the Builder expressly and impliedly waived its right to demand arbitration by substantially engaging in the litigation process.  Alternatively, the Developer argued that the Builder failed to demand arbitration prior to a deadline that the general contract expressly imposed.  The deadline at issue provided that any “demand for arbitration shall be made within…a reasonable time after the Claim has arisen, and in no event shall it be made after the date when institution of legal or equitable proceedings based on such Claim would be barred by the applicable statute of limitations…”

The trial court found that the Builder waived its right to arbitrate.  The appellate court did not reach the waiver issue, but affirmed on the grounds that the arbitration deadline barred the Builder’s demand for arbitration because the statute of limitations had run on the Developer’s claims by the time the Builder made its demand.  The Supreme Court of Texas granted the Builder’s petition for review and reversed.

The Court first addressed the Developer’s contention that the Builder expressly waived its arbitration rights by seeking a continuance and agreeing to a new trial date in the underlying litigation.  The Court held that although the acts of requesting and then agreeing to a new trial date could be inconsistent with an intent to exercise the right to arbitrate, they did not constitute an express waiver of that right.

Likewise, the Court held that the Builder had not impliedly waived its right to compel arbitration by substantially invoking the litigation process.  The court reasoned that the Builder did not elect to resolve its dispute with the Developer through litigation; rather, it was in the litigation because the Developer filed suit against it.  And, the Court reasoned that the Builder’s litigation conduct— which included filing counterclaims, seeking to transfer venue, motions to designate responsible third parties and participation in pretrial discovery —was aimed at defending itself and minimizing its litigation expenses, rather than at taking advantage of the judicial forum.  In addition, the Court found that the Builder’s participation in the litigation did not cause the Developer the kind of prejudice necessary to clear the “high hurdle” of waiver.  Accordingly, the Court concluded that the Builder’s participation in the litigation did not waive its right to demand arbitration.

Next, the Court considered the Developer’s contention that the Builder’s demand for arbitration was untimely based on the deadline imposed in the general contract.  In response, the Builder argued that only the arbitrators—and not the courts—can decide whether the contractual deadline bars the Builder’s demand for arbitration.  The Court agreed.  The Court  recognized that, once a party seeking arbitration proves the existence of an enforceable agreement to arbitrate, Texas and federal law recognize a strong presumption “in favor of arbitration such that myriad doubts—as to waiver, scope, and other issues not relating to enforceability—must be resolved in favor of arbitration.”  The Court reasoned that, unlike the Developer’s waiver by litigation conduct argument, the parties’ dispute over the meaning and effect of the contractual deadline did not touch upon the issue of whether an enforceable agreement to arbitrate the Developer’s claims existed.  Instead, the parties disputed whether, in light of the contractual deadline, the existing, enforceable agreement limited the Builder’s rights under the agreement to arbitrate itself.  Thus, the Court held that the Developer’s contention that it does, and the Builder’s contention that it does not, are themselves “Claims arising out of or related to the Contract,” which the parties expressly agreed to arbitrate.
Consequently, the Court held that the Builder did not expressly or impliedly waive its right to arbitration, and deferred to the arbitrators to decide whether and how the contractual deadline affects that right.

The Court also denied a motion by subcontractors to compel the Developer to arbitrate on the ground that the subcontract provisions on which they relied did not make arbitration mandatory.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.