The Supreme Court of Texas has never before found a waiver of the right to arbitrate, but in a recent five-to-four decision likely to attract multiple friend-of-the court briefs on rehearing, the court vacated an $800,000 arbitration award in favor of two homeowners and remanded their claims for trial based on the conclusion of five justices that the homeowners had waived their right to arbitrate by their pre-arbitration litigation conduct.  Perry Homes v. Cull, No. 05-0882, 2008 Tex. LEXIS 423, 2008 WL 1922978 (Tex. May 2, 2008).  The court reaffirmed its prior holding that prejudice to the opposing party must be shown to establish a waiver of the right to arbitrate, but in this instance the five-justice majority inferred that prejudice resulted from the homeowners’ litigation conduct.

Robert and Jane Cull bought a house from Perry Homes with an accompanying warranty from Home Owners Multiple Equity, Inc. and Warranty Underwriters Insurance Company.  The warranty agreement included a broad arbitration clause providing that all claims the Culls might have against Perry Homes or the warranty companies were subject to the Federal Arbitration Act, and would be submitted to the American Arbitration Association (AAA) or another arbitrator agreed upon by the parties.

After experiencing a number of unresolved problems with the house over several years, the Culls sued Perry Homes and the warranty companies.  The warranty companies requested arbitration, which the Culls opposed.  In their 79-page opposition to the request for arbitration, the Culls complained of fees charged by the AAA and asserted that the AAA “is incompetent, is biased, and fails to provide fair and appropriate arbitration panels.”  Nobody pressed the trial court for a ruling on the request for arbitration, and the Culls proceeded with discovery in the lawsuit, including requests for disclosures, requests for documents, a number of depositions, and five motions to compel.  Perry Homes filed two motions for protection.  After completing discovery and shortly before a scheduled trial date, the Culls asked the trial court to stay the lawsuit and compel arbitration.

The trial court granted the Culls’ motion based on Perry Homes’ and the warranty companies’ failure to show they had suffered prejudice as a result of proceedings in the lawsuit.  Perry Homes and the warranty companies sought mandamus relief, but were unsuccessful.  After a year in arbitration, the arbitrator awarded the Culls $800,000, which included restitution of the purchase price of their home, mental anguish damages, exemplary damages, and attorney’s fees.  Perry Homes and the warranty companies moved to vacate the arbitrator’s award, arguing (among other things) that the case should never have been sent to arbitration after so much activity in court.  The trial court overruled their objections and confirmed the arbitration award.  The court of appeals affirmed the trial court’s judgment.  The Supreme Court of Texas reversed the judgments below, vacated the arbitration award, and remanded the case “for a prompt trial.”

All nine justices on the supreme court joined in holding that (1) an order compelling arbitration is subject to appellate review after completion of arbitration, even if pre-arbitration review was sought by mandamus, (2) whether conduct in litigation amounts to a waiver of the right to arbitrate is a question for decision by courts, not arbitrators, (3) whether a party waives an arbitration clause by substantially invoking the judicial process is to be determined from the totality of the circumstances on a case-by-case basis, and (4) prejudice to the opposing party must be shown to establish a party’s waiver of the right to arbitrate.

But only five justices agreed that the Culls’ litigation conduct alone demonstrated prejudice to Perry Homes and the warranty companies sufficient to hold that the Culls had waived the right to arbitrate:  “[M]anipulation of litigation for one party’s advantage and another’s detriment is precisely the kind of inherent unfairness that constitutes prejudice under federal and state law.”  The remaining four justices dissented (in two separate opinions) from the court’s judgment and from the majority’s holding that prejudice could be inferred from the Culls’ litigation conduct.  In the dissenters’ view, the trial court did not abuse its discretion by compelling arbitration because Perry Homes had not built a record upon which the trial court could find prejudice necessary to establish waiver of the Culls’ right to arbitrate.

Justice Brister’s opinion for the majority, Justice O’Neill’s concurring opinion, Justice Johnson’s concurring and dissenting opinion, and Justice Willett’s concurring and dissenting opinion are available at the following hyperlinks: 

All of the opinions are also available at 2008 Tex. LEXIS 423 and at 2008 WL 1922978