Texas Supreme Court Finds No Waiver of Right to Enforce Arbitration Clause

Back to Business as Usual on the Arbitration Front COMMENT BY WOLFGANG HIRCZY DE MINO The arbitration-friendly Texas Supreme Court recently made headlines by holding - for the first time - that the right to arbitrate was (implicitly) waived by substantially invoking the judicial process and conducting discovery. It overturned a substantial arbitration award in favor of consumers in a residential construction dispute with a builder who also happens to be a major contributor to the judicial election campaigns of the incumbents on the court. In ruling for Perry Homes, and remanding for a trial on the merits, which the home owners had avoided by moving for arbitration shortly before the trial setting, the Court based its decision on the "totality of the circumstances." Arguably, the totality-of-the circumstances test amounts to no test or jurisprudential guideline at all, while preserving for the Court full discretion to resolve what constitutes waiver on a case-by-case basis ad hoc. The contours of what constitutes waiver-by-conduct remain nebulous, putting litigants who do not immediately pursue arbitration at risk. In this subsequent case, the Court finds no waiver, as has been its pattern prior to Perry Homes v. Cull (Tex. 2008). Resolving the petition in a per curiam opinion, it issues a mandamus order requiring the judge of the trial court to send the parties to arbitration. In Re Fleetwood Homes of Texas, LP, No. 06-0943 (Tex. June 20, 2008)(orig. proc.) (per curiam) (mandamus granted to compel arbitration) Also see prior post: Texas Supreme Court Finds No Waiver - In Re CitiGroup ═══════════════════════════════════════════ In Re Fleetwood Homes of Texas (Tex. 2008) (orig. proc.) ═══════════════════════════════════════════ PER CURIAM [Note: links are not part of the court's opinion; footnote omitted; go to court's web site to read opinion in pdf) Parties that “conduct full discovery, file motions going to the merits, and seek arbitration only on the eve of trial” waive any contractual right to arbitration. In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 764 (Tex. 2006). The relators here did none of those, instead merely discussing a potential trial setting and sending a set of written discovery the day before moving to compel arbitration. The trial court held the relators waived arbitration, and a divided court of appeals denied mandamus relief. ___ S.W.3d ___. We disagree, and thus conditionally grant it. See In re Weekley, 180 S.W.3d 127, 130 (Tex. 2005) (“Mandamus relief is proper to enforce arbitration agreements governed by the FAA.”). Fleetwood Enterprises, Inc., manufactures mobile homes. In January 2005 it signed a dealer agreement with Gulf Regional Services, Inc., an owner and developer of mobile home parks in southeast Texas that also sells and leases mobile homes. The agreement included an arbitration clause covering “any dispute, controversy or claim among the Parties.” In August 2005 Fleetwood cancelled the agreement on the ground that Gulf was planning to sell or use mobile homes at a location other than that specified in the dealer agreement.After Gulf filed suit in October 2005, Fleetwood filed an answer demanding arbitration, but did not actually move to compel arbitration until July 2006. Gulf opposed the motion on two grounds: express waiver and unconscionability.“[A] party waives an arbitration clause by substantially invoking the judicial process to the other party’s detriment or prejudice.” Perry Homes v. Cull, ___ S.W.3d ___, ___ (Tex. 2007). Waiver is a legal question for the court based on the totality of the circumstances, and asks whether a party has substantially invoked the judicial process to an opponent’s detriment, the latter term meaning inherent unfairness caused by “a party’s attempt to have it both ways by switching between litigation and arbitration to its own advantage.” Id. at __. Gulf argues that Fleetwood expressly waived arbitration, pointing to several emails from Fleetwood’s counsel regarding a proposed trial setting, culminating in the following:I have reviewed the Setting Request and would ask that we try to get a setting in March . . . . Given the documentation I received last week and the work we need to do as a result of those documents, Fleetwood is not going to be in a position to try this case in December. If you are agreeable to this, we could sign an agreed Setting Request, otherwise, I will have to oppose the request after you submit it and request a later setting.We need not decide whether Gulf is correct that express waiver is governed by different rules than those that govern implied waiver, as we disagree that this rises to the level of an express waiver. Nothing in this communication expressly waives arbitration or revokes the arbitration demand Fleetwood included in every answer it filed.Instead, the question here is whether Fleetwood impliedly waived arbitration by failing to pursue its arbitration demand for eight months while discussing a trial setting and allowing limited discovery. We have already answered that question “No.” In EZ Pawn Corp. v. Mancias, we held a party had not waived arbitration by filing an answer, discussing a docket-control order, sending written discovery, noticing a deposition, and agreeing to postpone a trial setting. 934 S.W.2d 87, 90 (Tex. 1996). Gulf points out correctly that the movant in EZ Pawn had not yet “discovered” the arbitration clause until after these actions had already taken place. Id. at 89. But our opinion was based on the nonmovant’s failure to show any prejudice, id. at 90, a requirement we recently reaffirmed. See Perry Homes, __ S.W.3d at __. As in EZ Pawn, the evidence here is legally insufficient to support a finding of prejudice. Gulf does not explain how it possibly could have been prejudiced by exchanging emails about a trial setting. Moreover, while these communications are a factor to be considered in the totality-of-the-circumstances, they are not the only factors. See id. at ___. Here, Fleetwood took no depositions, although it noticed one deposition before cancelling it.[1] It served one set of written discovery the day before it moved to compel arbitration. It filed no dispositive motions, nor did it wait until the eve of trial to move to compel. Taken together, these actions are not enough to overcome the presumption against waiver. See In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex. 2006); In re Bruce Terminix, 988 S.W.2d 702, 704 (Tex. 1998). Gulf also argues the arbitration clause is substantively unconscionable, citing two reasons. First, it asserts that arbitration limits its right to discovery. But limited discovery is one of arbitration’s “most distinctive features.” Perry Homes, ___ S.W.3d at ___; see also Preston v. Ferrer, ___ U.S. ___, ___ (2008) (“A prime objective of an agreement to arbitrate is to achieve streamlined proceedings and expeditious results.”). Gulf’s argument that “streamlined” discovery makes arbitration unconscionable would nullify almost all arbitration agreements. We hold that arbitration’s limits on discovery for both parties does not make it unconscionable. See In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 678 (Tex. 2006) (“The test for substantive unconscionability is whether, given the parties’ general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.” (internal quotation marks omitted)). Second, Gulf asserts the agreement here is unconscionable because it allows the prevailing party to recover attorney’s fees. It is true that absent a contractual agreement like this, Texas law allows attorney’s fees only for a prevailing plaintiff. See Tex. Civ. Prac. & Rem. Code § 38.001–.002. But allowing both parties to recover fees hardly makes an agreement “one-sided”; such agreements, common in commercial contexts, surely make them less so. Because Gulf has failed to show that Fleetwood waived its contractual right to arbitration, we conditionally grant Fleetwood’s petition for writ of mandamus and direct the trial court to compel arbitration. We are confident that the trial court will promptly comply, and our writ will issue only if it does not. OPINION DELIVERED: June 20, 2008

Failure to appear for arbitration results in default judgment

Pro se appellant fails to convince court of appeals that default judgment should be set aside in child custody modification suit; no motion for new trial was filed in the court below. Llorance v. Sohi No. 01-07-00840-CV (Tex.App.- Houston [1st Dist.] Apr. 17, 2008)(Higley) (family law SAPCR modification, default judgment arbitration order affirmed) Opinion by Justice Higley Before Justices Nuchia, Hanks and Higley Full case style: Leezet Llorance v. Farhad Safavi Sohi Appeal from 257th District Court of Harris County Trial Court Judge: The Honorable Judy L. Warne Disposition: Family district court's judgment affirmed MEMORANDUM OPINION [Note: Footnotes omitted; to see full opinion, click on case name above] In this suit affecting the parent-child relationship, pro se appellant, Leezat Llorance, appeals the trial court’s default modification order, which modifies an earlier order establishing the parent-child relationship between Llorance’s minor child, F.P.L.S., and appellee, Farhad Safavi Sohi. Raising what we construe to be one issue, Llorance complains that the default modification order should be set aside because she was unable to attend the arbitration hearing, from which the modification order emanated, because F.P.L.S. was ill. We affirm. Background On September 28, 2004, the trial court signed an “Agreed Order Establishing the Parent Child Relationship” (“the agreed order”) in which Farhad Safavi Sohi was adjudicated to be the father of F.P.L.S. The agreed order appointed Llorance as F.P.L.S.’s sole managing conservator and named Sohi as possessory conservator. With respect to possession, the agreed order provided that, until F.P.L.S.’s fifth birthday on July 15, 2008, Sohi was entitled to supervised visitation with F.P.L.S. every Saturday. The agreed order further provided that, beginning July 15, 2008, Sohi would be entitled to visitation under a standard possession order, as set forth in Family Code sections 153.311 through 153.317. Sohi was also ordered to pay Llorance monthly child support in the amount of $256.00. On March 16, 2006, Sohi filed a petition seeking modification of the agreed order. Sohi requested that he immediately be given possession of F.P.L.S. pursuant to a standard possession order. He also requested that his monthly child-support payments be decreased. Llorance answered and filed a counter-petition in which she requested an increase in child support and alleged that Sohi should not be given possession of F.P.L.S. pursuant to a standard possession order. Llorance alleged that Sohi did not seek the modification in the best interest of F.P.L.S., rather he sought modification to “retaliate” against her and to cause her “financial ruin.” The modification action was tried by an arbitrator on August 31, 2007. Sohi and his counsel attended the arbitration hearing; however, Llorance did not attend. On that same day, the arbitrator signed an order entitled “Arbitrator’s Binding Order in Suit to Modify Agreed Order Establishing the Parent-Child Relationship” (“the default modification order”) in which the arbitrator noted that Llorance had not appeared at the arbitration hearing. In the default modification order, the arbitrator removed Llorance as F.P.L.S.’s sole managing conservator and appointed Sohi and Llorance as joint managing conservators. Llorance retained the right to establish F.P.L.S.’s primary place of residence with a geographic restriction. With respect to visitation, the arbitrator incorporated the statutory standard possession order. The modification order also increased Sohi’s monthly child support to $300.00. The trial court signed and adopted the modification order on September 27, 2007. Llorance did not file a motion for new trial. On October 2, 2007, Llorance filed a pro se notice of appeal in which she challenged the default modification order. In the notice of appeal, Llorance admitted she had received notice of the arbitration hearing, but alleged that she had been unable to attend because she had taken F.P.L.S. to the emergency room in the early morning hours of August 31, 2007, the day of arbitration. Llorance asserted that, on that morning, she had spoken to the arbitrator’s assistant and had repeatedly called and left messages for the arbitrator to inform the arbitrator that she could not attend arbitration because she had to take F.P.L.S. to the emergency room. Llorance claimed that the arbitrator never returned her calls. Llorance stated that F.P.L.S. was admitted to the hospital on August 31, 2007 and remained hospitalized until September 2, 2007. In the notice of appeal, Llorance further alleged that, on September 2, 2007, she faxed a letter to the arbitrator in which she explained why she had not attended trial and questioned why her telephone messages to the arbitrator had not been returned. Llorance also attached a copy of F.P.L.S.’s hospital discharge record. Llorance contended that the first response from the arbitrator came on September 27, 2007, when Llorance received a letter from the arbitrator informing her of the default modification order. In her notice of appeal, Llorance asked for a hearing date and requested that the original agreed order remain in effect until the appeal is determined. In support of the allegations in the notice of appeal, Llorance attached copies of her telephone records to show that she had made numerous attempts to contact the arbitrator, the September 2, 2007 letter that Llorance faxed to the arbitrator with the appended medical record, and the letter from the arbitrator notifying Llorance of the default modification order. Although not shown in the record, Llorance also asserts that arbitration had originally been set on April 11, 2007. On that date, Llorance claims that she and her then attorney had attended arbitration but that Sohi and his counsel had not appeared. According to Llorance, the arbitrator had contacted Sohi and rescheduled the arbitration. Llorance questions why Sohi was given an opportunity to reschedule arbitration and relies on this perceived inequitable treatment in challenging the default modification order on appeal. Llorance also questions why the arbitrator signed the default modification order, which was prepared by Sohi’s counsel, on the same date as the hearing. Llorance concludes her appellate brief by requesting that the default modification order be set aside and that the agreed order be reinstated. Analysis We begin by acknowledging that the same prerequisites for setting aside a “no-answer” default also apply to a “post-answer” default, such as the one at issue here. Cliff v. Huggins, 724 S.W.2d 778, 779 (Tex. 1987). Harris v. Burks, No. 01-06-00128-CV, 2007 WL 1776048 at *1 (Tex. App.—Houston [1st Dist.] June 21, 2007, no pet.) (mem. op.). When, as here, extrinsic evidence is necessary to challenge a default judgment, a motion for new trial is a prerequisite to complaining on appeal that it should be set aside. In re J.D.K., No. 02-06-280-CV, 2007 WL 2792487 at *1 (Tex. App.—Fort Worth Sept. 27, 2007, no pet.) (mem. op.) (citing, in part, Tex. R. Civ. P. 324(b)(1); Massey v. Columbus State Bank, 35 S.W.3d 697, 699 (Tex. App.—Houston [1st Dist.] 2000, pet. denied)). As mentioned, Llorance did not file a motion for new trial. Even if we construe her notice of appeal as a motion for new trial under the limited facts of this case, see J.D.K., 2007 WL 2792487 at *2, Llorance failed to show that the default modification order should be set aside and a new trial ordered. A trial court should set aside a default judgment and grant a new trial if (1) the failure to appear was not intentional or the result of conscious indifference but rather was due to accident or mistake; (2) the defendant sets up a meritorious defense; and (3) the granting of a new trial would not cause delay or otherwise injure the prevailing party. Craddock v. Sunshine Bus Lines, Inc., 133 S.W.2d 124, 126 (Tex. 1939); see In re R.R., 209 S.W.3d 112, 114–15 (Tex. 2006). Though she makes allegations pertinent to the first Craddock prong in her notice of appeal, Llorance neither sets up a meritorious defense nor asserts that granting a new trial would not cause delay or injure Sohi. Accordingly, we overrule Llorance’s complaint that the trial court improperly signed a default judgment against her for her failure to appear at arbitration. Conclusion We affirm the judgment of the trial court. Laura Carter Higley Justice Panel consists of Justices Nuchia, Hanks, and Higley.