Tuesday, April 28, 2015

Timeliness of arbitration demand for the arbitrator to decide, not the court, Texas Supreme Court says

In G.T. Leach Builders LLC v Sapphire V.P., LP, No. 13-0497 (Tex. 2015), a complex construction-project-related dispute involving multiple parties and multiple contracts, the Texas Supreme Court recently addressed a number of important arbitration-related issues. Most notably, it reversed the intermediate court of appeals on the matter of whether the court or the arbitrator gets to decide whether the arbitration demand was timely asserted. 

G.T. Leach Builders, LLC v. Sapphire V.P., LP, No. 13-0497, 2015 WL 1288373 (Tex., Mar. 20, 2015)
G.T. Leach Builders, LLC v. Sapphire V.P., LP, No. 13-0497 (Tex. 2015)
The Supreme Court, in an opinion by Jeff Boyd, concluded that the question is not a gateway issue of arbitrability and therefore goes to the arbitrator. This seems logically unsatisfactory, because the matter of whether a litigant has waived the right to compel arbitration by litigation conduct is and remains a matter for the court. The failure to meet the deadline to invoke or initiate arbitration is likewise a matter of conduct (omission). So why should the former be a matter of arbitrability properly passed on by the Court, but the latter a matter to be arbitrated (rather than a threshold matter of whether an arbitration referral is (still) appropriate, or has been forfeited by undue delay?   
Moreover, a contractual provision setting a deadline will generally be more amenable to quick and efficient application and enforcement because it is likely unambiguous and the relevant facts are measured in days or months. Delay in quantifiable. No need for fact-intensive inquiry encompassing multiple dimensions of conduct, not to mention consideration of the amorphous “totality of the circumstances” to resolve whether the deadline has be missed. Resolution by the court would thus also conserve judicial and private resources.

Thirdly, if a party’s litigation conduct may arguably transform a “presently enforceable right to arbitrate” into its opposite, how does a failure to meet the deadline for arbitration not render the “presently enforceable right to arbitrate” into something that was presently enforceable before the deadline, but not after? Why should the court not resolve both types of scenarios involving the potential loss of the otherwise available right to compel arbitration in case pending before it? 

Finally, under the Supreme Court’s ruling, the case must be sent to arbitration for the arbitrator to determine that the case cannot be arbitrated because the right to arbitrate was lost by missing the deadline. But in reaching that conclusion, the arbitrator would in fact be arbitrating an issue that touches on the very basis of the arbitrator’s authority to act, i.e. did the party that sought arbitration still have a right to do so, and was it appropriate for the arbitrator to make any decision at all? There would appear to be an inherent contradiction of a arbitrator deciding that arbitration should not be taking place because the right to arbitrate no longer existed when the arbitration was compelled. 

The scenario might be analogized with the proposition that a court always has jurisdiction to determine whether it has jurisdiction. But limitations issues are not jurisdictional. And an arbitrator never has plenary jurisdiction because arbitration is always a creature of contract. Therefore, the jurisdiction analogy fails. 

Moreover, what happens if the arbitrator issues an “award” finding that relief is barred because the deadline to commence arbitration has been missed? Is it that binding on the court? Does it have res judicata effect? Or can the dispute then be resolved in court, assuming the claim itself is not time-barred, even though the resolution of that claim by arbitration was time-barred as determined by the arbitrator in the award? And even if the cause of action was time-barred, would the court then still have authority to so rule on the merits?

What if either party moves for confirmation of the arbitrator's award to transform it into a judgment?  What if arbitrator entered a zero (take-nothing) award, rather than a time-bar finding equivalent to a trial court's dismissal reciting the basis for dismissal in the order, or the equivalent to a dismissal order accompanied by findings of facts and conclusions of law doing so. What if the arbitrator issues an "award" that awards no relief but does not state a reason (i.e. does not say that relief was denied because the deadline to commence arbitration had been missed, the applicable statute of limitations had expired, or any other reason)? Would that still leave ground to argue that the court should decide the controversy in a later proceeding because the arbitrator was in no position to determine whether any relief should be granted on the merits? What would be the effect of an arbitrator's finding of absence of arbitrability in a case in which arbitration was compelled? Does that reverse the order to compel, and the judicial findings upon which it rests?   

All these concerns could be addressed, and the logical inconsistencies could be eliminated -- at least in case where the controversy originates in court -- had the Supreme Court held that timelines under the arbitration deadline is a gateway matter, specifically, a matter of whether the arbitration agreement is ‘presently’ enforceable. This is the same question that is implicated in the court’s role of determining whether the party seeking arbitration has waived the right to do so by its litigation conduct, thereby rendering the arbitration agreement not or no longer "presently enforceable". 

The Thirteenth Court of Appeals' resolution of this issue is logically and jurisprudentially much more persuasive, and would also serve the goal of efficiency by avoiding litigation of time-bar issues in two different fora: court and arbitral forum, not to mention trips to appellate courts. The court below should have been affirmed.
G.T. LEACH BUILDERS, LLC, ET AL., Petitioners,
SAPPHIRE V.P., LP, Respondent.

No. 13-0497.
Supreme Court of Texas.

Argued November 5, 2014.
Opinion delivered: March 20, 2015. 

JUSTICE JEFFREY S. BOYD, delivered the opinion of the Court.

Texas law encourages parties to resolve disputes through arbitration,[1] but it will not force them to arbitrate unless they have agreed to that alternative.[2] If they have, or if they are equitably estopped from denying their assent to such an agreement, courts must honor the agreement by referring the disputes to arbitration unless the party demanding arbitration has waived that right by substantially participating in the litigation. We apply these principles in this case to determine whether a property developer must arbitrate its claims against several defendants involved in a construction project. The trial court denied all of the defendants' motions to compel arbitration, and the court of appeals affirmed. We hold that (1) the developer agreed to arbitrate its claims against the general contractor and the general contractor did not waive its right to demand arbitration; (2) the developer's argument that a contractual deadline bars the general contractor's demand for arbitration is itself a claim that must be arbitrated; (3) the developer did not agree in the general contract to arbitrate its claims against the other defendants; (4) the developer is not equitably estopped from denying any such agreement; and (5) the subcontracts do not contain an enforceable arbitration agreement. In short, we hold that the developer must arbitrate its claims against the general contractor but not its claims against the other defendants.



In July 2008, Hurricane Dolly caused extensive damage to a luxury condominium project that Sapphire V.P., L.P. was in the process of developing on South Padre Island. Sapphire filed suit against Adams Insurance Services, Inc., Arthur J. Gallagher Risk Management, and Tracy Williams (collectively, the Insurance Brokers), asserting claims for negligence and breach of contract. Sapphire alleged that, eight days before the hurricane hit, the Insurance Brokers allowed a builder's risk insurance policy to expire and be replaced by a permanent insurance policy even though construction of the project was not yet complete. Sapphire sought to recover millions of dollars for water damage, increased construction costs, delay costs, lost revenue, and other losses that the builder's risk policy allegedly covered or should have covered but the permanent policy did not.