A divided Texas Supreme Court held that a homeowner waived his right to arbitrate a dispute with a builder by initially resisting arbitration, conducting full discovery in supposed preparation for litigation, and ultimately seeking to compel arbitration shortly before trial.

In Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008), Cull sued builder Perry Homes and various warranty companies for defects to a home. The warranty companies immediately requested arbitration in accordance with an agreement with Cull, but Cull vigorously opposed arbitration. At the time, no party pressed for a ruling. Instead, Cull's attorney requested extensive discovery from all defendants, including Perry Homes.

After extensive discovery was completed and just before trial was scheduled to begin, Cull moved to compel arbitration. Despite its reservations, the trial court granted the motion to compel. Perry Homes filed an appeal, which was denied without opinion.

After a year in arbitration, the arbitrator awarded Cull $800,000. Perry Homes moved to vacate the award, maintaining that the trial court had erred in concluding that that Cull had not waived his right to compel arbitration. The trial court confirmed the award, and the appellate court affirmed upon appeal.

On review, the Texas Supreme Court first noted that a waiver of the right to arbitrate requires a showing of both substantial invocation of the litigation process and subsequent prejudice to the non-moving party. It also would consider the "totality of the circumstances," including knowledge of the arbitration clause, the amount of discovery conducted, who initiated that discovery, whether it related to the merits of the case, how much was useful in arbitration, and whether the moving party sought judgment on the merits.

Here, the Court found that Cull "unquestionably" substantially invoked the litigation process. It noted Cull's 79-page initial objection to arbitration, five motions to compel discovery, 76 requests for document production, two motions for protective orders, six notices for deposition, three notices for deposition of opposing experts, and other activities.

The Court also noted that Cull's objection to arbitration posited that the administrator was "incompetent," "biased," and not "fair," and that this filing alone would support a finding of waiver in some federal courts. See, e.g., In re Tyco Int'l Ltd. Sec. Litig., 422 F.3d 41, 46 (1st Cir. 2005) (objecting to arbitration before trial waives right to later arbitrate); Gilmore v. Shearson/Am. Express Inc., 811 F.2d 108, 112 (2d Cir. 1987) (withdrawing a motion to compel arbitration is functionally equivalent to waiving the right to arbitrate).

Furthermore, the Court observed that Cull moved to arbitrate very late in the process. While the trial was not scheduled for the next day, the Court noted that the vast majority of pre-trial activities were already completed before Cull moved to compel. The motion to compel came so late that the Court found that invoking arbitration likely delayed proceedings further by not allowing the imminent trial to proceed.

In sum, the Court found that Cull had "purposefully and unjustifiably… manipulate[d] the exercise of its arbitral rights simply to gain an unfair tactical advantage over the opposing party." To the Court, Cull's activity was "precisely the kind of inherent unfairness that constitutes prejudice under federal and state law." Accordingly, the Court reversed the order compelling arbitration and the order confirming the award.

Two justices dissented in part in separate opinions. Justice Johnson, joined by two others, opined that Perry Homes had failed to show prejudice from the extensive discovery conducted by Cull, because it had not offered any evidence that the liberal arbitration rules adopted in the parties' agreement would have precluded such extensive discovery.

Justice Willett argued that the majority had not applied the correct standard of review to the trial court's findings, and that the motion to compel should have been affirmed under a proper application of the abuse of discretion standard.