August 16, 2019

When Mediations Attack: A Case against Deferred Rulings on Motions to Compel Arbitration

Jean M. Terry

Construction contracts commonly specify their preferred method of dispute resolution.  Some contracts require that mediation be completed or attempted before a party may move forward with arbitration or litigation.  Just as many, though, do not have mediation as a condition precedent and may not mention mediation at all.  Instead, the contract may dictate only where the parties need to file their case in order to be heard.  However, there is a recent trend of parties being ordered to participate in mediation prior to ruling on a motion to compel arbitration, even in instances where mediation is not a condition precedent to arbitration.  As such rulings are outside the jurisdiction of the trial court and frustrate the purposes of the Federal Arbitration Act, they should be uniformly barred. 

Arbitration Is Liberally Favored

There is a “liberal policy favoring arbitration agreements.”.  Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991)).  However, in order for a matter to be arbitratable, a trial court must first determine "that parties contracted to submit their disputes to arbitration." Sanford v. Casleton Health Care Ctr., L.L.C., 813 N.E.2d 411, 416 (Ind. Ct. App. 2004). In order to answer the inquiry, the trial court must determine "that the parties contracted to submit their disputes to arbitration." Id.

Once a trial court answers this question in the affirmative, however, the court loses jurisdiction and is “required by statute to compel arbitration.”  9 U.S.C.A. § 4; Sanford, 813 N.E.2d at 416.  In fact, the trial court loses all ability to rule on any procedural questions, including whether a party can avoid the duty to arbitrate, after this determination.  In re Weekley Homes, 985 S.W.2d 111, 113-114 (Tx. App. Ct. 1998).  That power shifts completely to the arbitrator once it is determined that the parties have agreed upon arbitration.  Id. (citing John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964). This loss of jurisdiction is because “judicial intervention can undermine legitimate expectations based on an ADR clause produced through due bargaining….”  PSI Energy, Inc. v. AMAX, INC., 644 N.E.2d 96, 100 (Ind. 1994).   

In Spite of Favorable Policy, Courts Opt to Retain Jurisdiction

But regardless of this favorable treatment, some courts have opted, in derogation of statutes and case law, to retain jurisdiction over the case.  These courts effectively hold the parties hostage until some unbargained for condition is met, be it mediation or discovery.  For example, the trial court in In re Frank A. Smith Sales, Inc., No. 13-16-00020-CV, 2016 Tex. App. LEXIS 1809, *8, (Tx. Ct. App. Feb. 22, 2016), deferred its ruling on a motion to compel arbitration and ordered the parties to mediation.  Likewise, in Hangartner v. Alexander, 2015 ILAPP (4th) 140272-U, the trial court ordered that parties “mediate/arbitrate” before it would rule on a pending motion to compel arbitration, ostensibly intending the for the parties to mediate first.  Texas’ arbitration statute even makes an express allowance for discovery before a determination on a motion to compel.  This allowance, however, is limited to what is “necessary to permit the court to make a proper decision on a motion to compel arbitration but not to authorize discovery into the case’s merits.”  Tantrum St. LLC v. Carson, 2017 Tex. App. LEXIS 6912, *22-23.  

While the Federal Arbitration Act (“FAA”) and most states have a statute allowing for the immediate appeal of a denial of a motion to compel arbitration, these statutes still fail to address the deferral of a ruling on such a motion.  See 9 U.S. Code § 16; KRS 417.220; I.C. § 34-57-2-19.  For example, the Hangartner court determined that it lacked jurisdiction to hear an appeal of the trial court’s order to “mediate/arbitrate,” reasoning that “orders requiring mediation are not appealable” because they are merely a way for a court to control its docket.  Hangartner, 2015 IL APP (4th) 140272-U, P15.  

Some states, however, have acknowledged the importance of enforcing parties’ negotiated agreements and have provided a direct method of appeal when a trial court refuses to rule upon a Motion to Compel.  In Smith Sales, , the Texas Court of Appeals found such actions by the lower court were an abuse of discretion. “Arbitration is intended to provide a lower-cost, expedited means to resolve disputes.  Motions to compel arbitration should be resolved without delay.  Accordingly, mandamus is available to review a trial court’s deferral of a ruling on a motion to compel arbitration.”  Id.  The Texas Court of Appeals has even stated that “[d]elaying a decision on the merits of arbitrability until after discovery…‘force[s] [parties] to litigate….’”  In re Heritage Bldg. Sys., 185 S.W.3d 539, 542 (Tx. App. Ct. 2005).  

Be Wary of Waving Arbitration

Meanwhile, astute counsel should be wary of waiving their arbitration rights by participating in the litigation.  “A party waives its right to arbitration by substantially involving the judicial process to the other party’s detriment or prejudice.” Tantrum, 2017 Tex. App. LEXIS 6912, *14; Safety Nat’l Cas. Co. v. Cinerg Corp., 829 N.E.2d 986, 1004 (Ind. Ct. App. 2005).  One court has found that a party’s participation in mediation was a factor exhibiting waiver of arbitration rights.  Robinson v. Food Serv. of Belton, 415 F.Supp.2d 1221, 1225 (D. Kan. 2005).  The Robinson court reasoned that the movant had substantially invoked the “litigation machinery” by participating in discovery, mediation, pre-trial conferences, and asserting a counterclaim.  Id. at 1226.  The Texas Supreme Court has found that discovery was a factor to be weighed when making a waiver determination.  Tantrum, 2017 Tex. App. LEXIS 6912, *15.   

So what’s a movant to do? Violate a court order to mediate and risk contempt?  Or comply with the order and thereby waive the party’s right to arbitrate?  Either way, the movant is forced to make this choice despite the fact that it had a commercially enforceable agreement to arbitrate whose validity was never challenged by the opposing party.  Thus, it is imperative that more states consider Texas’ approach in order to maintain the integrity of arbitration clauses.  Otherwise, parties could be subjected to indefinite deferred rulings while losing their properly contracted rights to arbitrate.  What’s more, courts must recognize that, similar to the considerations made during a determination of whether a party has waived its right to arbitrate, a party whose arbitration rights are deferred also experiences prejudice in the form of “inherent unfairness in terms of delay, expense, or damage to a party’s legal position.”  Perry Homes v. Cull, 258 S.W.3d 580, 597 (Tex. 2008).  These deferrals must end so that the FAA, state statutes, and precedent are followed and so that agreements to arbitrate are uniformly enforced.  

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Jean M. Terry

Gordon & Rees Scully Mansukhani, LLP, Louisville, Kentucky, Division 3 (Design), YLD, Diversity Fellow