Dargahi v. Handa–compelling non-signatories to arbitrate; waiver


Case Summaries, Compelling Arbitration, Texas Courts of Appeal / Sunday, November 12th, 2017

In Dargahi v. Handa, 03-17-00386-CV, 2017 WL 5247517 (Tex. App.—Austin Nov. 8, 2017, no pet. h.), the Austin Court of Appeals addressed the denial of a motion to compel arbitration by the district court, finding that when a principal is bound by the terms of a valid arbitration agreement, its agents, employees, and representatives are also covered by the agreement.

Background

Plaintiffs/Appellees, the Handas entered a contract with Defendant/Appellant Lakeway Custom Homes and Renovation to build a house on the Handas’ property. After a dispute over payments, the Handas filed suit, alleging that they had paid 95% of the $1.46 million dollar contract price, that defendants demanded further payments exceeding the contract price, and ceased further work on the house when the Handas refused to pay the additional amount. The lawsuit also alleged that Defendants had failed to pay subcontractors, despite falsely representing that they had been paid, fraudulently diverted funds to their own use, and negligently performed the construction work. After the answer was filed and some discovery conducted, Defendants moved to compel arbitration. Plaintiffs did not argue that the arbitration clause did not encompass the dispute with Lakeway Custom Homes, but argued (1) that the individual defendants could not rely on the arbitration clause in the agreement with Lakeway, and (2) had waived the right to arbitrate by substantially invoking the litigation process. The trial court denied the motion to compel arbitration. The Court of Appeals reversed.

Decision–Compelling Non-signatories to Arbitrate

Plaintiffs objected to individual defendants, Pejman Dargahi and Kamran Dargahi, invoking the arbitration clause because they were not signatories. While as a general rule, an arbitration clause cannot be invoked by a non-party to the arbitration contract,1 here the court recognized that when a principal is bound by the terms of a valid arbitration agreement, its agents, employees, and representatives are also covered by the agreement, even if those agents did not sign the agreement. The scope of an arbitration agreement may be extended to claims against agents of the principal bound by the agreement when all the agents’ allegedly wrongful acts relate to their behavior as agents of the principal, and those acts were within the scope of the claims covered by the arbitration provisions for which the principal would be liable. In addition, extending the scope of an arbitration provision to an agent of the party who agreed to arbitration furthers the policy favoring arbitration and the parties’ intent to provide a single forum for resolving disputes arising under an agreement. Applying these principles to the case at hand, the Austin Court of Appeals found that Pejman signed the construction contract over the printed name of “Lakeway Custom Homes and Renovation” which alone was sufficient evidence as to his agency. As to Kamran, without a signature or other proof of his agency, the Austin Court of Appeals turned to the allegations, noting that their substance revealed that Kamran’s potential liability was based on and factually intertwined with conduct as a representative of the signatory company–“they allege that Kamran and his brother (a) negligently constructed the home (a task they undertook due to the contract ), (b) misused funds (provided to them pursuant to the contract ), and (c) failed to meet contractual obligations and common-law and statutory duties (that flow from the existence of the contract ).”

Decision–Waiver of Right to Compel Arbitration

The Austin Court of Appeals next addressed whether the defendants waived arbitration by substantially invoking the judicial process to the opposing party’s detriment. The Court applied the well-recognized Perry Homes factors: (a) whether the movant was plaintiff or defendant, (b) how long the movant delayed before seeking arbitration, (c) whether the movant knew of the arbitration clause all along, (d) how much pretrial activity related to the merits rather than arbitrability or jurisdiction, (e) how much time and expense has been incurred in litigation, (f) whether the movant sought or opposed arbitration earlier in the case, (g) whether the movant filed affirmative claims or dispositive motions, (h) what discovery would be unavailable in arbitration, (i) whether activity in court would be duplicated in arbitration, (j) when the case was to be tried, and (k) how much discovery has been conducted and who initiated it. Here, the Court identified a number of factors weighing in favor of waiver of the right to compel arbitration–an unexplained 9–month delay in moving to compel, issuing a subpoena to the the plaintiffs’ lender–but concluded that it did not, as a whole, constitute substantial invocation of the judicial process by defendants. The Court characterized the pre-trial costs incurred by the plaintiffs as “largely self-inflicted.”

Documents

  1. See G.T. Leach Builders v. Sapphire

Luke Gilman is an attorney at Jackson Walker in Houston, Texas, specializing in arbitration and ancillary litigation in federal and state court.