In re CGI Construction–can a court require a party to waive arbitration to set aside a default?


Case Summaries, Compelling Arbitration, Texas Courts of Appeal / Wednesday, February 27th, 2019

No, says the Dallas Court of Appeals. In an unpublished case, In re CGI Constr., Inc., 05-18-00320-CV, 2018 WL 3017318, at *2 (Tex. App.—Dallas June 18, 2018, no pet.) the Dallas Court of Appeals addressed the question of whether or not a trial court could properly condition setting aside a default judgment on a defendant waiving a contractual right of arbitration.

Background

In a dispute between a subcontractor and general contractor relating to two construction projects, CGI Construction failed to respond to the petition and the court entered a default judgment. CGI Construction later moved to set the judgment aside. The trial court granted the motion but imposed two conditions: (1) CGI pay the plaintiff’s attorneys fees incurred in obtaining the default judgment; and (2) CGI waive its right to seek arbitration in the proceeding.

It is not hard to imagine why a trial court may feel that there is some penalty that should accompany the failure to respond to a lawsuit at all. If there were no penalty and the trial court simply vacated the judgment some days, weeks, or months later, the trial court would necessarily reduce the incentives for parties to promptly respond. On the other hand, there may be some fault on the part of the plaintiff in giving notice of the lawsuit or some other extenuating circumstance explaining why the defendant did not timely respond. Trial courts in Texas have some significant incentives at their disposal. They are permitted to grant new trials conditioned upon the payment of attorney’s fees, expenses for witnesses, travel expenses, and other costs incurred in obtaining the default judgment.

Texas trial courts may not condition a new trial on a defendant’s waiver of a contractual right to arbitrate

However, conditioning granting a new trial on waiver of arbitration is beyond a trial court’s discretion, as explained by the Court of Appeals:

Pivot has cited no authority, and we have found none, permitting a court to condition the setting aside of a default judgment on waiver of contractual arbitration rights. In light of the reluctance of courts to impair the sanctity of contracts or vested rights, and the public policy favoring arbitration, we conclude the trial court may not condition the granting of a new trial and motion to set aside default judgment on waiver of contractual arbitration rights. The trial court, therefore, abused its discretion by conditioning its order on CGI’s waiver of its contractual arbitration rights.

In re CGI Constr., Inc., 05-18-00320-CV, 2018 WL 3017318, at *2 (Tex. App.—Dallas June 18, 2018, no pet.) (citations omitted).

Addendum: Other jurisdictions appear to have taken a harsher view on the effect of a default. Recent precedent in New York deems a default in responding to a lawsuit to be a waiver of a contractual right to arbitrate. See Crowdpay US Inc. v. Midnight Gaming Corp. (a/k/a McGraw Inc.), 2019 N.Y. Misc. LEXIS 389 (Sup. Ct. N.Y. Co. Jan. 23, 2019); see also Gilbert Samberg, “Just What Was Needed”: Another Way to Waive a Right to Arbitrate. This strikes me as an unduly harsh result to enforce as a general rule. One can imagine circumstances in which it might be justified. For example, there may be controverted evidence that the defaulting defendant was well aware of the suit and simply refused to participate without any legal basis or extenuating circumstances. However, one can also imagine such rule would give a plaintiff seeking to avoid arbitration an incentive to file in court as a roll of the dice on the off chance that the defendant fails to respond and thus obtain a waiver of the agreement to arbitrate to which they would not otherwise be entitled.

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