© 2014 The Texas Lawbook.
By Kerry Curry
Contributing Writer to The Texas Lawbook
(May 12) – A first-of-its-kind decision by a Texas appellate court in a small business dispute could have far-reaching ramifications for companies that use arbitration to settle business conflicts.
The Amarillo Court of Appeals vacated an arbitration award based on an arbitrator’s unreasonable delay. The arbitrator took 19 months to make a ruling that parties in the case had agreed would be rendered within 14 days.
“Parties typically opt for arbitration because of the speed, efficiency and cost reduction that it purports to offer when compared to traditional litigation,” said Christopher Kratovil, an attorney with Dykema in Dallas. “But in those rare instances where an arbitrator fails to perform his contractual and ethical duty to render a timely award, those benefits simply cease to exist and the fundamental purpose of arbitration is defeated.”
Kratovil was lead appellate counsel for Doris Sims and her company, Succession Builders LLC of Dallas, during the appeal. Dykema’s Chais Sweat also represented Sims.
Kenton Hutcherson, of Hutcherson Law in Dallas, represented Matthew Gay and his company, Building Tomorrow’s Talent, who won the arbitration award that the appeals court vacated. Hutcherson said he plans to ask the Texas Supreme Court to review the case.
“Our position is that while there was a delay, a large part of that delay was manufactured by Ms. Sims,” Hutcherson said.
While they disagree over some of the facts, Hutcherson and Kratovil agree the ruling’s impact could be extensive.
In its decision, the court noted that the arbitrator’s “conduct defeated the intent of arbitration—a contractual arrangement by parties ‘to obtain a speedy and inexpensive final disposition.’ ” The court, which received the case from the Fort Worth Court of Appeals on a docket equalization order, also said this was the first Texas case to vacate an arbitration award based on unreasonable delay by the arbitrator. “The parties have not cited this court to any Texas cases involving tardiness of an award, and we have found none.”
The Dispute
The case is a basic business divorce with a few twists.
Doris Sims and Matthew Gay worked together at CVS Caremark in human resources and wrote a book together: Building Tomorrow’s Talent: A Practitioner’s Guide to Talent Management and Succession Planning.
Emboldened by the book’s success, they started their own human resources consultancy, with each partner holding 50 percent interest. Sims funded the business with a $90,000 loan. After a year, she became disenchanted with the enterprise, and the two parted ways. Sims started a new, one-person consulting firm, Succession Builders LLC. Gay sued, seeking a temporary injunction. Sims was allowed to move forward, but the court ordered that any future disputes be resolved through mediation.
The two partners went to mediation to settle how to split up various materials such as presentations and contracts generated during their year in business together. The case went before mediator Michael J. Whitten, a solo practitioner in Denton, who successfully mediated the case. In one of the case’s unusual twists, the mediation agreement required that any future disputes go before Whitten to be resolved.
In October 2008, Sims sought out Whitten to arbitrate a copyright issue. An arbitration hearing was held on Nov. 24, 2008, with an agreement that the arbitrator would rule within 14 days of the defendant’s final written submission, which was submitted on Dec. 22, 2008.
The ruling was due no later than Jan. 6, 2009, but that day came and went with no ruling. Kratovil said Sims’ trial attorney in the case — and Sims herself — made multiple appeals to Whitten’s office for the ruling, all to no avail. Gay’s counsel emailed Whitten’s office on April 21, 2009, objecting to Sims’ “inappropriate effort to influence and inject collateral issues,” but also sought to continue with the “agreed-upon arbitration framework.”
Kratovil said his client, Sims, repeatedly and vigorously sought a ruling because the delay left her new business venture in a state of limbo.
A year after the arbitration hearing, Sims sued the arbitrator for breach of contract and fraud. Gay intervened in that case, alleging Sims was attempting to hijack the arbitration process. Gay requested the court compel an arbitration decision, which it did although Whitten, during a hearing in the case, told the court his impartiality had been compromised. On Aug. 10, 2010, Whitten ruled in favor of Gay, awarding $195,000 in damages and $92,135 in attorney’s fees, but didn’t issue his final written judgment until Aug. 25, 2011, a year past the trial court’s deadline.
A trial court confirmed the award. But the appellate court disagreed.
“Sims asserts the trial court erred in confirming the arbitrator’s award after the deadline set by the parties had passed. We agree,” the April 30 opinion said.
Hutcherson contends that both parties abandoned the 14-day deadline because the agreement required bifurcation of the merits and the damages/attorney’s fees.
He said he also believes Sims and her trial attorney made inappropriate communication with Whitten while Whitten had the case under consideration, and said filing a suit against the arbitrator and withdrawing from the arbitration put everything into chaos, causing further delays.
Even if those original deadlines were abandoned, the court noted that Whitten still missed the trial court’s order, given on June 18, 2010, that he provide a schedule for discovery, testimony and briefing within 14 days and provide a written ruling within 60 days.
Kratovil said he believes turn-of-the-century common law rulings support the action of the appellate court. In those common law cases, an arbitrator who missed his or her deadline had no authority to rule, but once arbitration was codified into the Federal Arbitration Act and the Texas Arbitration Act, the status of that common law rule became unclear.
“This is a small case but the principle that it articulates is an important one,” Kratovil said. “The greater importance may be to transactional and corporate lawyers – not to litigators – because this ruling stands for the proposition that when the parties agree to place a time limit on the arbitrator’s ruling, that time limit means something and it’s enforceable,” he said.
“If you are going to include a time limit in your arbitration agreement be mindful of it because in the wake of this ruling, a severe violation of the time limit by the arbitrator may invalidate his award.”
Hutcherson said he believes the legal impact could be devastating for arbitration.
“The message to people in arbitration will be, if you are losing, do everything you can to manufacture a delay and disrupt the arbitration, which includes things that happened in this case: File lawsuits in multiple courts, file a lawsuit against the arbitrator. Resist discovery,” Hutcherson said.
“If someone is a defendant in arbitration and there is a claim for all profits based on copyrights or trade secrets, you can just resist discovery and run out the clock and the arbitration would become annulled,” he said. “Based on that, I don’t know who in their right mind would want to pursue arbitration based on such a fragile system.”
Hutcherson said he doesn’t believe there was anything in the Texas Arbitration Act that says the arbitrator loses jurisdiction or that it would void an arbitration decision on the basis of delay.
“There are mechanisms in place in the statute if there is delay or obstruction in arbitration to go to the court and have the court issue orders to facilitate the arbitration which is what we did. We were the ones who went to the Denton County District Court to get an order to get this arbitration completed. They were the ones who simply withdrew and sued us in multiple different courts.”
Kratovil said, “Arbitrators are creatures of contract. If that contract says they have authority for ‘x’ amount of time, then they have to abide by that, at least within reason.”
Whitten, the arbitrator, declined to comment when contacted by The Texas Lawbook.
“I’ve been advised by counsel not to comment,” he said, “I’ll just say there is more to the story than what appeared in that appellate opinion and leave it at that.”
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