Tilson Home Corp. v. Zepeda, No. 14-16-00075-CV, 2016 Tex. App. LEXIS 12022 (Tex. App. Nov. 8, 2016)

The Court of Appeals of Texas has held that an arbitrator—not a trial court—must determine whether a prerequisite to the obligation to arbitrate has been met. Thus, when faced with the procedural question of whether an arbitration demand was timely filed, Texas trial courts must compel arbitration, leaving the question to the arbitrator.

In Tilson Home Corp., Jorge and Lisa Zepeda hired Tilson to build a home on their property. The contract’s arbitration provision stated:

Any dispute or claim which arise[s] from or relates to this Agreement, the Work and/or the Home will be barred unless the claim is filed with the [AAA] by Owner or Contractor within two (2) years and one (1) day from the date the cause of action accrues.

The Zepedas declined to proceed with the entire contract and a dispute arose. Tilson filed suit and, in the same filing, moved to compel arbitration. The Zepedas moved to dismiss the suit for lack of jurisdiction and also objected to the motion to compel, arguing that Tilson’s attempt to enforce the arbitration agreement was untimely. The trial court denied Tilson’s motion to compel and found that because the suit was filed more than two years and one day after the cause of action accrued, the court lacked jurisdiction and had no authority to order the parties to arbitration.

On appeal, Tilson argued that the trial court erred in denying its motion to compel arbitration because Tilson conclusively established: (1) a valid arbitration agreement, and (2) that its claims were within the scope of the arbitration agreement. In response, the Zepedas argued that because Tilson filed for arbitration after the contractual deadline had passed, its claims were not within the scope of the arbitration agreement. Essentially, the Zepedas argued that the contractual deadline was part of the scope of the arbitration agreement.

The Court of Appeals of Texas held that the trial court had no discretion but to compel arbitration because whether Tilson’s failure to demand arbitration before the specific contractual deadline barred its claim was a question of procedural—not substantive—arbitrability. The Court reasoned that issues involving procedural impediments to arbitration—generally, any issue requiring the adjudicator to decide if a party has satisfied the prerequisites to compelling arbitration—are for the arbitrator to decide. It relied, in part, on a prior decision of the Texas Supreme Court, which involved the question of whether a contract provision stating that no claim can be brought to arbitration after the statute of limitations had run, bars a party’s demand for arbitration. The Supreme Court in that case held that the question was one of procedural arbitrability for the arbitrator.

Conversely, matters of substantive arbitrability are for the trial court to decide. Although the Court of Appeals agreed with the Zepedas that whether a particular claim is within the scope of the agreement is a matter of substantive arbitrability, the Court reasoned that the Zepedas’ real argument was not a scope limitation, but instead that the deadline acted to bar all of Tilson’s claims. Therefore, it reversed the trial court and remanded the case with instructions to enter an order compelling arbitration and staying the litigation pending the outcome of the arbitration.

Also in its opinion, the Court of Appeals determined that the trial court erred by concluding that because the suit was untimely, the court lacked jurisdiction and, therefore, had no authority to compel arbitration. The Court reasoned that an argument that a prerequisite to arbitration has not been met goes to the merits, not to the trial court’s jurisdiction.

To view the full text of the court’s decision, courtesy of Lexis®, click here.