Background: The JOA and Initial Litigation
In 2000, Power Exploration, LLC (Power) entered into a Joint Operating Agreement (JOA) with a prior operator, which included an arbitration provision. Sun Exploration, Inc (Sun) acquired the former operator’s interest in 2016 and began serving as operator. In June of 2019, Sun filed suit (Power Expl., L.L.C. v. Sun Expl., Inc., No. 13-23-00291-CV, 2024 WL 3616540, at *1 [Tex. App.-Corpus Christi-Edinburg Aug. 1, 2024, no pet. h.]) against Power for failure to pay JIBs. Power actively participated in the litigation for nearly four years, engaging in discovery and filing counterclaims based on the JOA, but then moved to compel arbitration about a month before trial. The trial court denied the motion, and this accelerated appeal followed.
The Waiver Test: Substantial Invocation and Prejudice
The appellate court applied a two-prong test to determine if Power waived its right to compel arbitration, analyzing (1) whether Power had substantially invoked the judicial process in a manner inconsistent with arbitration rights and (2) whether Sun suffered actual prejudice as a result.
In the court’s view, Power substantially invoked the judicial process by actively participating in the litigation on the merits for nearly four years, including asserting its own claims for breach of the JOA, without attempting to compel arbitration until the eve of trial and without justifiable excuse for the delay. The court held that this conduct was inconsistent with an intent to arbitrate, establishing the first prong of waiver.
Power’s Argument Rejected
Power claimed that it was unaware of the contents of the JOA until Sun attached it to a motion for summary judgment filed shortly before Power’s motion to compel arbitration. The court rejected that argument, reasoning that Power was a signatory to the JOA and was presumed to know its contents. Additionally, evidence showed that Power had referred to the JOA in earlier communications.
Prejudice to Sun and the Court’s Reasoning
Regarding the prejudice prong, the court noted that prejudice in this context refers to inherent unfairness caused by a party's attempt to switch between litigation and arbitration to gain an advantage, resulting in delay or expense to the other party. The court rejected Power’s argument that minimal discovery activity meant Sun could not demonstrate prejudice, instead reasoning specific evidence of discovery costs is not always required to show prejudice. In the court’s view, the “extraordinary delay” itself—nearly four years before invoking arbitration without justification—was “the most substantial factor supporting prejudice,” and when coupled with Power’s extensive litigation conduct invoking the judicial process, prejudiced Sun by causing prejudicial delay and expense. The court concluded that the trial court could have reasonably concluded under these circumstances that Power’s attempt to have it both ways by switching between litigation and arbitration to its own advantage resulted in “inherent unfairness” to Sun.
Conclusion: Arbitration Waiver Affirmed
The court held that the trial court did not abuse its discretion in denying the motion to compel arbitration, affirming the waiver of Power’s arbitration rights.
