Arbitration clauses in engagement letters can send the claims of both clients and their counsel to arbitration, but suing despite the presence of such a clause may cause a waiver of the right to arbitrate. In Smith v. Duncan Land & Exploration, Inc., No. 2-05-334-CV, 2006 Tex. App. Lexis 6353 (Tex. App.–Fort Worth July 20, 2006), Duncan Land & Exploration hired Attorney Smith to perform legal services in a suit by Duncan Land & Exploration against Robert Blay. Smith and Brian Duncan, as Duncan Land & Exploration’s President, signed an engagement letter setting forth the terms of Smith’s representation of Duncan Land & Exploration. The following provision is included on the last page of the letter:

If a party to this agreement has a dispute or claim against the other party or anyone employed under this agreement and the dispute or claim arises out of, is related to, or concerns any aspect of this agreement or services performed or not performed under this agreement, all such disputes or claims shall be submitted to binding arbitration. Any such arbitration shall be held in Wichita Falls, Texas, and no legal proceedings may be instituted except to enforce the award of the arbitrator or to preserve the jurisdiction of any court with existing jurisdiction of any of the parties, whether related or not to this agreement.

Smith prepared the letter agreement.

During the course of the suit, Duncan Land & Exploration  hired another attorney and eventually refused to pay Smith fees and expenses that she claimed Duncan Land & Exploration  owed her. As a result, Smith intervened in Duncan Land & Exploration’s suit against Blay, asking that the trial court award her $7,725.25 in reasonable attorney’s fees and expenses for legal services she had rendered in the Blay suit. Duncan Land & Exploration  filed a counterclaim for breach of contract, claiming that Smith breached her own letter agreement by filing a petition in intervention rather than an application for arbitration. Duncan Land & Exploration asked the trial court to award breach of contract damages of $6,725.25, sanctions of $6,725.25 for Smith’s frivolous pleading, reasonable and necessary attorney’s fees of $3,000, and costs of court.

The trial court held a hearing. Smith called in sick and did not appear. The trial court abated Smith’s petition in intervention and ordered that “any dispute between Brian Duncan and [Smith] regarding Attorney Fees in this cause of action should be sent to arbitration as a final decision.” The trial court also set a hearing on Duncan Land & Exploration ‘s counterclaim for damages, sanctions, and attorney’s fees.

The trial court later held a hearing on Duncan Land & Exploration ‘s counterclaim. The trial court took the matter under advisement and on March 14, 2005, sent the parties a letter stating that “[a]fter due consideration, the court is of the opinion that [Smith] should not have filed an action for fees without first seeking a resolution with Mr. Duncan, either through negotiation or arbitration as set forth in the fee contract prepared by [Smith].”

On July 11, 2005, Smith filed an “Objection to Proposed Judgment And Motion For Partial Rehearing Relating to Intervention.” In the motion for rehearing section, she contended for the first time that Duncan Land & Exploration ‘s counterclaim should also have been ordered to arbitration. There is no response in the record. The trial court denied Smith’s objection to the proposed judgment and denied the motion for partial rehearing on August 24, 2005. On August 25, 2005, the trial court signed an order awarding Duncan Land & Exploration  $3,000 in attorney’s fees on its counterclaim against Smith. Smith appealed.

The parties arbitrated the fee dispute in October 2005. The arbitrator awarded Smith $4,625.25, after offsetting the trial court’s $3,000 attorney’s fees award on Smith’s counterclaim. Smith filed an application to confirm the arbitration award on November 16, 2005, along with a “First Amended Answer to Counterclaim and Counter-Motion for Sanctions.” On November 22, 2005, the trial court signed a final judgment confirming the arbitrator’s award and severing the counterclaim, thus making its August 25, 2005 order final.

On appeal, Smith contended that the trial court abused its discretion by retaining jurisdiction of Duncan’s counterclaim, rather than ordering it to arbitration. Smith claimed that the counterclaim was arbitrable because “it was interwoven with the contract so that it could not stand alone” and that she did not waive her right to arbitrate the counterclaim. The court of appeals agreed with her first point, that the counterclaim fell within the scope of the arbitration clause, saying:

The arbitration agreement in the letter agreement applies to a “dispute or claim [that] arises out of, is related to, or concerns any aspect of [the] agreement.” This type of language is construed broadly. In re Conseco Fin. Serv. Corp., 19 S.W.3d 562, 568 (Tex. App.–Waco 2000, orig. proceeding). It encompasses all claims at issue unless “it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue.” Prudential Secs. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex. 1995) (orig. proceeding).

Here, [Duncan’s] counterclaim for breach of contract is based directly on and “arises out of” the letter agreement; [Duncan] contends that [Smith] breached the arbitration provision by filing a suit in intervention rather than an application to arbitrate. Thus, [Duncan’s] breach of contract claim falls within the scope of the arbitration agreement. See Pepe Int’l Dev. Co. v. Garcia, 915 S.W.2d 925, 931 (Tex. App.–Houston [1st Dist.] 1996, orig. proceeding).

The court of appeals then turned to the question of whether Smith had waived the arbitration clause by bringing suit on her claim for fees.

Whether a party has waived its right to arbitrate presents a question of law that we review de novo. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 574 (Tex. 1999) (orig. proceeding); In re Southwind Group, Inc., 188 S.W.3d 730, 735 (Tex. App.–Eastland 2006, orig. proceeding). Because public policy favors arbitration, there is a strong presumption against finding that a party has waived its right to arbitration; the burden to prove waiver is thus a heavy one. In re Bruce Terminix Co., 988 S.W.2d 702, 704-05 (Tex. 1998) (orig. proceeding); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex. 1996) (orig. proceeding); Southwind Group, Inc., 188 S.W.3d at 735. Any doubts regarding waiver are resolved in favor of arbitration. Bruce Terminix Co., 988 S.W.2d at 705; Southwind Group, Inc., 188 S.W.3d at 735.

Waiver may be express or implied, but it must be intentional. EZ Pawn Corp., 934 S.W.2d at 89; Southwind Group, Inc., 188 S.W.3d at 735. Whether waiver occurs depends on the individual facts and circumstances of each case. Southwind Group, Inc., 188 S.W.3d at 735; Williams Indus., Inc. v. Earth Dev. Sys. Corp., 110 S.W.3d 131, 135 (Tex. App.--Houston [1st Dist.] 2003, no pet.). A party does not waive arbitration merely by delay; instead, the party urging waiver must establish that any delay resulted in prejudice. Prudential Secs. Inc., 909 S.W.2d at 898; Southwind Group, Inc., 188 S.W.3d at 735. A court may find waiver only when (1) the party seeking arbitration has substantially invoked the judicial process and (2) the party opposing arbitration suffers actual prejudice as a result. Bruce Terminix Co., 988 S.W.2d at 704; Southwind Group, Inc., 188 S.W.3d at 735.

Courts will not find that a party has waived its right to enforce an arbitration clause by merely taking part in litigation unless it has substantially invoked the judicial process to its opponent’s detriment. Bruce Terminix Co., 988 S.W.2d at 704; Southwind Group, Inc., 188 S.W.3d at 736. Substantially invoking the judicial process may occur when the party seeking arbitration actively tried, but failed, to achieve a satisfactory result in litigation before turning to arbitration. Southwind Group, Inc., 188 S.W.3d at 736; Williams Indus., Inc., 110 S.W.3d at 135.

Applying these principles, the court of appeals found that the attorney had waived the arbitration clause:

Here, [Smith] not only waited almost a year and a half after the counterclaim was filed to request arbitration of the counterclaim, she actually participated in a hearing on the merits of the counterclaim without objection. Only after the trial court rendered a damage judgment against her did she assert her right to arbitration, a little over a year after the hearing on the merits. By the time [Smith] finally requested arbitration of the counterclaim, [Duncan] and [Duncan’s] counsel had already prepared for, attended, and incurred expenses in connection with a trial on the merits on the counterclaim, and [Duncan] had received a favorable ruling from the trial court on its counterclaim. See Marble Slab Creamery, Inc. v. Wesic, Inc., 823 S.W.2d 436, 439 (Tex. App.–Houston [14th Dist.] 1992, no writ) (holding that appellate court may presume trial court took judicial notice of its own record and that trial court record in that case supported prejudice element). Under these circumstances, we hold that [Smith] substantially invoked the litigation process to [Duncan’s] detriment and, thus, waived her right to arbitrate the counterclaim. See Frye v. Paine, Webber, Jackson & Curtis, Inc., 877 F.2d 396, 398 (5th Cir. 1989) (party waived arbitration by participating in trial that ended in mistrial); Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497-98 (5th Cir. 1986) (party waived arbitration by filing multiple lawsuits); see also In re Serv. Corp. Int’l, 85 S.W.3d 171, 175 (Tex. 2002) (orig. proceeding) (“The Fifth Circuit has held that ‘a party only invokes the judicial process to the extent it litigates a specific claim it subsequently seeks to arbitrate.’“); cf. Sedillo v. Campbell, 5 S.W.3d 824, 826-29 (Tex. App.–Houston [14th Dist.] 1999, no pet.) (holding that defendant substantially invoked litigation process by filing bankruptcy petition in bad faith after being sued, then filing counterclaim against plaintiff when bankruptcy stay was lifted). Because [Smith] waived her right to arbitrate the counterclaim, the trial court did not abuse its discretion by declining to order that the counterclaim be arbitrated.

The court of appeals also rejected the attorney’s argument that the enforceabilty of the arbitration provision was debatable:

Smith further argues that her conduct did not justify sanctions because it is unclear whether the arbitration clause in the letter agreement is enforceable. She cites to the split of authority among the courts of appeals as to whether an arbitration agreement in an engagement letter between an attorney and client is enforceable in an action against the attorney for legal malpractice.

The split, which is centered on § 171.002(c) of the Texas Civil Practice and Remedies Code pertaining to arbitrability of personal injury claims, is illustrated by comparing Taylor v. Wilson, 180 S.W.3d 627, 631 (Tex. App.–Houston [14th Dist.] 2005, pet. filed) (holding that legal malpractice suit is not claim for personal injury; thus, § 171.002(c) does not apply to such a suit and arbitration agreement in engagement letter was not unenforceable on that ground), In re Hartigan, 107 S.W.3d 684, 690 (Tex. App.–San Antonio 2003, orig. proceeding) (same), and Miller v. Brewer, 118 S.W.3d 896, 899 (Tex. App.–Amarillo 2003, no pet.) (same), with In re Godt, 28 S.W.3d 732, 738-39 (Tex. App.–Corpus Christi 2000, orig. proceeding) (holding that legal malpractice suit is personal injury claim for purposes of § 171.002(a)(3) and (c); therefore, arbitration agreement in engagement letter is unenforceable unless requirements of § 171.002(c) are met). In rejecting Smith’s argument, the court said:

These cases are based on § 171.002(c) of the civil practice and remedies code, which provides that a personal injury claim is arbitrable under the [Texas General Arbitration Act] only if “each party to the claim, on the advice of counsel, agrees in writing to arbitrate . . . and . . . the agreement is signed by each party and each party’s attorney.” Tex. Civ. Prac. & Rem. Code Ann. § 171.002(c) (Vernon 2005). But [Smith] intervened in [Duncan’s] suit against Blay on breach of contract and quantum meruit theories to recover attorney’s fees; she did not assert a personal injury claim. In addition, [Duncan’s] counterclaim was for breach of contract, not legal malpractice. Thus, the cases cited . . . are not applicable to this dispute, and the arbitration clause in the letter agreement could not be rendered unenforceable by that authority.

Finally, the court of appeals affirmed the trial court’s finding that the plea in intervention had been filed in bad faith or for purposes of harassment:

Here, the trial court was aware of the circumstances of the case: appellant drafted a letter agreement that precluded the institution of any legal proceedings other than arbitration; appellant and appellee got into a dispute over appellant’s fees; appellant had some apparently heated discussions with appellee’s new attorney regarding payment of those fees, during which appellee’s counsel told appellant that she would not recover any past due attorney’s fees unless the trial court awarded them to her; and after those discussions, appellant violated her own letter agreement with appellee by intervening in appellee’s suit against Blay and failing to request arbitration of her claims. Under these circumstances, we cannot conclude that the trial court abused its discretion by finding that appellant’s suit in intervention was brought in bad faith or for the purpose of harassment.