In a case of first impression the Texas Supreme Court recently held that the issue of whether a party has the mental capacity to contract is an issue for courts, not arbitrators. The Court traced the history of the so-called "separability" spawned by the United States Supreme Court’s decision in Prima Paint Corp. v. Conklin Manufacturing Co., 388 U.S. 395, 404 (1967), that held that challenges to an entire contract should be decided by arbitrators and challenges to an arbitration agreement itself should be decided by courts.
The separability doctrine proved problematic in a third category of cases; those in which a party challenged the very existence of a contract in the first place, so-called "contract formation" issues. Relying on dicta in Buckeye Check Cashing, Inc. v Cardegna, 546 U.S. 440, 444 n.1 (2006), and numerous other state and federal decisions, the Texas Supreme Court held that contract formation issues, specifically mental capacity, are for courts, not arbitrators. Accordingly, the Court denied Morgan Stanley’s attempt to compel arbitration by mandamus. Justice Hecht dissented and would have treated lack of capacity as "closer to fraudulent inducement than to lack of signature." The Court’s opinion in In re Morgan Stanley & Co., Inc. can be found at this link.