This term the Texas Supreme Court issued a succession of rulings favoring arbitration agreements and refusing to recognize various defenses. It rejected a claim of unconscionability due to excessive costs, held a nonsignatory bound to arbitrate by direct-benefits estoppel, and held that incorporation of AAA Commercial Rules into a contract constitutes a clear and unmistakable agreement that the arbitrator not the courts would rule on arbitrability questions.
Unconscionability due to excessive costs rejected
In Houston AN USA, LLC v. Shattenkirk, No. 22-0214, 2023 Tex. LEXIS 438 (Tex. May 26, 2023), the court held that an employee resisting arbitration of an employment-discrimination suit failed to establish that the arbitration agreement was unconscionable because the costs of arbitration are so excessive that they would foreclose the employee from pursuing his claims. The court recognized that a party opposing arbitration on this ground has the burden of proof, citing In re Poly-Am, LP, Poly-America, 262 S.W.3d 337, 356 (Tex. 2008). The party resisting arbitration must show that the party “will actually be charged fees that would prevent him from effectively vindicating his statutory rights.” “[T]he crucial inquiry is whether the arbitral forum in a particular case is an adequate and accessible substitute to litigation,” citing In re Olshan Found Repair Co., 328 S.W.3d 883, 894-95 (Tex. 2010). If the cost of proceeding in court and arbitration are comparable “that effectively ends the inquiry because it renders the arbitral forum ’equally accessible.’” Shattenkirk’s evidence included an AAA invoice from an unrelated case, an affidavit from Shattenkirk’s attorney that his case would last longer than the one in the invoice and averring that the cost to litigate in court would be a few hundred dollars. The court held that such evidence fell short of demonstrating that Shattenkirk would actually be charged fees that would prevent him from effectively vindicating his rights. The affidavit arguably provided a reasonable basis to estimate the total fees of arbitration, but did not show how that amount compared to the overall cost of litigation nor show Shattenkirk’s ability to afford litigation but not arbitration. The court held that the reference to litigation costing a few hundred dollars appeared to refer only to filing fees and was thus not concrete evidence of the increased cost of arbitration as compared to litigation or that such increased cost foreclosed the party from pursuing his claims. And nothing in the record showed that Shattenkirk would actually be charged and incur the estimated costs of arbitration. The agreement did not specify any arbitration rules such as JAMS or AAA, but the court noted that those groups had employment arbitration rules requiring employers to pay all costs other than an initial filing fee. Without condoning silence in an arbitration agreement with regard to payment terms, the court held that the plaintiff “cannot leverage the contractual silence about who would pay to summarily avoid the arbitration agreement he made.” It concluded that the risk that Shattenkirk would be saddled with prohibitive costs was “too speculative to justify the invalidation of the arbitration agreement.”
Direct-benefits estoppel applied to non-signatory
In Lennar Homes of Tex. Land & Constr., Ltd. v. Whiteley, No. 21-0783, 2023 Tex. LEXIS 407 (Tex. May 12, 2023), the court held that a subsequent purchaser of a home was bound under the doctrine of direct-benefits estoppel to arbitration clauses in a builder’s purchase-and-sale agreement with the original purchaser and in a deed to that purchaser. A home was built for an original purchaser under an agreement that included both a general and a warranty-specific arbitration agreement. The builder later recorded a deed that included an arbitration provision and stated that the provision would run with the land and bind all successors and assigns. The house was later sold to a new buyer who discovered mold and sued the builder. The plaintiff argued that she was not a party to any of the arbitration agreements and was not bound by them. The trial court issued a stay and the parties proceeded to arbitration, where plaintiff was denied relief and the builder awarded its attorney fees and costs. But the trial court vacated the award and the court of appeals affirmed. The Texas Supreme Court first listed the six ways non-signatories can be bound to arbitration agreements: (1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) equitable estoppel; and (6) third-party beneficiary, citing In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005). With regard to direct benefits estoppel, a non-signatory may be compelled to arbitrate if its claims are “based on a contract” containing an arbitration provision, but not if liability arises from general obligations imposed by law. Whether a claim seeks a direct benefit from a contract turns on the substance of the claim not artful pleading. The court held that implied warranty claims are as much a part of the writing as the express terms of the contract, and absent a contract such warranties would not arise. It analyzed each implied warranty separately. The implied warranty of good workmanship applies unless it is supplanted by express warranties in the contract, therefore the claim does not stand independently of the purchase agreement. The implied warranty of habitability can be waived to the extent that defects are adequately disclosed. The purchase agreement here contained some disclosures and therefore liability for breach of this implied warranty, while not arising from the purchase agreement, must still be determined with reference to it and thus does not stand independently from it. The court concluded that the plaintiff was bound to arbitrate pursuant to the purchase and sale agreement under the doctrine of direct-benefits estoppel and rendered judgment confirming the arbitrator’s award in favor of the builder and against the plaintiff. On the basis of its holding in this case the court ordered arbitration in the similar case of Taylor Morrison of Tex., Inc. v. Kohlmeyer, No. 21-0072, 2023 Tex. LEXIS 623 (Tex. June 30, 2023).
Incorporation of AAA rules delegates arbitrability to the arbitrator
Finally, in a case of first impression, the court in TotalEnergies E&P USA, Inc. v. MP Gulf of Mex., LLC, No. 21-0028, 2023 Tex. LEXIS 315 (Tex. June 9, 2023), held that incorporating AAA Commercial Rules into a contract constitutes a clear and unmistakable agreement that the arbitrator decides arbitrability. The parties had two related contracts, a System Operating Agreement that included an arbitration clause and a Cost Sharing Agreement that did not. The arbitration provision provided that arbitration would be in accordance with AAA Commercial Rules. The plaintiff attempted to bring claims solely under the Cost Sharing Agreement and thereby avoid arbitration. MP Gulf contended that by incorporating the AAA Commercial Rules, the System Operating Agreement delegated to the arbitrator the power to rule on the arbitrability of any claim including those ostensibly under the Cost Sharing Agreement. The AAA rule mandates that the arbitrator has “the power” to decide arbitrability issues. The Texas Supreme Court noted that courts will enforce an agreement to delegate arbitrability disputes to the arbitrator only if such agreement is “clear and unmistakable,” which raised the question of the effect of incorporating the AAA rules. After reviewing many other state and federal court rulings, the court held that, “as a general rule, an agreement to arbitrate in accordance with the AAA or similar rules constitutes a clear and unmistakable agreement that the arbitrator must decide whether the parties’ disputes must be resolved through arbitration.” The majority further held that such an agreement grants the arbitrator the exclusive power to rule on what claims are arbitrable and courts do not have concurrent power to make such rulings. “The fact that the parties’ arbitration agreement may cover only some disputes while carving out others does not affect the fact that the delegation agreement clearly and unmistakably requires the arbitrator to decide whether the present disputes must be resolved through arbitration.” That ruling still left Total E&P’s argument that the valid arbitration agreement did not apply to the claims it was asserting because they did not arise out of the agreement containing the valid arbitration agreement. But the court noted that while challenges to the scope of an arbitration agreement are ordinarily decided by the courts, that rule applies unless the parties have clearly and unmistakably delegated that issue to the arbitrators, as the parties did here. Thus the arbitrator was required to decide whether the arbitration agreement required arbitration of the claims asserted by Total E&P.