Tuesday, July 7, 2009

Legal Incapacity as a Defense to Arbitration: In Re Morgan Stanley & Co, Inc. (Tex. 2009)

In re Morgan Stanley & Co, Inc. (Tex. 2009) LACK OF CAPACITY AS A DEFENSE TO A MOTION TO COMPEL ARBITRATION Does the issue of a customer's incompetence to contract (and thus to assent to arbitration as part of an account agreement with a financial institution) go to the court or to the arbitrator? Texas Supreme Court, in majority opinion by Justice David Medina, says legal capacity to enter an arbitration agreement is a gateway issue for the court to decide, rather than for arbitrators. One justice of 8 sitting in the case – Nathan Hecht - dissented, likening the legal incapacity claim to fraudulent inducement as a theory to avoid an existing contract, and arguing that a contract executed by a person without legal capacity may nevertheless be ratified and is merely voidable, not void, under state law. Two other justices authored concurring opinions. Justice Don Willett reads the FAA as clearly assigning judges the role to determine whether an agreement to arbitrate was validly formed in the first place. Justice Scott Brister, however, disputed that the issue was that simple, and wrote separately to suggest that the defendant invoke direct benefits estoppel to enforce the arbitration agreement regardless of whether the customer was mentally competent when she signed the account agreement containing the arbitration clause. Equitable estoppel would prevent the plaintiff (suing through her guardian) from attacking the validity of the arbitration clause because all of her claims against the financial institution derive from the underlying contract, of which the arbitration clause was a part. LINKS TO OPINIONS AND CASE DETAILS: In re Morgan Stanley & Co, Inc., No. 07-0665 (Tex. Jul. 3, 2009)(Medina) (arbitration vs. litigation: legal capacity of party to arbitration agreement, does the court or the arbitrator determine the issue?) IN RE MORGAN STANLEY & CO. INC., SUCCESSOR TO MORGAN STANLEY DW, INC.; from Dallas County; 5th district (05-07-00590-CV, ___ SW3d ___, 07-17-07 Opinion by the Dallas CoA) The petition for writ of mandamus is denied. Justice Medina delivered the opinion of the Court, in which Chief Justice Jefferson, Justice Wainwright, Justice Green, Justice Johnson, and Justice Willett joined. Justice Brister delivered a concurring opinion. Justice Willett delivered a concurring opinion. Justice Hecht delivered a dissenting opinion. (Justice O'Neill did not participate). BLOG COMMENT BY OTHERS ON 2009 TEXAS SUPREME COURT DECISION IN RE MORGAN STANLEY: Capacity to contract is issue for the courts, not arbitrators (Reverse & Render Blog); Texas Supreme Court Holds that the Court, not the Arbitrator Should Decide the Issue of Capacity to Contract (Disputing); Comment by Prof. Alan Scott Rau, University of Texas at Austin School of Law, posted on Disputing RELATED TERMS: incompetence, lack of capacity to contract, mental, legal incapacity defense, incapacitated party, void and voidable contracts, void ab initio, validity of assent, meeting of the minds, lack of authority to bind principal, contract formation vs contract validity defense, cancellation rescission remedy, direct benefits equitable estoppel as basis for enforcing arbitration agreement against nonsignatory, questions/issues for the court and issues for the arbitrator to decide, respective roles of judges and arbitrators, gateway or threshold issues.

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