Timeliness of arbitration demand for the arbitrator to decide, not the court, Texas Supreme Court says

In G.T. Leach Builders LLC v Sapphire V.P., LP, No. 13-0497 (Tex. 2015), a complex construction-project-related dispute involving multiple parties and multiple contracts, the Texas Supreme Court recently addressed a number of important arbitration-related issues. Most notably, it reversed the intermediate court of appeals on the matter of whether the court or the arbitrator gets to decide whether the arbitration demand was timely asserted. 

G.T. Leach Builders, LLC v. Sapphire V.P., LP, No. 13-0497 (Tex. 2015)

The Supreme Court, in an opinion by Jeff Boyd, concluded that the question is not a gateway issue of arbitrability and therefore goes to the arbitrator. This seems logically unsatisfactory, because the matter of whether a litigant has waived the right to compel arbitration by litigation conduct is and remains a matter for the court. The failure to meet the deadline to invoke or initiate arbitration is likewise a matter of conduct (omission). So why should the former be a matter of arbitrability properly passed on by the Court, but the latter a matter to be arbitrated (rather than a threshold matter of whether an arbitration referral is (still) appropriate, or has been forfeited by undue delay?   

  

Moreover, a contractual provision setting a deadline will generally be more amenable to quick and efficient application and enforcement because it is likely unambiguous and the relevant facts are measured in days or months. Delay in quantifiable. No need for fact-intensive inquiry encompassing multiple dimensions of conduct, not to mention consideration of the amorphous “totality of the circumstances” to resolve whether the deadline has be missed. Resolution by the court would thus also conserve judicial and private resources.

Thirdly, if a party’s litigation conduct may arguably transform a “presently enforceable right to arbitrate” into its opposite, how does a failure to meet the deadline for arbitration not render the “presently enforceable right to arbitrate” into something that was presently enforceable before the deadline, but not after? Why should the court not resolve both types of scenarios involving the potential loss of the otherwise available right to compel arbitration in case pending before it? 

Finally, under the Supreme Court’s ruling, the case must be sent to arbitration for the arbitrator to determine that the case cannot be arbitrated because the right to arbitrate was lost by missing the deadline. But in reaching that conclusion, the arbitrator would in fact be arbitrating an issue that touches on the very basis of the arbitrator’s authority to act, i.e. did the party that sought arbitration still have a right to do so, and was it appropriate for the arbitrator to make any decision at all? There would appear to be an inherent contradiction of a arbitrator deciding that arbitration should not be taking place because the right to arbitrate no longer existed when the arbitration was compelled. 

The scenario might be analogized with the proposition that a court always has jurisdiction to determine whether it has jurisdiction. But limitations issues are not jurisdictional. And an arbitrator never has plenary jurisdiction because arbitration is always a creature of contract. Therefore, the jurisdiction analogy fails. 

Moreover, what happens if the arbitrator issues an “award” finding that relief is barred because the deadline to commence arbitration has been missed? Is it that binding on the court? Does it have res judicata effect? Or can the dispute then be resolved in court, assuming the claim itself is not time-barred, even though the resolution of that claim by arbitration was time-barred as determined by the arbitrator in the award? And even if the cause of action was time-barred, would the court then still have authority to so rule on the merits?

What if either party moves for confirmation of the arbitrator's award to transform it into a judgment?  What if arbitrator entered a zero (take-nothing) award, rather than a time-bar finding equivalent to a trial court's dismissal reciting the basis for dismissal in the order, or the equivalent to a dismissal order accompanied by findings of facts and conclusions of law doing so. What if the arbitrator issues an "award" that awards no relief but does not state a reason (i.e. does not say that relief was denied because the deadline to commence arbitration had been missed, the applicable statute of limitations had expired, or any other reason)? Would that still leave ground to argue that the court should decide the controversy in a later proceeding because the arbitrator was in no position to determine whether any relief should be granted on the merits? What would be the effect of an arbitrator's finding of absence of arbitrability in a case in which arbitration was compelled? Does that reverse the order to compel, and the judicial findings upon which it rests?   

All these concerns could be addressed, and the logical inconsistencies could be eliminated -- at least in case where the controversy originates in court -- had the Supreme Court held that timelines under the arbitration deadline is a gateway matter, specifically, a matter of whether the arbitration agreement is ‘presently’ enforceable. This is the same question that is implicated in the court’s role of determining whether the party seeking arbitration has waived the right to do so by its litigation conduct, thereby rendering the arbitration agreement not or no longer "presently enforceable". 

The Thirteenth Court of Appeals' resolution of this issue is logically and jurisprudentially much more persuasive, and would also serve the goal of efficiency by avoiding litigation of time-bar issues in two different fora: court and arbitral forum, not to mention trips to appellate courts. The court below should have been affirmed.

   

  

G.T. LEACH BUILDERS, LLC, ET AL., Petitioners,

v.

SAPPHIRE V.P., LP, Respondent.

No. 13-0497.

Supreme Court of Texas.

Argued November 5, 2014.

Opinion delivered: March 20, 2015. 

JUSTICE JEFFREY S. BOYD, delivered the opinion of the Court.

Texas law encourages parties to resolve disputes through arbitration,[1] but it will not force them to arbitrate unless they have agreed to that alternative.[2] If they have, or if they are equitably estopped from denying their assent to such an agreement, courts must honor the agreement by referring the disputes to arbitration unless the party demanding arbitration has waived that right by substantially participating in the litigation. We apply these principles in this case to determine whether a property developer must arbitrate its claims against several defendants involved in a construction project. The trial court denied all of the defendants' motions to compel arbitration, and the court of appeals affirmed. We hold that (1) the developer agreed to arbitrate its claims against the general contractor and the general contractor did not waive its right to demand arbitration; (2) the developer's argument that a contractual deadline bars the general contractor's demand for arbitration is itself a claim that must be arbitrated; (3) the developer did not agree in the general contract to arbitrate its claims against the other defendants; (4) the developer is not equitably estopped from denying any such agreement; and (5) the subcontracts do not contain an enforceable arbitration agreement. In short, we hold that the developer must arbitrate its claims against the general contractor but not its claims against the other defendants.

I.

Background

In July 2008, Hurricane Dolly caused extensive damage to a luxury condominium project that Sapphire V.P., L.P. was in the process of developing on South Padre Island. Sapphire filed suit against Adams Insurance Services, Inc., Arthur J. Gallagher Risk Management, and Tracy Williams (collectively, the Insurance Brokers), asserting claims for negligence and breach of contract. Sapphire alleged that, eight days before the hurricane hit, the Insurance Brokers allowed a builder's risk insurance policy to expire and be replaced by a permanent insurance policy even though construction of the project was not yet complete. Sapphire sought to recover millions of dollars for water damage, increased construction costs, delay costs, lost revenue, and other losses that the builder's risk policy allegedly covered or should have covered but the permanent policy did not.

Trial court judge strayed beyond the gateway area - mandamus granted

Houston Court of Appeals holds that trial court went beyond its limited role of determining gateway matters and strayed into arbitrators' territory by taking up issues of manner and procedure relating to the arbitration process.

OPINION BY JANE BLAND

This is an interlocutory appeal and a companion petition for a writ of mandamus that challenge the trial court's order designating an arbitral forum. Donna Miller, both individually and as the executor of her deceased husband's estate, has sued her husband's former employers, Academy, Ltd. and Academy Managing Co., L.L.C. (Academy), contending that Academy breached its agreement, pursuant to its executive compensation plan, to pay the estate $2.4 million if Academy underwent a change of control within a three-year period.

Academy invoked the agreement's arbitration provision and moved in the trial court to compel arbitration, which it did. Then, in a motion to clarify that ruling, Miller asked the trial court to interpret the arbitration provision as not requiring administration by the American Arbitration Association. In its order granting Miller's motion, the trial court declared that "the previously ordered arbitration of this cause shall be conducted privately and without having to file and administer the arbitration with the American Arbitration Association."

 Academy seeks either appellate or mandamus relief from the trial court's order granting Miller's motion to clarify and supplementing its prior order compelling arbitration. We hold that we lack jurisdiction over Academy's appeal, but we exercise our mandamus jurisdiction to correct the trial court's error in interpreting a contract issue that properly belongs to the arbitrators. We therefore conditionally grant the writ.

Background

In 2007, Academy established an executive compensation plan, named "Plan I," for certain employees, including the decedent. Plan I contains the following arbitration provision:

Section 14. Dispute Resolution; Governing Law

(a) The exclusive venue for any action in respect of Section 13 of this Retention Plan shall be the state and Federal courts located in Harris County, Texas.

(b) Except as provided in Section 14(a) above, any controversy or claim arising out of or relating to this Retention Plan Shall be settled by arbitration in Harris County, Texas by three arbitrators appointed by the parties. If the parties cannot agree within 30 days on the appointment of arbitrators, one shall be appointed by the Company and one by the applicable Participant, and the third shall be appointed by the first two arbitrators. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association for resolution of commercial disputes, except with respect to the selection of arbitrators, which shall be as provided in this paragraph. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by either party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators have no authority to modify any provision of this Retention Plan other than a benefit specifically provided under or by virtue of the Retention Plan. If a Participant substantially prevails on at least one material issue which is the subject of such arbitration, the Company shall be responsible for all of the fees and expenses of the American Arbitration Association and the arbitrators. Otherwise, each party shall share the fees and expenses of the American Arbitration Association and the arbitrators equally.

Discussion

I. Appellate Jurisdiction

 The parties do not contend that their arbitration agreement is governed exclusively by either the Federal Arbitration Act or the Texas General Arbitration Act, and Academy has invoked both sections 51.016 and 171.098 of the Texas Civil Practice and Remedies Code as the basis for our jurisdiction over its appeal. As a threshold issue, Miller challenges whether appellate jurisdiction exists, contending that Academy's challenge to the trial court's order requiring a non-AAA-administered arbitration does not fall within any of the specific grounds for appeal that either of these sections authorizes.

Section 171.098(a)(1), the appeal provision of the state arbitration statute, requires, as a predicate to our interlocutory appellate jurisdiction, the filing of "an application to compel arbitration made under Section 171.021" and an order denying that application. TEX. CIV. PRAC. & REM. CODE ANN. § 171.098 (West 2012). To prevail under Section 171.021, such a motion must show the existence of an agreement to arbitrate that applies to the parties' dispute and that the opposing party has refused to arbitrate. TEX. CIV. PRAC. & REM. CODE ANN. § 171.021(a) (West 2012). Section 51.016 allows for state court appeals in agreements governed by the FAA. TEX. CIV. PRAC. & REM. CODE ANN. § 51.016 (West 2012). Pertinent to this case, a party may appeal (1) an order refusing to stay litigation pending arbitration of its subject matter, (2) denial of a petition to order arbitration, and (3) an order denying an application to compel arbitration. Id. (incorporating grounds set forth in 9 U.S.C. § 16).

The appealed order, purporting to clarify the parties' rights under the arbitration agreement, does not fall within any of the types of appealable orders identified under either the state or federal statutes. We therefore lack appellate jurisdiction over Academy's attempted interlocutory appeal.

II. Mandamus Jurisdiction

Academy alternatively seeks mandamus relief, complaining that the trial court abused its discretion in signing the order, because it effectively denies Academy's right to arbitrate the underlying dispute according to the arbitration agreement's terms. A writ of mandamus issues to correct a clear abuse of discretion when no adequate remedy at law exists. Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992). A trial court has no discretion to apply the law incorrectly. Id. at 840. A party seeking relief from the failure to enforce a valid arbitration agreement, according to its terms, has no adequate remedy at law and is entitled to mandamus relief to correct the trial court's error. See In re Serv. Corp. Int'l, 355 S.W.3d 655, 657 (Tex. 2011) (orig. proceeding) (holding that mandamus relief is available from trial court's appointment of arbitrator in contravention of parties' agreement that they would select arbitrator by mutual agreement or, if unable to agree, seek appointment by AAA); see Aspen Tech., Inv. v. Shasha, 253 S.W.3d 857 (Tex. App.-Houston [14th Dist.] 2008, orig. proceeding) (granting relief from trial court's order compelling arbitration under clause in parties' 2006 agreement instead of under parties' 2008 agreement, which had valid arbitration clause that supplanted earlier one); accord BP Exploration Libya Ltd. v. ExxonMobil Libya Ltd., 689 F.3d 481, 496-97 (5th Cir. 2012) (vacating district court's order requiring parties to proceed to arbitration before five arbitrators, where parties had expressly agreed to arbitrate before three-member panel).

The parties' arbitration agreement provides that they are to select three arbitrators by mutual agreement, or, if they "cannot agree within 30 days on the appointment of arbitrators, one shall be appointed by the Company and one by the applicable Participant, and the third shall be appointed by the first two arbitrators." The parties apparently have no quarrel over this selection method, and they can comply with it before determining whether the arbitration is subject to formal AAA administration.

Because no obstacle to the appointment of the arbitrators exists, we next consider if the question decided by the trial court—whether the arbitration agreement requires the parties to file and administer the arbitration through the American Arbitration Association or merely requires that the arbitrators use the rules set forth by the AAA—is for the courts or the arbitrators to decide. In Green Tree Financial Corp. v. Bazzle, the United States Supreme Court explained the narrow scope of the judicial role in interpreting arbitration agreements:

In certain limited circumstances, courts assume that the parties intended courts, not arbitrators, to decide a particular arbitration-related matter (in the absence of "clea[r] and unmistakabl[e]" evidence to the contrary). AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649 (1986). These limited instances typically involve matters of a kind that "contracting parties would likely have expected a court" to decide. Howsam v. Dean Witter Reynolds, Inc., 537 U. S. 79, 83 (2002). They include certain gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy. See generally Howsam, supra. See also John Wiley & Sons, Inc. v. Livingston, 376 U. S. 543, 546-547 (1964) (whether an arbitration agreement survives a corporate merger); AT&T, supra, at 651-52 (whether a labor-management layoff controversy falls within the scope of an arbitration clause).

539 U.S. 444, 452 (2003); see also Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 82-83, 123 S. Ct. 588, 591 (2002) (holding that applicability of NASD time limit rule is matter presumptively for arbitrator, not for judge). The question of whether the parties agreed to formal AAA administration in this case concerns neither the validity nor the scope of the arbitration agreement. Consequently, the issue belongs to the arbitrators, not to the courts. See Howsam, 537 U.S. at 83; In re D. Wilson Constr. Co., 196 S.W.3d 774, 780-81 (Tex. 2006) (orig. proceeding); see also Austin Commercial Contractors, L.P. v. Carter & Burgess, Inc., 347 S.W.3d 897, 902 (Tex. App.-Dallas 2011, pet. denied) (holding that challenge to Civilian Board of Contract Appeals' [CBCA] jurisdiction as arbitrator of dispute, as well as waiver and election-of-remedies complaints, "are matters of procedure that are for the arbitrator and not for the court," and conditionally granting writ of mandamus directing trial court to vacate portion of order requiring arbitration to proceed under AAA instead of CBCA); Am. Realty Trust, Inc. v. JDN Real Estate—McKinney, L.P., 74 S.W.3d 527, 531 (Tex. App.-Dallas 2002, pet. denied) (citing John Wiley & Sons v. Livingston, 376 U.S. 543, 557, 84 S. Ct. 909, 918 (1964) ("[I]f a court determines the parties have an obligation to submit the subject matter of a dispute to arbitration, `procedural' questions concerning the dispute . . . are left to the arbitrator.")). We hold that the trial court erred in straying past the gateway and into the arbitrators' presumptive arena by addressing whether the parties agreed to formal AAA administration and ordering that they did not.

Conclusion

We dismiss Academy's appeal for lack of jurisdiction. We conditionally grant mandamus relief to Academy and direct the trial court to vacate its March 5, 2012 order supplementing its earlier order compelling arbitration. We are confident the trial court will comply, and the writ will issue only if it fails to do so.

SOURCE: HOUSTON COURT OF APPEALS -  Nos. 01-12-00293-CV & 01-12-00356-CV – 2/21/2013

Who decides the gateway issues? Judge or Arbitrator?

Generally the Court resolves the treshhold issue of arbitrability, but the underlying agreement may allocate that function to the arbitrator or panel of arbitrators, as demonstrated by the following caselaw snippet from a recent opinion by the El Paso Court of Appeals:   

      

Court Or Arbitrator?           

El Paso courthouse

  

When a dispute involving an agreement to arbitrate is brought to a court for resolution, it is the court's obligation to determine whether the parties agreed to submit a particular issue to arbitration. See United Steelworkers of America v. American Mfg. Co., 363 U.S. 564, 80 S.Ct. 1343, 4 L.Ed.2d 1403 (1960); Del E. Webb Const. v. Richardson Hosp. Authority, 823 F.2d 145 (5th Cir. 1987).

   

An arbitration provision may give the arbitrator the power to resolve gateway issues regarding validity and enforceability of the arbitration agreement. In that event, the entire matter of arbitrability is transferred from the courts to the arbitrator. Unless the agreement clearly demonstrates that the parties intended to confer on the arbitrator the power to determine what disputes are arbitrable, the court retains the duty to decide that issue. Arbitration agreements that clearly and unmistakably show intent to assign gateway issues to the arbitrator are fully enforceable. See Rent-A-Center, ___ U.S. ___, 130 S.Ct. at 2777; First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1985)(holding question of primary power to decide arbitrability "turns upon what the parties agreed about that matter"); AT&T Technologies, Inc. v. Communications. Workers, 475 U.S. 643, 649, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986)(holding parties may agree to arbitrate arbitrability). Accordingly, under First Options, gateway questions which are normally decided by a court will be submitted to an arbitrator where the agreement was clear and unmistakable. See First Options, 514 U.S. at 943; AT&T Technologies, Inc., 475 U.S. at 649, 106 S.Ct. at 1418.

SOURCE: EL PASO COURT OF APPEALS - 08-11-00091-CV – 4/25/2012

CASE: HIS Acquisition No. 131 v. Iturralde (Tex.App.- El Paso [8^th Dist.] April 25, 2012)

Here, the Agreement provided that "any and all claims challenging the validity or enforceability of this Agreement . . ." are subject to arbitration. It thus clearly and unmistakably provided for issues of validity and enforceability to go to the arbitrator. Iturralde argues that whether the contract is supported by adequate consideration is not an issue of validity or enforceability but rather an issue of formation for the court to decide. We disagree. The Agreement bears Iturralde's signature evidencing her assent to its terms and clearly provides for an arbitrator to decide all issues of arbitrability.

  

In Rent-A-Center, the Supreme Court clarified how courts must treat challenges to an arbitration agreement's delegation provision. See Rent-A-Center, ___ U.S. ___, 130 S.Ct. 2772.

  

The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.

  

Id. at 2775-76. According to the Supreme Court, the analysis in situations challenging a stand-alone arbitration agreement containing a delegation provision depends on the kind of challenge being made. Id. If the challenge relates to the arbitration agreement as a whole, and the agreement contains a provision delegating issues of arbitrability to the arbitrator, then the challenge must be directed to arbitration. Id. If the challenge is specific to the issue of delegation, however, then the court must resolve the challenge. Id.

  

The Agreement presented clearly and unmistakably provides that issues of validity and enforceability go to the arbitrator. Iturralde signed the Agreement, manifesting her intent that gateway issues be arbitrated. Additionally, Iturralde challenges the entire arbitration agreement based on the assertion that the term provision renders the Agreement illusory. Under Rent-A-Center, because there is a specific delegation provision, and Iturralde challenges the Agreement as a whole, rather than the specific delegation provision, the issue goes to the arbitrator. Therefore, the determination of whether the agreement is illusory is for the arbitrator and not the court.

  

SOURCE: EL PASO COURT OF APPEALS - 08-11-00091-CV – 4/25/2012

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.