Are Your Arbitration Provisions Enforceable?
by Jason Cagle
January 24, 2023
It is common for construction contracts to contain provisions requiring the parties to submit any claims arising out of the contracts to arbitration. Courts tend to enforce such provisions vigorously. However, there are certain situations where courts will decline to enforce arbitration provisions. Three recent cases from the Texas courts illustrate some of these situations.
The first situation involves an unsuccessful attempt to enforce an arbitration provision against the employee of a subcontractor. V3 Constr. Co., LLC v. Butler, 2021 Tex. App. LEXIS 1152 (Tex. App.—Fort Worth Feb. 11, 2021, pet. denied). The general contractor hired a testing company to perform inspections on the jobsite. The parties’ subcontract contained a broad arbitration provision. While working on the jobsite, the testing company’s employee fell off a scaffold and was injured. The employee sued the contractor, claiming its negligence caused his injuries. The general contractor asked the court to compel the employee to submit his claims to arbitration. The court denied the request. Although the testing company signed the arbitration agreement, its employee had not. There are ways in which non-signatories to an arbitration agreement can be compelled to arbitrate, but they did not apply to the employee’s personal-injury claims. For example, the employee’s claims were not based on a right under the subcontract, but rather the contractor’s alleged failure to maintain a safe jobsite under common law. The take-away from this case is that arbitration provisions might not be enforceable against individuals that did not sign the agreement, even if they work for companies that did sign the agreement. It is important to have other measures in place to reduce the risk of liability for such claims, such as obtaining liability insurance.
The second situation involves a company’s failure to bind a customer with an arbitration agreement sent after the transaction had occurred. Nationwide Coin & Bullion Res., Inc. v. Ciarlone, 2022 Tex. App. LEXIS 1721 (Tex. App.—Houston [1st Dist.] Mar. 15, 2022, no pet. h.). A representative of a company which sells coins spoke over the phone with a customer about making a purchase. The representative and the customer agreed to the price of the coins, the customer mailed the company a check, and the company had the coins delivered. The package included an invoice with an arbitration provision on the back. When a dispute arose concerning the coins, the customer filed a lawsuit and the company attempted to enforce the arbitration provision. The court rejected this attempt, finding that the customer had not agreed to arbitrate because the arbitration agreement was sent to him after the transaction had been completed.
This case provides a situation similar to one often found in the construction industry: transactions with suppliers which send purchase orders or invoices with new terms when they deliver the materials. Whether or not the new terms are binding on the party receiving them often depends on a complex analysis of the parties’ conduct and applicable law. For example, had the coin customer been a “merchant” as defined under the Uniform Commercial Code, the terms of the invoice with the arbitration agreement might have been binding on him unless he communicated an objection to the company. Tex. Bus. & Com. Code § 2.207(b). If the new terms are not binding, however, they will not be enforced even if they contain an arbitration provision.
In the third situation, the documents comprising the parties’ agreement contained not one, but two arbitration provisions. Unfortunately, conflicting language in the provisions made both of them unenforceable. Links Constr. v. United Structures of Am., 2022 Tex. App. LEXIS 2405 (Tex. App.—Houston [14th Dist.] Apr. 14, 2022, no pet. h.). A general contractor hired a roofing subcontractor to perform work on a project. The parties executed a purchase order, which attached and incorporated the subcontractor’s quotation. The purchase order had a provision which required mandatory arbitration. The quotation had an arbitration provision as well, but it gave the subcontractor the sole option to decide whether the claims would be subject to arbitration. The subcontractor later filed a lawsuit against the general contractor, which moved to compel arbitration. The court denied the motion. It explained that the conflicting terms of the arbitration agreements showed that the parties had not had a “meeting of the minds” where they both reached the same understanding of their agreement. As a result, they never formed an arbitration agreement and the lawsuit could proceed.
Construction contracts sometimes attach or reference quotations or other documents. Inconsistent terms in the attached documents can create problems with interpretation and enforcement of the subcontract’s provisions. This was a worst-case scenario, where a subcontract provision which would otherwise be broadly enforced (arbitration) was rendered unenforceable by inconsistent language in the attachment. Contractors should scrutinize any attachments closely for inconsistent language. They should also include a subcontract provision stating that, in the event there is a conflict with an attachment, the language in the subcontract governs.
For more information on how these arbitration developments could impact your business, please consult with one of our attorneys at (972) 392-8900.