Tag: Arbitration

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.

Challenges to overall enforceability of a contract can be determined by an arbitrator

October 17, 2017

The parties to a dispute entered into an informal written settlement agreement, which contemplated execution of a more-formal settlement agreement later. The informal settlement agreement stated that “any disagreement result[ing] from negotiation and completion of this documentation” would be submitted to arbitration. One party argued the informal settlement agreement was wholly unenforceable because it was not approved by that party’s Board of Directors.

The court of appeals analyzed whether the arbitrator or the trial court should decide whether the entire informal settlement agreement was enforceable. The parties’ dispute concerned a challenge to the enforceability of the entire contract, rather than a challenge specifically to the arbitration provision. Under these circumstances, the court held that the arbitrator should decide whether the contract is enforceable.

It seems rather ironic that the parties are required to use the arbitration process, as set forth in the agreement, to determine whether the agreement (which contains the arbitration clause) is indeed enforceable. On the other hand, if a party challenged only the enforceability of the arbitration clause (but not the enforceability of the entire contract), most cases have held that a court should decide that dispute.

Human Biostar, Inc. v. Celltex Therapeutics Corp. , 514 S.W.3d 844 (Tex. App.–Houston [14th Dist.] Jan. 19, 2017, pet. denied).

The attached information is general in nature, is presented for discussion purposes only, and may not reflect current legal developments, nor fully explore all potential areas of this topic. The information included should not be relied upon or construed as legal advice and is not a substitute for obtaining legal advice from an attorney. No legal representation is undertaken or implied with the distribution of this information.

Arbitration agreement found unenforceable because employer could modify it without advance notice to the employee

October 17, 2017

An employee had a dispute with his employer arising out of personal injuries on a worksite. The employer’s written Dispute Resolution Policy contained an arbitration provision. The employee asserted the arbitration provision was unenforceable because the employer was permitted to modify or terminate Dispute Resolution Policy at its sole discretion. As a result, the employee argued the arbitration provision was an illusory promise, that is, it was unenforceable due to lack of mutuality because only one side was bound to perform under the agreement.

The court held that the arbitration provision in this instance was unenforceable. Under Texas law, an agreement giving the employer power to modify or terminate the agreement is enforceable (and not illusory) so long as the power: (1) extends only to prospective claims; (2) applies equally to the employer’s and employee’s claims; and (3) requires the employer to give advance notice to the employee before the modification or termination is effective. In this case, the Dispute Resolution Policy complied with the first two criteria, but failed the third because it permitted the employer to modify the policy without providing advance notice to the employee. The arbitration provision was therefore unenforceable.

This case illustrates the importance of careful drafting of arbitration provisions to ensure their enforceability.

Henry & Sons Construction Co., Inc. v. Campos , 510 S.W.3d 689 (Tex. App.–Corpus Christi Oct. 1, 2016, pet. denied).

The attached information is general in nature, is presented for discussion purposes only, and may not reflect current legal developments, nor fully explore all potential areas of this topic. The information included should not be relied upon or construed as legal advice and is not a substitute for obtaining legal advice from an attorney. No legal representation is undertaken or implied with the distribution of this information.