Contesting the Motion to Compel Arbitration

Transcription

1 Contesting the Motion to Compel Arbitration By Robert W. Loree I. Introduction Aparty who wants to enforce an arbitration clause typically files a motion to compel arbitration or a plea in abatement. This article will briefly examine the grounds for contesting a party s request for arbitration. Before filing or responding to a motion to compel arbitration or plea in abatement thereon, counsel may want to consider the problems inherent in arbitration and whether arbitration is even appropriate for the case. When arbitration clauses first came into vogue, defendants often touted them as a panacea for costly, time-consuming litigation. The initial assumptions and reasoning promoting arbitration, however, have not withstood the test of time. Arbitration has come under increasing attacks and criticism as being both costly and not much more expedient than the litigation process it was designed to replace, especially when the arbitrating parties are represented by counsel. Experience has shown that there are problems inherent with the arbitration process for all parties. Arbitration clauses in contracts have generated significant satellite litigation concerning their enforcement, and this satellite litigation does not address and often delays any resolution on the merits of the dispute, especially when a mandamus or interlocutory appeal is taken from an order denying arbitration. 1 The costs of arbitration are significant for all parties, particularly if the arbitration is administered by the American Arbitration Association ( AAA ). Arbitrating a dispute in excess of $75,000 with a single arbitrator from the American Arbitration Association can easily cost $20,000 or more. These costs escalate if more than one arbitrator is used and if an arbitrating party wants to make a record of the arbitration hearing. Limitations on discovery can be imposed during the arbitration, which can affect both sides and prevent a case from being fully developed. Truly sanctionable conduct is also difficult to punish since an arbitrator may not have the authority to do so and is not likely to sanction a party who is paying for his services. More importantly, arbitration a form of private litigation prevents both sides from seeking meaningful appellate review of important legal issues that may arise during the arbitration process. 2 There is an attractive alternative. Some experienced attorneys have been agreeing to try cases to the bench instead of fighting over the enforceability of an arbitration clause. Such an agreement alleviates the problems San Antonio Lawyer 6 May-June 2009

2 with arbitration concerning the time and expense of satellite litigation, the costs of the arbitration process itself, and unconscionable arbitration clauses that attempt to unduly limit a participant s rights. A non-jury trial should also provide a prompt and efficient administration of the claim under the Texas Rules of Civil Procedure without inhibiting meaningful appellate review. It is this appellate review that promotes the development of the common law that is inhibited by the private litigation of the arbitration process. II. Contesting the Motion to Compel Arbitration A. Examining the Arbitration Clause and the Burden of Proof If opposing counsel is not interested in a bench trial and insists on pursuing arbitration, the first step in contesting a motion to compel arbitration is to examine the subject arbitration clause. Since arbitration agreements are creatures of contract, the enforceability of an arbitration clause is usually determined under the law of contracts. The determination of whether parties agreed to arbitrate generally requires a court to decide: (1) whether there is a valid agreement to arbitrate between the parties, and (2) whether the dispute before the court is within the scope of the arbitration agreement. 3 An arbitration agreement must meet all requisite contract elements, and even though there is a strong presumption favoring arbitration, the presumption only arises after the party seeking to compel arbitration proves that a valid arbitration agreement exists. 4 As a result, arbitration is not automatic. The party moving to compel arbitration has the burden of proof to first establish that a valid arbitration agreement exists and that it covers the non-movant s claims. 5 The movant typically proves up its right to arbitration by attaching an affidavit to the motion to compel arbitration or the plea in abatement. The affidavit usually alleges facts that support the basis of the party s request for arbitration. The court is then required to decide whether to compel arbitration based upon the motion and attached proof, although live testimony is not precluded. The respondent can contest the movant s proof and the court must conduct an evidentiary hearing if material facts necessary to determining the right to arbitrate are controverted. 6 Generally, Texas courts will not compel arbitration unless a party clearly agreed to arbitrate and be bound by the arbitrator s decision. 7 Typically, in order to compel a party to arbitration, the party must have signed the arbitration agreement. This is a fundamental contract principle. Thus, a non-signatory to an arbitration agreement cannot be forced to arbitrate unless the non-signatory falls into an exception recognized under general equitable or contract law principles that would allow enforcement. 8 Determining whether a non-signatory may be bound by an agreement and made to arbitrate certain claims depends on the circumstances surrounding the case. Texas courts have recognized a number of distinct occasions when a non-signatory can be forced to arbitrate, even in the absence of a signature on the agreement itself. 9 In determining whether the dispute is within the scope of the arbitration agreement, courts focus on the facts alleged, not the causes of action asserted. 10 For example, an appellate court held that a claim was outside the scope of the arbitration clause where it involved a dispute about an employee s tort claims and only tangentially touched on the employment contract that contained the arbitration provision. 11 If the court finds the arbitration agreement is not a valid agreement or finds that the contested issue is not within the scope of the arbitration agreement, the court must deny the motion to compel arbitration. 12 Once a valid and enforceable arbitration agreement covering the asserted claims has been established, the burden then shifts to the opposing party to present evidence on one of the defenses to arbitration. The most common defenses are that the arbitration clause and its application are unconscionable, that the other party has waived its right to compel arbitration under the agreement, and that the arbitration agreement was induced or procured by fraud. 13 B. Examining the Applicable Arbitration Statute In contesting a motion to compel arbitration, in addition to traditional contract principles, counsel should also examine the governing arbitration statutes, the Federal Arbitration Act ( FAA ) and the Texas Arbitration Act ( TAA ). Counsel needs to determine which statute will govern the subject arbitration clause. As a practical matter, most arbitration clauses will be subject to the FAA. The FAA, enacted by Congress in 1925, specifically provides that agreements to arbitrate are valid, irrevocable and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract. 14 The FAA is very broad in its scope and applies to all claims involving interstate commerce and maritime transactions. A few exceptions are identified in the statute. 15 The amount of interstate commerce considered in the contract need not be substantial for the FAA to apply. 16 The FAA will extend to any contract affecting commerce as far as the Commerce Clause of the United States Constitution will reach. 17 Factors determining if the FAA preempts the TAA include whether: (1) the agreement is in writing, (2) it involves interstate commerce, (3) it can withstand scrutiny under traditional contract defenses, and (4) state law affects the enforceability of the agreement. However, the mere fact that a contract affects interstate commerce, thus triggering the FAA, does not preclude enforcement under the TAA as well. The FAA only preempts contrary state law, not consonant state law. 18 Due to the FAA s breadth, most movants in a motion to compel arbitration attempt to establish the right to arbitrate under the FAA and submit an affidavit attached to the motion that sets out facts establishing how the transaction affects interstate commerce. Nevertheless, some Texas courts have held that merely naming the FAA in an arbitration clause is sufficient to compel arbitration without a showing of how the transaction affects interstate commerce. 19 In any event, the question of whether the transaction affects interstate commerce, and is thereby governed by the FAA, is a question of fact. 20 Whenever possible, the party opposing arbitration should contest the application of the FAA because it allows the arbitration of many consumer transactions that are exempt from arbitration under the TAA. The right to arbitrate under the TAA is more limited than under the FAA. In general, under the TAA, Texas courts have the authority to compel arbitration, stay litigation, stay arbitration, appoint arbitrators, enforce arbitrator s subpoenas, confirm arbitration awards, vacate arbitration awards, and modify and correct arbitration awards. 21 Section of the TAA specifically provides, A written agreement to arbitrate San Antonio Lawyer 7 May-June 2009

3 is valid and enforceable if the agreement is to arbitrate a controversy that: (1) exists at the time of the agreement, or (2) arises between the parties after the date of the agreement. A party may revoke the agreement only on a ground that exists at law or in equity for the revocation of a contract. Unlike the FAA, the TAA has no requirement that the transaction involve interstate commerce. Unless the parties agree in writing to arbitrate and the writing is signed by each party and each party s attorney, Section of the TAA exempts the following transactions: (1) Collective bargaining agreements; (2) The acquisition of property, services, money or credit in which the total consideration is not more than $50,000, unless the parties agree in writing to arbitrate and the agreement is signed by each party and each party s attorney; (3) Personal injury claims, unless each party to the claim, on the advice of counsel, agrees in writing to arbitrate and the agreement is signed by each party and each party s attorney; (4) Workers compensation benefits claims; and (5) An agreement made before January 1, These exemptions prevent the arbitration of most consumer transactions under $50,000 because the contract usually will not be signed each party s counsel. As a result, most movants attempt to compel arbitration of these types of transactions under the FAA. Movants also attempt to invoke the FAA concerning the arbitration of personal injury claims since FAA has no exemption concerning personal injury claims, unlike the TAA. 22 If the movant does not invoke the FAA in one of these transactions, then respondent s counsel should point out the exemption at the hearing on the motion to compel arbitration. In addition, where an arbitration clause specifically provides for arbitration under the TAA, it has been held that such a choice of law clause excludes the application of the FAA and requires arbitration under the TAA. 23 If the court orders the parties to arbitration, it must stay the litigation. 24 In addition to being required by statute, there are practical reasons for requesting an order staying court proceedings pending the result of the arbitration. First, there is a ready-made forum for enforcement, modification, correction and even the setting aside of any award as required by Sections and of the TAA. Secondly, a stay is not a final order. A party seeking to challenge an order compelling arbitration needs the confirmation of an award and the entry a judgment under Section in order to appeal an erroneous granting of a motion to compel arbitration. C. Determining and Applying Respondent s Arbitration Defenses Once respondent s counsel has determined the law affecting the motion to compel arbitration, he or she should draft the response to the motion to plead any 1 Review of an order denying arbitration under the Federal Arbitration Act is by mandamus, while an interlocutory appeal must be taken from an order denying arbitration under the Texas Arbitration Act. Global Fin. Servs., L.L.C. v. Estate of McClean, Nos CV, CV, 2007 WL (Tex. App. San Antonio Jun. 20, 2007, orig. proceeding). 2 An arbitrator s decision under the Federal Arbitration Act can only be set aside on limited statutory grounds typically involving fraudulent conduct in the arbitration proceedings by the prevailing party or the arbitrator or when the arbitrator exceeds his powers. See 9 U.S.C. 1, et. seq. In addition, the Fifth Circuit has recently ruled that a manifest disregard of the law by an arbitrator is no longer a ground for vacating an arbitration award under the Federal Arbitration Act. Citigroup Global Mkt., Inc. v. Bacon, F.3d, No , 2009 WL (5 th Cir. Mar. 5, 2009). The grounds for contesting an arbitration award under the Texas Arbitration Act are described in the statute. See TEX. CIV. PRAC. & REM. CODE , et. seq. In this respect, a mere mistake of fact or law is not sufficient to set aside the arbitration award. Absent a statutory or common-law ground to vacate or modify the award, a reviewing court lacks jurisdiction to review other complaints, including the sufficiency of the evidence supporting the award. See Jamison & Harris v. National Loan Investors, 939 S.W.2d 735, 737 (Tex. App. Houston [14 th Dist.] 1997, pet. denied); J. J. Gregory Gourmet v. Antone s Imp., 927 S.W.2d 31, 33, 35 (Tex. App. Houston [1 st Dist.] 1995, no writ). 3 Webb v. Investacorp, Inc., 89 F.3d 252, (5 th Cir. 1996); Henry v. Gonzalez, 18 S.W.3d 684, 688 (Tex. Civ. San Antonio 2000, pet. dism d by agr.). 4 J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003); In re Halliburton, 80 S.W.3d 566, 570 (Tex. 2002) (orig. proceeding). 5 In re First Merit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2004) (orig. proceeding); In re Oakwood Mobile Homes, 987 S.W.2d 571, 573 (Tex. 1999) (orig. proceeding). Due to this burden, arbitration clauses awarding attorney s fees against a party contesting arbitration should not be enforceable as unconscionable and a violation of a contestant s due process rights. 6 Jack B. Anglin Co. Inc., v. Tipps, 842 S.W.2d 266, 269 (Tex. 1992). The procedural aspects of a motion to compel arbitration are more thoroughly discussed in In re Big 8 Food Stores, Ltd., 166 S.W.3d 869, 875 (Tex. App. El Paso 2005, no pet.). 7 See United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960); Trico Marine Servs., Inc. v. Stewart & Stevenson Technical Servs., Inc., 73 S.W.3d 545, 548 (Tex. App. Houston [14 th Dist.] 2002, orig. proceeding); Phillips v. ACS Municipal Brokers, Inc., 888 S.W.2d 872, 875 (Tex. App. Dallas 1994, no writ). 8 See Mohamed v. Auto Nation USA Corp., 89 S.W.3d 830 (Tex. App. Houston [1 st Dist.] 2002, no pet.). 9 A non-signatory may be bound by an agreement to arbitrate in the following circumstances: (1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) equitable estoppel; or (6) third-party beneficiary. See In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005) (orig. proceeding) (adopting the rule of direct benefits estoppel); see also In re Weekley Homes, L.P., 180 S.W.3d 127 (Tex. 2005) (orig. proceeding). 10 Prudential Secs., Inc. v. Marshall, 909 S.W.2d 896, 900 (Tex. 1995). 11 Ikon Office Solutions, Inc. v. Eifert, 2 S.W.3d 688, 696 (Tex. App. Houston [14 th Dist.] 1999, no pet). 12 TEX. CIV. PRAC. & REM. CODE (b). 13 In re Oakwood Mobile Homes, 987 S.W.2d at 573; In re Merrill Lynch Trust Co., 123 S.W.3d 549, 554 (Tex. App. San Antonio 2003, orig. proceeding). 14 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991); 9 U.S.C See 9 U.S.C. 1 (emphasis added). 16 Lost Creek Mun. Utils. Dist. v. Travis Indus. Painters, Inc., 827 S.W.2d 103, 105 (Tex. App. Austin 1992, writ denied). 17 In re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex. 2005) (orig. proceeding). 18 In re D. Wilson Constr. Co., 196 S.W.3d 774, 780 (Tex. 2006) (orig. proceeding). 19 See Teel v. Beldon Roofing & Remodeling Co., S.W.3d, No CV, 2007 WL (Tex. App. San Antonio Apr. 25, 2007); In re Kellogg Brown & Root, 80 S.W.3d 611, 617 (Tex. App. Houston [1 st Dist.] 2002, orig. proceeding). But see In re People s Choice Home Loan, Inc., 225 San Antonio Lawyer 8 May-June 2009

4 applicable defenses to the motion and attach any proof, usually an affidavit, to support the defense. As previously indicated, since arbitration agreements are creatures of contract, they are subject to all contractual defenses. An arbitration agreement can be materially breached, illegal, void, waived or rescinded. It can also be so one-sided that it is unconscionable and unenforceable. It could further be subject to the contractual defenses of impossibility, duress or coercion, lack of capacity, lack of consideration, and revocation. The most common arbitration defenses, however, are fraud, unconscionability, illegality, and waiver. 25 To succeed in challenging an arbitration agreement, these defenses must relate directly to the arbitration provision itself and not merely to the contract as a whole Fraud: If a fraud defense relates to the arbitration agreement itself, courts will address the fraud claim under both the FAA and the TAA. If, however, the fraud claim relates to the entire agreement, the arbitrator can decide the fraud claim. 27 Several Texas courts have affirmed orders to stay arbitration or have refused to compel arbitration based on fraud in the inducement of the arbitration agreement Unconscionability: Unconscionability is determined under the applicable state law, and an arbitration agreement determined to be unconscionable is not enforceable. 29 Unconscionability is a question of law for the court to decide, 30 and the party alleging unconscionability has the burden of proof to establish it. 31 In evaluating the validity of an arbitration provision, a court may consider both procedural and substantive unconscionability. Procedural unconscionability refers to the circumstances surrounding the adoption of the arbitration provision, and substantive unconscionability refers to the fairness of the arbitration provision itself. 32 Courts determine unconscionability by looking at the circumstances surrounding the making of the agreement, including but not limited to: (1) the relative bargaining strengths of the parties, and (2) whether the contract is illegal, against public policy, or oppressive or unreasonable. This determination is made on a case-by-case basis. 33 The test for substantive unconscionability is whether given the parties general commercial background and the commercial needs of the particular trade or case the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract. An arbitration clause that limits discovery for both parties does not make it per se unconscionable, 34 but a clause that prohibits all discovery or unreasonably imposes fees on a plaintiff may be unconscionable. Even then, though, if the subject arbitration clause has a severability clause, those unconscionable provisions can be stricken, and the case can then be referred to arbitration. 35 Excessive arbitration costs can also support a finding of unconscionability. 36 It should be noted, however, that the Texas Supreme Court has held that an arbitration subjecting a party to substantial costs and fees does not make an arbi- S.W.3d 35, (Tex. App. El Paso 2005, orig. proceeding) (noting that parties cannot confer subject matter jurisdiction by agreement). 20 In re Educ. Mgmt. Corp., 14 S.W.3d 418, 423 (Tex. App. Houston [14 th Dist.] 2000, orig. proceeding). 21 TEX. CIV. PRAC. & REM. CODE , et seq. 22 In re Nexion Health at Humble, Inc., 173 S.W.3d 67 (Tex. 2005) (orig. proceeding). 23 In re Olshan Found. Repair Co., L.L.C., 277 S.W.3d 124 (Tex. App. Dallas 2009, orig. proceeding). 24 TEX. CIV. PRAC. & REM. CODE Doctor s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S. Ct. 1652, 134 L. Ed. 2d 902 (1966). 26 See In re FirstMerit Bank, 52 S.W.3d 749, 756 (Tex. 2001) (orig. proceeding) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, (1967). 27 See Prima Paint Corp., 388 U.S. at ; Miller v. Pub. Storage Mgmt., 121 F.3d 215, 219 (5 th Cir. 1997) (citing R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d 534, 538 (5 th Cir. 1992)); Henry v. Gonzales, 18 S.W.3d 684, 691 (Tex. App. San Antonio 2000, pet. dism d by agr.); Pepe Int l Dev. Co. v. Pub Brewing Co., 915 S.W.2d 925, 930 (Tex. App. Houston [1 st Dist.] 1996, no writ). 28 EZ Pawn Corp. v. Gonzalez, 921 S.W.2d 320, (Tex. App. Corpus Christi 1996, writ denied); Gulf Interstate Eng g Co. v. Pecos Pipeline & Production Co., 680 S.W.2d 879, 881 (Tex. App. Houston [1 st Dist.] 1984, writ dism d w.o.j.). 29 Doctor s Assocs., Inc., 517 U.S. at ; TEX. CIV. PRAC. & REM. CODE Amer. Employer s Ins. Co. v. Aiken, 942 S.W.2d 156, 160 (Tex. App. Fort Worth 1997, no writ). 31 See In re Oakwood Mobile Homes, Inc., 987 S.W.2d at In re Halliburton Co., 80 S.W.3d 566, (Tex. 2002) (orig. proceeding). 33 In re Turner Bros. Trucking Co., 8 S.W.3d 370, 376 (Tex. App. Texarkana 1999, no pet.); Am. Employers Ins. Co. v. Aiken, 942 S.W.2d at See In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 678 (Tex. 2006) (orig. proceeding). 35 In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008) (orig. proceeding). 36 See Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 91, 121 S. Ct. at 522, 148 L.Ed.2d 373 (2000). 37 See In re FirstMerit Bank, N.A., 52 S.W.3d at See TEX. CIV. PRAC. & REM. CODE (b). 39 In re Turner Bros. Trucking Co., 8 S.W.3d 370 (Tex. App. Texarkana 1999, orig. proceeding). 40 In re RLS Legal Solutions, LLC, 156 S.W.3d 160 (Tex. App. Beaumont 2005, orig. proceeding). 41 E. Marine Corp. v. Fukaya Trading Co., 364 F.2d 80, 83 (5 th Cir. 1966). 42 Chattanooga Mailers Union Local No. 92 v. Chattanooga News-Free Press Co., 524 F.2d 1305, 1313 (6 th Cir. 1975). 43 In re Godt, 28 S.W.3d 732, (Tex. App. Corpus Christi 2000, no pet.). 44 See TEX. BUS. & COM. CODE (b). 45 Williams v. CIGNA Fin. Advisors, Inc., 56 F.3d 656, 661 (5 th Cir. 1995). 46 In re Certain Underwriters at Lloyd s, 18 S.W.3d 867, 871 (Tex. App. Beaumont 2000, no pet.). 47 Marble Slab Creamery, Inc. v. Wesic, Inc., 823 S.W.2d 436, 438 (Tex. App. Houston [1st Dist.] 1992, no writ). 48 EZ Pawn Corp. v. Gonzalez, 921 S.W.2d 320, 324 (Tex. App. Corpus Christi 1996, writ denied). 49 An order compelling arbitration is interlocutory and generally not appealable under the FAA and the TAA. See F.C. Schaffer & Assocs., Inc. v. Demech Contractors, Ltd., 101 F.3d 40 (5 th Cir. 1996); Tex. Civ. Prac. & Rem. Code ; In re Palacios, 221 S.W.3d 564 (Tex. 2006) (orig. proceeding); In re Godt, 28 S.W.3d 732 (Tex. App. Corpus Christi 2000, no. pet.). San Antonio Lawyer 9 May-June 2009

5 tration agreement per se unconscionable. Rather, the objecting party must present specific evidence they would be charged excessive fees, i.e., specific evidence of the future costs and the likelihood of incurring such costs. 37 To meet this burden, respondent needs an affidavit from counsel concerning the costs of the proposed arbitration, which can be based on counsel s experience with similar arbitrations. An affidavit is also needed from the client, stating that he or she cannot afford these arbitration costs. A leading case where excessive arbitration costs and fees were shown is Olshan Foundation Repair Co. v. Ayala, 180 S.W.3d 212 (Tex. App. San Antonio 2005, pet. denied). In that case, a dispute arose over the work done by Olshan pursuant to a $22,650 foundation-stabilization contract for the Ayalas home. The contract required arbitration with a panel of three structural engineers appointed by the AAA. After the court compelled the parties to arbitrate based on the arbitration clause, the parties were each notified by AAA to pay $33,150 in costs, in advance, for the arbitration. The Ayalas went back to the trial court and claimed the costs made the arbitration agreement substantively unconscionable. The trial court agreed, citing In re First Merit Bank, N.A. and denied the motion to compel arbitration. The Fourth Court of Appeals, in a 2-1 decision, affirmed the trial court s holding that the disparity between the amount in controversy and the amount charged to arbitrate the controversy was so large that the trial court acted within its discretion in finding the arbitration clause unconscionable. The Texas Supreme Court denied Olshan s petition for review. Trial courts are often very interested in the amount of fees and expenses charged to arbitrate cases, especially the fees and expenses required by AAA. Even with a single arbitrator from AAA, the fees and expenses for a mid-sized case can exceed $20,000. Many clients cannot afford to pay $10,000 to arbitrate their claims in addition to the cost of any expert witness testimony, effectively preventing them from prosecuting their claims. In addition to obtaining affidavits concerning these costs, it is good practice to write a letter to opposing counsel offering an agreed bench trial instead of litigating over the enforceability of the arbitration clause. If the opposing party refuses this offer, attach the letter as an exhibit to the response opposing the motion to compel arbitration to show what steps the plaintiff is willing to undertake to avoid the excessive costs of arbitration. This letter has been effective in showing that the opposing party s refusal of a non-jury trial and insistence that the parties use AAA is more about imposing excessive burdens and costs on the party resisting arbitration than it is about resolving the claim. In this respect, the practitioner can also argue that the court has inherent power under the alternative-dispute-resolution procedures statutes to structure an arbitration that is reasonable to avoid the high costs of arbitrating with AAA, even if the clause requires such an arbitration. 38 In another case, the Texarkana court of appeals held that obtaining an arbitration agreement from a functionally illiterate young man with a reading disorder was procedurally unconscionable. 39 Where the employer refused to provide a paycheck for previous work until the employee signed an arbitration agreement, the Beaumont court of appeals found the agreement was unenforceable because it was coerced by economic duress Illegality: An arbitration agreement can be unenforceable if the contract is void for illegality. 41 Courts may enforce arbitration clauses upon a finding that the illegal clause in the contract is not so central to the contract as to require the voiding of the entire contract, even if the contract did not contain a savings or severability clause. 42 Arbitration agreements under the TAA may be held unenforceable either for violating state law unrelated to the arbitration issues or for failing to comply with the provisions of the TAA. 43 An example of illegality would be if a consumer contract violated the Home Solicitation Act, which renders the entire contract void, including any arbitration clause therein Waiver: An agreement to arbitrate can be waived just like any other contractual right. Generally, courts find waiver when a party has substantially invoked the judicial process to the detriment or prejudice of the other party. 45 Factors to be considered include: (a) how long the litigation has been proceeding; (b) the activity in and status of litigation; (c) the advantage gained by the litigation activity, such as conducting discovery not available in San Antonio Lawyer 10 May-June 2009 arbitration; (d) the delay and expense involved; and (e) the rulings obtained from the court. 46 Waiver can be found when a party did not seek arbitration until one month before trial. 47 Waiver can also be based on the delay in seeking arbitration by participating in the judicial process for almost one year and on the resulting prejudice to the other party. 48 The Supreme Court of Texas has recently addressed waiver of an arbitration agreement in Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008) and in In re Fleetwood Homes of Texas, L.P., 257 S.W.3d 692 (Tex. 2008). Perry Homes v. Cull dealt with waiver of arbitration by conduct during litigation, which is a question of law for the court, not the arbitrator. The Supreme Court of Texas held that the homeowners waived their right to arbitration under the FAA because their conduct substantially invoked the judicial process and unfairly manipulated the litigation to the detriment or prejudice of the builder. The facts of Perry Homes are somewhat unique, in that the homeowners first objected to going to arbitration. After almost completing discovery in the case over a fourteen-month period and just four days prior to trial, the homeowners then changed their minds and moved to compel arbitration, which the trial court granted. The Supreme Court of Texas held that the homeowners switching back and forth prejudiced the builder. The Court did not give a checklist for determining when a party has waived its right to arbitration but held that such waiver is determined on a case-by-case basis. More importantly, the Court adopted a totality-of-the-circumstances test in deciding waiver issues. In re Fleetwood Homes of Texas, L.P., involved waiver concerning an arbitration agreement contained in a dealer agreement. After the agreement was cancelled, the dealer filed suit. Defendant did not move to compel arbitration for some time. The dealer contended that arbitration was waived due to several s from the defendant concerning a trial setting. The court held that the evidence was legally insufficient to support a finding of prejudice to the dealer based on the exchange of s. The court noted that the communications were merely a factor to be considered, that no dispositive motions were filed by the defendant, - continued on page 22 -

6 Published by NationWide Publishing SA 1922 Great Ridge San Antonio, TX Publisher - Ron L. Hogue rlhogue1222@satx.rr.com Fax: For information on advertising in the San Antonio Lawyer magazine Call The San Antonio Lawyer is published bimonthly by Nationwide Publishing SA, on behalf of the San Antonio Bar Association. Reproduction in any manner of any material, in whole or in part, is prohibited without the express written consent of the Editor in Chief. Material contained herein does not necessarily reflect the opinion of the Publisher or its staff. San Antonio Lawyer, the San Antonio Bar Assocation and the Publisher reserve the right to edit all materials and assume no responsibility for accuracy, errors or omissions. San Antonio Lawyer and the Publisher do not knowingly accept false or misleading advertisements, false or misleading editorials and do not assume any responsibility should such editorials or advertising appear. Advertisers Index Assn. of Atty. Mediators 23 Galant Computer Invest. 4 La Scala Restaurant 5 Lindemann Productions 18 Hugh McWilliams 4 Law Office of Jeff Small 19 Tower Life Building 2 Weston Centre 24 Contesting the Motion to Compel Arbitration and that the motion to compel arbitration was not filed on the eve of trial. In addition, even though the arbitration clause limited discovery, the court rejected the dealers contention that the arbitration clause was unconscionable. III. Conclusion Due to the problems inherent in the arbitration process, which may not be known until later, motions to compel arbitration should be strenuously contested. Even if a party is wrongfully compelled to arbitrate, which is generally not reviewable by mandamus or interlocutory appeal, 49 the party can appeal the erroneous order compelling of arbitration after the entry of an arbitration award and its confirmation in a - continued from page 10 - judgment from the trial court. Such an appeal can give the party opposing arbitration a possible second bite at the apple if it is dissatisfied with the arbitration award. This second bite, however, may not be available unless the motion to compel arbitration has been properly contested and all complaints have been preserved for appellate review. Mr. Loree is the senior partner with Loree, Hernandez & Lipscomb, specializing in representing plaintiffs in civil litigation. Mr. Loree has practiced law in Texas for over 30 years and is board certified in Civil Trial Law by the Texas Board of Legal Specialization. Legal Word for the Day: by Mark I. Unger Malfontance \ [mal-fon-tuh nz] noun Law Loss of credibility due to fudging of ink in a demand letter. use Judge, in all my years of practice, I ve never seen such malfontance. I m entitled to verbal sanctions at the very least. San Antonio Lawyer 22 May-June 2009