Arbitration Agreements Are Next To Impossible To Break.

In Re U.S. Home Corporation, et al., #03-1080 (Tex. October 12, 2007)

This decision from the Texas Supreme Court illustrates how difficult it is to get out from under an arbitration clause in a contract.   Because many insurance policies contain clauses requiring any coverage disputes to be decided by arbitration rather than litigation in the courts, this case is worth a comment.  This is actually a ruling on a writ of mandamus rather than the typical appeal of a lower court's disposition of a case on it merits.  Mandamus is a procedure for challenging a lower court's  ruling on a pre-trial matter like a motion to compel discovery, or, as in this case, a motion to compel arbitration in lieu of litigation.

The plaintiffs sued their homebuilders alleging that their houses were built without shower pans.  The contracts signed by the plaintiffs contained clauses requiring that any disputes arising under the contracts will be determined first by mediation and, failing mediation, second by arbitration.  In general, consumers usually believe that they have a better chance of obtaining a favorable outcome before a jury in litigation rather than a panel of industry experts (or dispute resolution experts) on an arbitration panel.  At any rate, the plaintiffs in this case felt that way and sought (and obtained) a court decision that they were not compelled to submit to arbitration.  The builders filed for a writ of mandamus ("mandamus" is a Latin word meaning "we command," and is the name of the procedure in common law whereby a superior court compels a lower court to perform correctly mandatory yet purely ministerial duties).

The Supreme Court granted the writ conditionally (meaning that the Court declared what the lower court should do if the writ were actually drawn up, signed, and wrapped in red tape -- the conditional grant seems less officious).  The following are five arguments frequently raised to avoid arbitration agreements and the Court's reasons for pouring them out:

 

1. The trial court found the arbitration clauses were contracts of adhesion and thus procedurally unconscionable. But the High Court held: “Adhesion contracts are not automatically unconscionable, and there is nothing per se unconscionable about arbitration agreements.”

    

2. The trial court found the arbitration agreements were procured by fraud. But the Court countered:  “The plaintiffs pointed to no evidence of misrepresentations, scienter, or reliance, instead arguing only that the arbitration clause was on the back of their single-sheet contract. As they concede no one prevented them from reading both sides, this is not fraud.. Like any other contract clause, a party cannot avoid an arbitration clause by simply failing to read it.”

    

3. The trial court found the arbitration clauses were not supported by mutual consideration. But, the Court observed, “As both parties agreed to arbitration, this is again simply wrong.”

    

4. The trial court found arbitration would be unduly burdensome and costly. “To sustain such a defense, both the United States Supreme Court and this Court require specific evidence that a party will actually be charged excessive arbitration fees.”

    

5. The trial court found that mediation was a condition precedent to arbitration, and the former having yet to occur the latter could not be compelled. “But while the parties’ agreements clearly contemplated mediation before arbitration, there is no indication they intended to dispense with arbitration if mediation did not occur first.” 

The lesson is that it is almost impossible to avoid arbitration once the parties have agreed to it.