May 11, 2018

May 11, 2018:

Texas Supreme Court holds that whether the claim of a non-signatory to an arbitration agreement must be arbitrated, as opposed to litigated, is a gateway matter that a trial court, not the arbitrator, must determine.  Jody James Farms, JV v. Altman Group, 547 S.W.3d 624 (Tex. May 11, 2018).

Jody James obtained a crop insurance policy issued by insurer Rain & Hail, LLC, through the Altman Group, an independent insurance agency.  The insurance policy contained an arbitration clause.  The Altman Group was not a party to the insurance policy, was not named in the policy, and did not sign the policy.  James suffered a loss to his sorghum crop.  He began an arbitration proceeding against insurer Rain & Hail pursuant to the arbitration clause in the insurance policy.  James lost that arbitration, in part because the arbitrator determined that Rain & Hail did not receive timely notice of the loss.  James then sued the Altman Group, the independent insurance agency, contending that he timely notified the agency of the loss, but that it failed to notify Rain & Hail in time.  The Altman Group moved to compel arbitration pursuant to the arbitration clause in the insurance policy.  The trial court compelled arbitration.  The arbitrator determined that James was required to arbitrate (rather than litigate) his claim against the agency and then ruled against James on the merits of his claim.  The trial court confirmed the take nothing arbitration award.  The court of appeals affirmed.  The Texas Supreme Court reversed, vacating the arbitration award on the ground that the Altman Group was not bound by the arbitration clause in the insurance policy.  

According to the Texas Supreme Court, "[w]hether parties have agreed to arbitrate is a gateway matter ordinarily committed to the trial court."  547 S.W.3d at 631.  Parties are free to agree that they will arbitrate arbitrability, but "[a] presumption favors adjudication of arbitrability by the courts absent clear and unmistakable evidence of the parties' intent to submit that matter to arbitration."  Id.  The arbitration clause in the insurance policy incorporated the rules of the American Arbitration Association, and those rules provide that an arbitrator has the power to determine his or her own jurisdiction and decide questions about the existence of an arbitration agreement and the arbitrability of any claim.  Some Texas courts had held that incorporation of the AAA rules provides clear and unmistakable evidence that a signatory to an arbitration agreement intended to arbitrate questions of arbitrability even against a non-signatory to the arbitration agreement.  The Texas Supreme Court disagreed.  "Even when the partiy resisting arbitration is a signatory to an arbitration agreement, questions related to the existence of an arbitration agreement with a non-signatory are for the court, not the arbitrator."  Id. at 632.    

The court reasoned that "[t]o the extent that Jody James and Rain & Hail's agreement expressed any intent to arbitrate arbitrability, it did so only with respect to one another.  . . .  The insurance policy directly incorporates the AAA rules only for these disputes, not for disputes between Jody James and unspecified third parties."  Id. at 632-33.  There was no "clear and unmistakable evidence" that James and the Altman Group has agreed to arbitrate arbitrability because the Altman Group had never agreed to the arbitration clause in the insurance policy in the first place.  The arbitrator, therefore, lacked authority to determine arbitrability, and given that lack of authority, the Texas Supreme Court reviewed the arbitrability question de novo (rather than with the usual deference afforded arbitration rulings).  The court examined six theories by which a non-signatory to an arbitration agreement might be bound by the agreement, including agency, estoppel, and third-party beneficiary, and concluded, based on its de novo review, that none applied on the facts of this case.  Because the Altman Group had not agreed to arbitrate the dispute with James, the court vacated the take nothing arbitration award and remanded to the trial court for further proceedings.    


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