Corpus Christi COA Holds Arbitration Agreement Was Not Unconscionable in Construction Dispute

In Valli Construction, Inc. v. Alvites Concrete Services, No. 13-13-00295-CV (Tex. App – Corpus Christi, December 30, 2014), a Chevrolet dealership hired a general contractor, Valli, to build a structure for the company.  Valli then hired two local subcontractors to complete concrete and plumbing work on the project.  The Chevrolet dealer apparently asked the concrete subcontractor, Alvites, to begin working on the construction project before a formal written agreement was signed by the two contractors.  After work had already begun, Alvites signed a Subcontractor Agreement that contained an arbitration provision requiring the parties to resolve any future disputes in a Northern California County.

Following completion of the construction project, a local nursery sued the Chevrolet dealership and Valli over the improvement.  The car dealer then sued Valli and its subcontractors in Nueces County, Texas.  Alvites responded to the lawsuit by filing a counterclaim against the Chevrolet dealer and a cross-claim against Valli for breach of contract and other claims.  Next, Valli filed a motion to compel the concrete subcontractor’s claims against it to arbitration under the Federal Arbitration Act (“FAA”).  Alvites opposed the motion by claiming the arbitration agreement included in the Subcontractor Agreement was unconscionable.

In support of its unconscionability claims, the concrete subcontractor presented an affidavit to the court that was signed by the company’s operations manager.  According to the Alvites employee, his company was asked to begin work on the construction project after negotiating a price but before entering into a written contract.  The manager claimed that Valli sent a subcontractor agreement to Alvites after work had already begun and the general contractor refused to discuss or negotiate its terms.  The Alvites manager also stated his company signed the Subcontractor Agreement after being told to because project work had already commenced.  In addition, the man’s affidavit alleged that Alvites had no bargaining power with regard to the terms of the Subcontractor Agreement, the concrete company did not understand the ramifications of the alternative dispute resolution provision, enforcing the arbitral provision’s venue requirements would place an undue burden on the Texas-based concrete subcontractor, and substantial delay would result if the allegedly unconscionable arbitration provision was enforced.

The Nueces County court held that the arbitral provision at issue was unconscionable and Valli filed an appeal with Texas’ Thirteenth District Court of Appeals.  On appeal, the Corpus Christi court stated the FAA applies to arbitration agreements enforced in Texas where the parties hail from different states and the subject matter at issue involves interstate commerce.  The court also said an agreement to arbitrate may not be enforced in Texas if a party can prove it was unconscionable.  Because unconscionability is an affirmative defense, the burden of proof is on the party asserting it.

According to the appellate court, the State of Texas recognizes both substantive and procedural unconscionability:

Texas law recognizes both substantive and procedural unconscionability. In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 677 (Tex. 2006) (orig. proceeding). “Substantive unconscionability refers to the fairness of the arbitration provision itself, whereas procedural unconscionability refers to the circumstances surrounding adoption of the arbitration provision.” Id. Generally, a contract is unconscionable if, “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.” In re Olshan Found. Repair Co. LLC, 328 S.W.3d at 893 (citing TEX. BUS. & COM. CODE ANN. § 2.302, cmt. 1 (West, Westlaw through 2013 3d C.S.)). “The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power.” TEX. BUS. & COM. CODE ANN. § 2.302, cmt. 1 (internal citation omitted).

After the Thirteenth District stated a party is not required to demonstrate that an arbitration agreement is both procedurally and substantively unconscionable in order to avoid enforcement, the court examined the facts of the case. According to the court, Alvites failed to demonstrate the arbitral agreement at issue was procedurally unconscionable:

First, the Alvites Parties’ general allegation that Valli is a large national company and that the Alvites Parties are small, locally-owned businesses does not establish that the clause resulted from “overwhelming economic power.” See In re Advance PCS Health L.P., 172 S.W.3d at 608. Second, the fact that the Alvites Parties had already begun construction does not support a finding that the Alvites Parties had no bargaining power and therefore had no choice but to enter into the agreement. The Alvites Parties made the initial decision to begin construction without a formal contract. While Munive, in his affidavit, contended that Valli directed the Alvites Parties to begin work immediately, there is no evidence that the Alvites Parties were coerced into beginning construction or that they were the victim of any “sharp” business practices. See Minco Oil & Gas Co., 964 S.W.2d at 61. In addition, Munive’s contentions that the Alvites Parties attempted to discuss the terms of the contracts with Valli, but were told by a Valli representative to sign and return the contracts, and that the Alvites Parties signed the contracts because they had already begun work on the project, do not support a conclusion that the Alvites Parties had no choice but to sign the contract. Even after choosing to begin work without signing a formal contract, the Alvites Parties could have refused to sign the arbitration agreement and attempted to recover the funds they had already expended through a claim for a breach of the oral contract or quantum meruit. For the foregoing reasons, we conclude that none of the conduct alleged in the Munive affidavit constitutes deception, fraud, misrepresentation, surprise, or oppression sufficient to prove procedural unconscionability. See In re Palm Harbor Homes, Inc., 195 S.W.3d at 679; In re McKinney, 167 S.W.3d at 835.

The Court of Appeals next dismissed the company’s claims that the parties’ agreement to arbitrate was substantively unconscionable due to the excessive cost it would impose on Alvites:

Here, as their sole evidence that the costs of the arbitration proceedings rendered the arbitration clause unconscionable, the Alvites Parties provided the Munive Affidavit in which Munive generally stated that “to enforce the arbitration and venue provisions . . . would be an extreme hardship and costly” because they would have to pay an arbitrator and hire local counsel in California and because most of the witnesses live in Texas. The Alvites Parties provided no specific evidence of the costs they expected to incur, the expected cost differential between arbitration and litigation in court, or their ability to pay the costs of arbitration. See id. They therefore provided insufficient evidence to show that the arbitration agreement was cost prohibitive. See id.

The Corpus Christi court also disagreed with the concrete subcontractor’s assertion that the arbitration provision was unconscionable because its enforcement would unfairly require Alvites to simultaneously engage in litigation over the same claims:

On appeal, the Alvites Parties also argue that enforcement of the arbitration agreement would “unfairly burden them in the underlying suit.” Specifically, referring to their counter-claim against AN Chevrolet, they argue that “if the arbitration provisions are enforced, two cases with almost identical issues would be working their way through two different systems which could result in two different conclusions.” However, the Alvites Parties have directed us to no authority, and we find none, in support of their claim that unconscionability can be based on the enforced arbitration proceeding’s relationship to causes of action the party attempting to avoid arbitration has against other parties or on other parties’ claims arising out of the same subject matter.

Moreover, in response to the motion to compel, the Alvites Parties did not refer specifically to any facts or claims made by it or other parties or provide any evidence that established that any of the claims were dependent on one another. In the sole evidence presented in support of their unconsionability claim, Munive, the Alvites Parties’ operation manager, only generally contended that arbitration would cause a delay in the lawsuit. Therefore, to the extent that this is a cognizable legal argument, the Alvites Parties did not argue facts or provide relevant evidence to the trial court indicating that the arbitration proceedings and the proceedings in the trial court could render irreconcilable conclusions. Where no such showing has been made, allowing a plaintiff to avoid an arbitration clause simply because they have pending claims against another party arising out of the same subject matter could deprive defendants who contract for an arbitration provision of their statutory right to arbitration any time they are involved in multiparty litigation. Particularly given that the Alvites Parties did not provide evidence that they would be threatened with inconsistent results, we conclude that the arbitration’s potential effect on the Alvites Parties’ suit against AN Chevrolet, or on the other parties involved in the litigation, does not render the arbitration provision substantively unconscionable. Id. Because the Alvites Parties have not satisfied their burden to show that the arbitration provision is either procedurally or substantively unconscionable, we sustain Valli’s second point of error. Id.

Because the parties’ arbitration agreement was not unconscionable, Texas’ Thirteenth District Court of Appeals reversed the trial court’s decision and remanded the case.

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