Corpus Christi COA Holds Arbitrator Must Decide Whether Arbitral Clause Was Illusory

The Court of Appeals of Texas in Corpus Christi has ruled that a wrongful death lawsuit should be submitted to arbitration.  In Mission Petroleum Carriers, Inc. v. Dreese, No. 13-17-00102-CV (Tex. App. – Corpus Christi, March 8, 2018), a man, Perez, was unfortunately killed in a traffic crash while driving a freight truck that was owned by his employer, Mission Petroleum Carriers, Inc. (“MPC”).  Following the worker’s death, his children filed a wrongful death lawsuit against MPC in Live Oak County, Texas.

In response to the lawsuit, MPC filed a motion to compel the dispute to arbitration.  According to MPC, the wholly-owned subsidiary of Tetco adopted Tetco’s Employee Health and Safety Plan (the “Plan”) which included a binding arbitration provision prior to Perez’s death.  In addition, Perez signed a separate arbitration acknowledgement regarding the Plan.

Perez’s children argued before the district court that MPC’s motion should be denied because the arbitration clause was illusory based on a termination provision included in the Plan, the arbitral provision could not be severed from the rest of the Plan, and estoppel did not favor arbitration in the case.  Following a hearing, the court denied MPC’s motion to compel arbitration and the company filed an interlocutory appeal with Texas’s Thirteenth District.

On appeal, MPC claimed the district court committed error by denying the company’s motion because a determination regarding whether the agreement to arbitrate was illusory was an issue for an arbitrator to decide.  The Thirteenth District Court of Appeals agreed with MPC and stated:

There are two types of challenges to an arbitration provision: (1) a specific challenge to the validity of the arbitration agreement or clause, and (2) a broader challenge to the entire contract, either on a ground that directly affects the entire agreement, or on the ground that one of the contract’s provision is illegal and renders the whole contract invalid. In re Labatt, 279 S.W.3d at 647–48. A court may determine the first type of challenge, but a challenge to the validity of the contract, and not specifically to the arbitration clause, must go to the arbitrator. Id. at 648. For example, a claim of fraud in the inducement of the arbitration clause itself may be adjudicated by a court, but a court may not consider a claim of fraud in the inducement of the contract generally. See id. (internal citations omitted).

We first note that the arbitration clause at issue in this case is included as a clause within the larger Plan. In their responses resisting Mission’s motion to compel based upon the argument that the arbitration agreement is illusory, both Plaintiffs and Intervenors cite Mission’s “unilateral right to modify and terminate its obligation to arbitrate” based upon the Plan’s termination clause. After examining the termination clause, however, we read that clause as applicable to the entire Plan rather than to the particular arbitration clause at issue in this appeal. This reading is supported by the plain language of the termination provision, which states that “the provisions of this Plan may be amended . . .” and that Mission “reserves the right to terminate the Plan at any time.” (emphasis added). Stated another way, the termination provision speaks to the Plan as a whole rather than to isolated parts of the Plan such as the arbitration clause.

Because this termination provision applies to the entire Plan, a challenge to the termination provision is a challenge to the entire contract, rather than a separate arbitration agreement or a specific arbitration clause. Thus, the trial court abused its discretion by addressing these questions rather than allowing an arbitrator to decide them. See id. at 647–48; In re Merrill Lynch Trust Co., FSB, 235 S.W.3d 185, 190 n. 12 (Tex. 2007) (orig. proceeding) (holding that defenses that relate to the parties’ entire contract rather than the arbitration clause alone is a question for the arbitrators rather than the courts); see also Henry & Sons Construction Co., Inc. v. Campos, 510 S.W.3d 689, 691–700 (Tex. App.— Corpus Christi 2016, pet. denied) (concluding that a stand-alone dispute resolution policy agreement that covered “all disputes” arising out of an employee’s relationship with an employer was unenforceable). We sustain Mission’s first issue.

Since the “primary challenge brought against the arbitration agreement—that it is illusory—is for the arbitrators to decide, and not the courts,” the Thirteenth District Court of Appeals in Corpus Christi reversed the lower court’s order denying MPC’s motion to compel arbitration and remanded the case with instructions to instead grant the motion.

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