Houston Appeals Court Finds Arbitrator Exceeded His Authority in Case Against Non-Signatory

Houston’s First Appellate District has stated an arbitrator exceeded his authority when he determined that a non-signatory to an arbitration agreement was bound to arbitrate under the agreement. In Elgohary v. Herrera, No. 01-11-00550-CV (Tex. App. 1st March 5, 2013), Victor S. Elgohary entered into a written employment agreement with Herrera Partners, L.P., a Texas Limited Partnership with Gilbert A. Herrera as the limited partner. The employment agreement contained a clause that required any disputes between the parties to be decided through binding arbitration. Elgohary was subsequently terminated for cause in May 2007 and Herrera Partners was formally dissolved one month later.

After unsuccessfully pursuing a claim for unemployment compensation, Elgohary sought to compel arbitration with both Herrera Partners and Gilbert Herrera despite that Gilbert Hererra was not a signatory to the agreement. In response, Herrera Partners filed a counterclaim against Elgohary. In addition, Herrera stated he could not be compelled to arbitrate because he was not a signatory to the parties’ arbitral agreement. Herrera also argued throughout the arbitral proceeding that “whether he as a non-signatory should be compelled to arbitrate was a ‘gateway matter’ for the court to decide, not the arbitrator.”

The arbitrator found that a “successors and assigns” clause in the agreement “clearly and unmistakably” incorporated Herrera as the successor to Herrera Partners. According to the arbitrator, this rendered Herrera a proper party to the arbitration. The arbitrator then awarded Elgohary unpaid wages and business expenses. When Elgohary sought to confirm the arbitral award, Herrera filed an objection with the trial court. The lower court confirmed the arbitral award as it related to Herrera Partners and vacated the award against Herrera. Elgohary then filed an appeal with Houston’s First District.

The appeals court first examined whether the fact that Herrera signed the agreement as an agent of Herrera Partners constituted “clear and unmistakable evidence” of individual consent to arbitrate. After examining several prior cases, the Court stated the fact that Herrera signed “the agreement as agent is not clear and unmistakable agreement to submit claims against him personally to arbitration.” Likewise, the court also found that his agreement to arbitrate under AAA rules did not evidence Herrera’s agreement arbitrate any claims brought against him in his individual capacity.

Next, the appellate court examined the agreement’s “successors and assigns” clause, which read:

The rights and obligations of this Agreement shall be binding on the Partnership’s successors and assigns and inure to the benefit of any successor or assign of the Partnership.

The Houston court then held that the arbitrator exceeded his authority by deciding this “gateway issue.” According to the court,

[d]eciding that Herrera was bound by the “successors and assigns” clause of the employment agreement, the arbitrator skipped to the ‘merits’ of the dispute without there first being a judicial determination as to whether Herrera, individually agreed to arbitrate. We agree with the Fifth Circuit, that evidence of a successor, assigns, or affiliates clause in the contract between the signatories is not evidence that the non-signatory intended that an arbitrator decide whether the non-signatory was bound under the contract’s provisions about successors.

The appellate court continued,

The trial court properly decided that it, and not the arbitrator, had the authority to decide whether Herrera, as a non-signatory, had agreed to be bound the arbitration. However, the trial court did not then conduct an independent review to determine whether arbitration could nonetheless be compelled because of either successor liability under the contract or under any of the six theories for compelling a non-signatory to arbitrate set forth In re Merill Lynch, 235 S.W.3d at 191. Absent such an independent review of arbitrability by the trial court, its action denying the application to confirm and vacating the arbitration award against Herrera was premature.

Finally, because the trial court failed to conduct an independent review of the arbitrability issue, Houston’s First District reversed and remanded the case.