By Rick Freeman In IN RE HERITAGE BUILDING SYSTEMS, INC, No. 09-05-445-CV, decided by the Beaumont Court of Appeals on February 9, 2006, we find another decision by the Texas appellate courts that lends further proof to my belief that Arbitration is God in Texas courts. In this case, Bohler bought materials to construct a prefabricated building from Heritage. On the back of the purchase order was an arbitration clause providing for arbitration by the AAA in Little Rock, Arkansas. Bohler lived in Texas, apparently in the Beaumont Appellate District. Bohler sued Heritage alleging that components for the building were incorrectly engineered and manufactured. Heritage moved to compel arbitration pursuant to the arbitration clause on the back of the purchase order. Bohler moved to compel mediation. The trial court ordered mediation to occur within 60 days and deferred ruling on the motion to compel arbitration until after the mediation had occurred. Interestingly, pursuant to Section 154.022 of the Civil Practice and Remedies Code, the trial court ordered that any objection to the mediation be filed within 10 days of the order. Apparently, there was no objection filed; instead, at the end of the 60 day period, Heritage filed a petition for writ of mandamus. The appellate court granted the writ and ordered that the trial court vacate its order of mediation and compel arbitration of the case. There is no discussion by the appellate court of the effect of the failure of Heritage to file its objection to the order compelling mediation. The appellate court ruled that the trial court had no discretion to order the case to mediation where there is an arbitration clause. Although Texas has a policy of encouraging settlement of cases through alternative dispute resolution such as mediation, the arbitration clause trumped Texas policy. Although, mediating the case within 60 days could have resolved the dispute, the appellate court ruled that allowing the trial court to order mediation would have had the effect of delaying resolution of the case and increasing costs incurred. Instead of a mediation within 60 days of the order, the defendant did not file its objection within 10 days as ordered by the court, delayed until the 60 day period was about to expire before filing its writ of mandamus, and the appellate court decision was rendered in February of 2006, four months after the court-ordered mediation would have occurred. Total delay to avoid mediation was approximately 6 months and expenses had to be considerably more than a mediation fee. Arbitration is apparently God-like in the appellate courts of Texas. A boiler plate provision on the back of a purchase order removes ALL discretion from the trial court in its attempt to seek a quick and inexpensive resolution of the dispute.

The U.S. Supreme Court handed down its long-awaited (by us anyway) opinion in the Buckeye Check Cashing Case today. The majority opinion (link is to .pdf version), written by Justice Scalia for a 7-1 majority (Alito did not participate), reverses a decision by the Florida Supreme Court which held that a court, and not an arbitrator, must determine whether or not a contract between a check cashing company and consumers was an illegal violation of Florida’s usury laws. The Florida Supreme Court overturned a court of appeals order compelling arbitration, holding that enforcing the arbitration clause “could breathe life into a contract that not only violates state law, but also is criminal in nature.” The Supreme Court, however, held that since the party opposing arbitration argued that the arbitration clause was invalid as a part of an illegal contract, rather than on its own discreet terms, the arbitrator, and not a court, must rule on the enforceability of the clause. The Court reinforces the separability rule from Prima Paint and holds, firmly, that any argument about a contract’s general illegality or unenforceability has no bearing whatever on the arbitration clause’s enforceability. The Court also reinforces the notion that in FAA cases, state law has absolutely no bearing on this issue. In other words, the arbitration clause trumps the clear rule of contract law in Florda that there can be “no severable, or salvageable, parts of a contract found illegal and void under Florida law.” This in a state court proceeding, under Florida state law. (For those interested, you can find a .pdf of the Florida Supreme Court opinion here). Justice Thomas’ single-paragraph dissent (link is to .pdf file) focuses on this last point. He argues that the FAA should not apply to proceedings in state courts, and it should not supplant clear state law in state court proceedings. Buckeye Check Cashing, Inc. v. Cardegna, et al., 546 U.S. ___ (2006) (Cause No. 04-1264 in the United States Supreme Court). Technorati Tags: arbitration, ADR, law

by Rick Freeman Two recent decisions by the Texas courts of appeals show how far the Courts have gone in enforcing arbitration agreements – no matter what the facts. In Southwind Group, Inc., v. Landwehr (No. 11-05-00247-CV, No. 11-05-00324-CV; 2006 Tex. App. LEXIS 896), decided February 2, 2006, the Eastland Court of Appeals reversed a trial court’s denial of arbitration and remanded the case to the trial court with instructions to compel arbitration of the claims. In this case, Southwind entered into an employment contract with Landwehr in which there was an arbitration provision. The arbitration provision was broad, using the language “that arises out of or relates to this agreement.” Apparently, Southwind loaned Landwehr money to purchase a home. (Landwehr moved from Arkansas to Texas to take the job. It is not explained in the opinion if the loan was a part of the employment deal or not.) Disputes arose and Landwehr left the job and returned to Arkansas. Southwind then filed suit – in July of 2002 – against Landwehr seeking its loan back. Landwehr filed a counterclaim – in November of 2002 – alleging Southwind had breached the employment agreement. Written discovery occurred, several depositions were taken, a number of trial settings were scheduled, Southwind moved for continuances, Landwehr moved for summary judgment on Southwind’s claims against him, Southwind responded, a hearing on the summary judgment was held and the court denied the summary judgment. On June 1, 2005 – 3 years after filing suit – Southwind filed a motion to compel arbitration of Landwehr’s claims against Southwind. Landwehr responded by arguing that Southwind had waived its right to arbitration by its delay in seeking arbitration and by substantially invoking the judicial process. The trial court denied the motion to compel arbitration. The Eastland Court of Appeals reversed the trial court and remanded with instructions to compel arbitration of the Landwehr claims. I will leave it to the reader to examine the details of the court’s ruling. Suffice it to say, the Eastland Court ruled that delay alone cannot waive arbitration. There has to also be a showing of prejudice. The burden to show prejudice – and the Court highlights the fact that the burden is a HEAVY ONE – is on the party opposing arbitration. The same is true with invoking the judicial process. The Court says there has be a showing by the party opposing arbitration of substantial invocation of the judicial process and also a showing that the party opposing the arbitration has suffered actual prejudice. (Again the Court highlights the HEAVY BURDEN that is on the opposing party to make this showing.) In fact, the Court holds that substantial invocation of the judicial process means that the party seeking arbitration “actively tried, but failed, to achieve a satisfactory result in litigation before turning to arbitration.” Short of trying the case and losing, the Eastland Court apparently believes that the party seeking arbitration has not substantially invoked the judicial process. Even if this had occurred, the Eastland Court puts an additional burden on the party opposing arbitration to show that there is ACTUAL PREJUDICE to that party. Apparently, even winning a trial is not enough. The Court says that the focus of the courts on prejudice should be on access to information not discoverable in arbitration and the costs and fees incurred by the opponent due to the movant’s actions or delay. From this opinion, it can be argued that there is no res judicata with regard to the loss by the party who then moves to compel arbitration. Instead, it is the party who opposes arbitration, who has the heavy burden of proving waiver or substantial invocation of the judicial process and THEN proving actual prejudice by showing lack of discovery or substantial litigation costs and expenses due to the delay in moving for arbitration. I will discuss the second recent case in my next installment of ARBITRATION IS GOD.

In an opinion (link is to .pdf file) filed Wednesday, the Fifth Circuit affirmed a trial court decision to confirm an arbitral award which contained a punitive damages award for the arbitral plaintiff. The case involved a woman’s breach of fiduciary duty claims against the managers of an investment portfolio she received as part of a divorce settlement. The arbitral panel found that the investment company did in fact breach its duty to the Claimant, but that it could not award attorneys’ fees under the arbitration agreement and California substantive law. However, the panel did award the Claimant punitive damages, in the amount she had sought for attorneys’ fees. On appeal, the investment company argued that the court could not enforce the arbitral award’s punitive damages component. The opinion does not make any new law on this point, but it does provide another clear example of the steep burden a party must meet in attempting to prevent enforcement of an arbitration award in the Fifth Circuit. In the Fifth Circuit, two non-statutory (i.e. not found in the TAA or the FAA) grounds can exist for vacating an arbitral award: if the award displays manifest disregard of the law or is contrary to public policy. Neither basis for vacatur was found to exist in this case, but again, the opinion’s discussion of the elements of each is thorough and useful. Arbitral awards remain, for the most part, unappealable. Sarofim v. Trust Company of the West, Cause No. 05-20309 Technorati Tags: arbitration, ADR, Fifth Circuit, law