SCOTX Issues Sharply Divided Decision on Post-Verdict Arbitration

In a 6-3 opinion, a divided Supreme Court of Texas has affirmed an Amarillo appellate court’s order stating a dispute must be arbitrated despite that a trial was already completed and judgment was entered in the case.  In Bonsmara Natural Beef Co., et al. v. Hart of Texas Cattle Feeders, LLC, et al., No. 19-0263 (Tex. 2020), a company, Bonsmara, entered into an agreement with Hart of Texas Cattle Feeders (“Hart”) to supply food, medicine, and minerals to its cattle when located at Hart’s feed yards prior to processing.  The parties’ contract contained an agreement to arbitrate any future disputes in Amarillo in accordance with the rules of the Texas Cattle Feeders Association’s (“TCFA”) arbitration program.

Later, the parties’ relationship broke down and Bonsmara, together with the company’s president, filed a lawsuit against Hart and the company’s owners claiming Bonsmara incurred significant financial losses as a result of Hart’s failure to comply with the terms of the agreement.  In response to Bonsmara’s complaint, Hart filed a motion to compel the dispute to arbitration based on the parties’ contract.  Bonsmara countered Hart’s motion by claiming the parties’ agreement to arbitrate was unenforceable because Bonsmara was not a member of the TCFA and only members of the TCFA were permitted to arbitrate under its arbitration program.  In addition, Bonsmara claimed the contractually chosen arbitral forum was unavailable.  Ultimately, the trial court denied Hart’s motion to compel arbitration.

Instead of filing a timely interlocutory appeal, however, Hart filed a petition for mandamus with the Amarillo Court of Appeals.  In the company’s petition, Hart asked the appellate court to order the trial court to compel the dispute to arbitration.  Because Hart failed to file an interlocutory appeal, the Seventh District Court of Appeals denied Hart’s petition.  Following a jury trial, judgment was rendered in favor of Bonsmara.

On appeal to the Amarillo Court of Appeals, Hart claimed the trial court committed error when it denied the company’s motion to compel the dispute to arbitration.  Hart asked the appellate court to decide whether the parties’ agreement to arbitrate was enforceable despite the TCFA membership requirement.  Hart also asked the court to consider whether the nonsignatory owners of Hart could compel Bonsmara and its president to arbitration.

The Seventh District Court of Appeals held the arbitration agreement was enforceable because although it required the parties to arbitrate in accordance with the TCFA rules, it did not require that TCFA actually conduct the arbitral proceedings.  In addition, the Court of Appeals ruled Hart’s owners could compel Bonsmara and its president to arbitration based on the doctrine of direct-benefits estoppel.  The appellate court then reversed the trial court’s judgment in favor of Bonsmara and remanded the case with instructions to compel the dispute to arbitration.  Next, Bonsmara filed a successful petition for review with the Supreme Court of Texas.

According to Bonsmara’s petition, the issues presented in the case were:

1. The court of appeals erred in concluding that the unavailability of the chosen arbitral forum can be overlooked in favor of another arbitrator.

2. The court of appeals erred in concluding that a valid and enforceable arbitration agreement encompassing the causes of action in this litigation exists.

3. The court of appeals lacked jurisdiction to consider Defendants’ appeal of trial court’s denial of the motion to compel arbitration.

In the Texas Supreme Court’s opinion, the issues were consolidated.  The court stated:

In this Court, Bonsmara and Chapman (collectively, Bonsmara) seek our review of three issues, which we reorder and consolidate into two. First, Bonsmara contends that the Hart defendants’ failure to appeal the interlocutory order denying their motion to compel arbitration deprived the appellate court of jurisdiction to overturn that order on appeal from a final judgment. Second, if the order was appealable, Bonsmara contends that the court of appeals erred in reversing the judgment in its favor and remanding for arbitration of its claims because the parties’ chosen forum is unavailable and they cannot be compelled to arbitrate elsewhere, nor can they be compelled to arbitrate with non-signatories. We begin by addressing Bonsmara’s jurisdictional challenge.

According to the Texas high court, the Amarillo Court of Appeals “had jurisdiction to consider the trial court’s denial of the Hart defendants’ motion to compel arbitration.”  The court stated “[i]nterlocutory appeal statutes do not alter the principle that orders merge into—and may be challenged on appeal from—a final judgment,” and found “[o]ther courts agree that interlocutory appeal statutes do not bar review on final judgment.”  In addition, the Texas Supreme Court said “contrary decisions are rooted in non-statutory doctrines not at issue here.”

Following a lengthy explanation, the court ultimately held:

For these reasons, we hold that the court of appeals had jurisdiction to consider the Hart defendants’ appeal challenging the trial court’s arbitration order as merged into the final judgment, and the Hart defendants did not forfeit this challenge by choosing not to pursue an interlocutory appeal of that order.

Next, the Supreme Court of Texas turned to the question of whether the Amarillo appellate court erred when it ordered the case to arbitration.  The court stated “[t]he arbitration agreement is enforceable because Bonsmara has not shown that the arbitrator determined its forum is unavailable.”  The Texas high court also found “[t]he arbitration clause’s language does not foreclose the application of direct benefits estoppel.”

Finally, the Supreme Court of Texas affirmed the judgment of Seventh District Court of Appeals in Amarillo.

A dissenting opinion that was written by Justice Green and joined by both Chief Justice Hecht and Justice Devine argues the Texas Supreme Court’s opinion in the case undermines the very purpose of arbitration:

The issue in this case is whether a party that loses after a trial on the merits is still permitted to successfully assert on appeal its contractual right to arbitration of the dispute. That is, will the Court sanction the proverbial second bite at the apple? Common sense dictates that the gateway issue of arbitration must be resolved before trial because it is an alternate means of dispute resolution agreed upon by the parties. After a trial, the right to arbitration becomes moot because the dispute has been resolved by then. But by applying a myopically permissive interpretation of the interlocutory appeal statute, the Court concludes—in defiance of all common sense—that an interlocutory appeal of a trial court’s denial of a motion to compel arbitration is not required, and a challenge to such an order can wait until after a trial on the merits. The absurd result is that a party that fails to timely assert its right to arbitration under the interlocutory appeal statute can now, after losing at trial, be awarded a do-over in an arbitration proceeding—it gets another bite at the apple. So instead of taking a common-sense approach consistent with how Texas courts have treated other similar interlocutory appeal provisions, the Court—under the guise of diligent textualism—reaches a conclusion that undermines arbitration’s very purpose. Because I cannot agree with the Court’s misreading of the statute leading to this unwarranted and unearned outcome, I respectfully dissent.

The Court today concludes, for the first time, that a party has the option to either challenge a trial court’s denial of a motion to compel arbitration on interlocutory appeal or wait until after final judgment to appeal the denial. Ante at__. The Court’s rule not only endorses gamesmanship from parties who are unhappy with a trial’s outcome, it vitiates the Legislature’s explicit direction that the resolution of whether parties should arbitrate a dispute need not wait until after final judgment.

In addition, the dissenting opinion concluded:

The Court’s decision today runs counter to common sense and basic notions of fairness. By allowing litigants to see the outcome of a trial before appealing a denial of a motion to compel arbitration, the Court endorses a dispute resolution process that in this case—and likely in many others—will result in double the cost and double the time. This approach weaves uncertainty and inefficiency into the fabric of any litigation that includes a dispute over an arbitration clause. I would reverse the judgment of the court of appeals and hold that a party may not wait until after trial and final judgment to challenge a trial court’s pre-trial denial of a motion to compel arbitration. Because the Court holds otherwise, I respectfully dissent.

It will be interesting to see whether Justice Green is correct to surmise the Supreme Court’s opinion in this case will slow the legal process and encourage future legal gamesmanship.

Photo by: Meggyn Pomerleau on Unsplash