Western District Compels Arbitration Where Contractor Had Sole Discretion to Arbitrate

The Western District of Texas has compelled arbitration where the parties to a construction contract entered into an agreement which provided only one party with the discretion to submit any disputes to binding arbitration.

In United States ex rel. Gillette Air Conditioning Co. v. Satterfield & Pontikes Constr., No. SA-10-CV-778XR, (12/7/2010), Satterfield & Pontikes Construction Inc. (Satterfield) entered into a subcontract with Gillette Air Conditioning Company (Gillette) to provide HVAC and plumbing work on an building renovation and upgrade at Fort Sam Houston Training Barracks with a Full Spectrum Plumbing. After the work was completed, Gillette filed suit alleging that in addition to fulfilling its obligations pursuant to the contract, the company was also required to perform added work due to errors caused by Satterfield. Gillette also alleged that Satterfield breached the parties’ contract by failing to pay for labor and materials and by providing Gillette with flawed performance specifications. Satterfield moved to compel arbitration pursuant to the parties’ contract. The contract stated:

(b) In the event any controversy or dispute arises between Subcontractor [Gillette] and Contractor [Satterfield] relating to this Subcontract (or a breach thereof), which dispute or controversy does not involve the correlative rights and duties of Owner, Subcontractor shall request mediation of the dispute with Contractor and the parties shall attempt in good faith to mediate the dispute. Mediation of the dispute shall be a condition precedent to any further rights that the Subcontractor has to the resolution of this dispute.

(i) If mediation is unsuccessful, then Subcontractor agrees that Contractor shall make the determination (in its sole discretion) as to whether the dispute shall be settled by binding arbitration in accordance with the Construction Industry Arbitration Rules (then applicable) of the American Arbitration Association (in which Subcontractor agrees that it will submit its disputes to such arbitration and that such arbitration will be binding to the full extent enforceable under applicable arbitration statutes including the Federal Arbitration Act). Any arbitration held under this provision shall be held in Harris County, Texas.

(ii) In the event that Contractor determines that the dispute shall not be resolved through arbitration, then Subcontractor agrees that the dispute will be resolved by courts of competent jurisdiction in Harris County, Texas.

Contract, Art. 12(b). The contract also provides that “[t]his Subcontract shall be governed by the laws of the State of Texas . . . .” Contract, Art. 9(m).

Gillette “responded to the motion to compel arbitration by arguing that the arbitration clause is illusory and therefore unenforceable because it gives Satterfield the sole discretion to determine whether the dispute should be settled by arbitration.”

The court began its inquiry by performing a two-step analysis:

first, we determine whether the parties agreed to arbitrate and, second, whether a federal statute or policy renders the claims nonarbitrable. Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5^th Cir. 2003). The courts divide the first step into two more questions: whether a valid agreement to arbitrate exists and whether the dispute falls within that agreement. Id.

Gillette did not dispute that an agreement to arbitrate existed, but instead argued “only that the arbitration clause is illusory and thus unenforceable.” According to the court, “That issue is governed by Texas law. See Carter v. Countrywide Credit Industries, Inc., 362 F.3d 294, 301 (5th Cir. 2004).”

After distinguishing J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003), and In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 677 (Tex. 2006), the Western District held that the arbitration agreement was not illusory. According to the court, “Satterfield did not promise to arbitrate but then retain a unilateral right to avoid the arbitration. Thus, Satterfield did not make an illusory promise to arbitrate.”

The court continued by stating:

Given the express contractual language, the situation here is more akin to that in First Merit Bank, where the plaintiff complained the arbitration agreement was substantively unconscionable because it bound the plaintiff to arbitrate with the manufacturer but did not bind the manufacturer to arbitrate all claims with the plaintiff. Gillette has not argued that the arbitration agreement here is unconscionable, only that it is illusory. Even considering the issue of unconscionability, however, the Texas Supreme Court did not find the unequal arbitration clause in First Merit Bank to be unenforceable, and has subsequently re-affirmed the principle that “arbitration clauses generally do not require mutuality of obligation so long as adequate consideration supports the underlying contract.” In re Lyon Fin. Servs., Inc., 257 S.W.3d 228, 233 (Tex. 2008); . . .

Because the parties agreed to arbitrate, Gillette failed to allege that the underlying contract lacked consideration or to demonstrate the arbitration clause was unenforceable, and “no federal statute or policy renders the claims nonarbitrable,” the Western District of Texas granted Satterfield’s motion to compel arbitration.

Disputing blogged about one of the cases on which the court relied, In re Palm Harbor Homes, Inc., when it was decided here.

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