San Antonio Lawyer 6 May-June 2009

I. Introduction

party who wants to enforce an arbitration clause typically files a motion to compel arbitration or a plea in abatement. This article will briefly examine the grounds

for contesting a party’s request for arbitra-tion. Before filing or responding to a motion to compel arbitration or plea in abatement thereon, counsel may want to consider the problems inherent in arbitration and whether arbitration is even appropriate for the case.

When arbitration clauses first came into vogue, defendants often touted them as a panacea for costly, time-consuming litiga-tion. The initial assumptions and reasoning promoting arbitration, however, have not withstood the test of time. Arbitration has come under increasing attacks and criticism as being both costly and not much more ex-pedient than the litigation process it was de-signed to replace, especially when the arbi-trating parties are represented by counsel.

Experience has shown that there are problems inherent with the arbitration pro-cess for all parties. Arbitration clauses in contracts have generated significant satellite litigation concerning their enforcement, and this satellite litigation does not address and often delays any resolution on the merits of the dispute, especially when a mandamus or interlocutory appeal is taken from an order denying arbitration.1 The costs of arbitration are significant for all parties, particularly if the arbitration is administered by the Ameri-can Arbitration Association (“AAA”). Arbi-trating a dispute in excess of $75,000 with a single arbitrator from the American Arbitra-tion Association can easily cost $20,000 or more. These costs escalate if more than one arbitrator is used and if an arbitrating party wants to make a record of the arbitration hearing. Limitations on discovery can be im-posed during the arbitration, which can af-fect both sides and prevent a case from being fully developed. Truly sanctionable conduct is also difficult to punish since an arbitrator may not have the authority to do so and is not likely to sanction a party who is paying for his services. More importantly, arbitration — a form of private litigation — prevents both sides from seeking meaningful appellate re-view of important legal issues that may arise during the arbitration process.2

There is an attractive alternative. Some experienced attorneys have been agreeing to try cases to the bench instead of fighting over the enforceability of an arbitration clause. Such an agreement alleviates the problems

Contesting the Motionto CompelArbitrationBy Robert W. Loree

A

San Antonio Lawyer 7 May-June 2009

with arbitration concerning the time and expense of satellite litigation, the costs of the arbitration process itself, and uncon-scionable arbitration clauses that attempt to unduly limit a participant’s rights. A non-jury trial should also provide a prompt and efficient administration of the claim under the Texas Rules of Civil Pro-cedure without inhibiting meaningful ap-pellate review. It is this appellate review that promotes the development of the common law that is inhibited by the pri-vate litigation of the arbitration process. II. Contesting the Motion to Compel Arbitration

A. Examining the Arbitration Clause and the Burden of Proof

If opposing counsel is not interested in a bench trial and insists on pursuing arbitration, the first step in contesting a motion to compel arbitration is to exam-ine the subject arbitration clause. Since arbitration agreements are creatures of contract, the enforceability of an arbitra-tion clause is usually determined under the law of contracts. The determination of whether parties agreed to arbitrate gener-ally requires a court to decide: (1) whether there is a valid agreement to arbitrate be-tween the parties, and (2) whether the dis-pute before the court is within the scope of the arbitration agreement.3 An arbitration agreement must meet all requisite con-tract elements, and even though there is a strong presumption favoring arbitration, the presumption only arises after the party seeking to compel arbitration proves that a valid arbitration agreement exists.4

As a result, arbitration is not auto-matic. The party moving to compel arbi-tration has the burden of proof to first es-tablish that a valid arbitration agreement exists and that it covers the non-movant’s claims.5 The movant typically proves up its right to arbitration by attaching an af-fidavit to the motion to compel arbitration or the plea in abatement. The affidavit usually alleges facts that support the basis of the party’s request for arbitration. The court is then required to decide whether to compel arbitration based upon the motion and attached proof, although live testimo-ny is not precluded. The respondent can contest the movant’s proof and the court must conduct an evidentiary hearing if material facts necessary to determining the right to arbitrate are controverted.6

Generally, Texas courts will not

compel arbitration unless a party clearly agreed to arbitrate and be bound by the arbitrator’s decision.7 Typically, in order to compel a party to arbitration, the party must have signed the arbitration agree-ment. This is a fundamental contract principle. Thus, a non-signatory to an arbitration agreement cannot be forced to arbitrate unless the non-signatory falls into an exception recognized under gen-eral equitable or contract law principles that would allow enforcement.8 Deter-mining whether a non-signatory may be bound by an agreement and made to ar-bitrate certain claims depends on the cir-cumstances surrounding the case. Texas courts have recognized a number of dis-tinct occasions when a non-signatory can be forced to arbitrate, even in the absence of a signature on the agreement itself.9

In determining whether the dispute is within the scope of the arbitration agreement, courts focus on the facts al-leged, not the causes of action asserted.10 For example, an appellate court held that a claim was outside the scope of the arbitration clause where it involved a dispute about an employee’s tort claims and only tangentially touched on the employment contract that contained the arbitration provision.11 If the court finds the arbitration agreement is not a valid agreement or finds that the contested is-sue is not within the scope of the arbitra-tion agreement, the court must deny the motion to compel arbitration.12

Once a valid and enforceable arbi-tration agreement covering the asserted claims has been established, the burden then shifts to the opposing party to pres-ent evidence on one of the defenses to arbitration. The most common defenses are that the arbitration clause and its application are unconscionable, that the other party has waived its right to com-pel arbitration under the agreement, and that the arbitration agreement was induced or procured by fraud.13

B. Examining the ApplicableArbitration Statute

In contesting a motion to compel ar-bitration, in addition to traditional con-tract principles, counsel should also ex-amine the governing arbitration statutes, the Federal Arbitration Act (“FAA”) and the Texas Arbitration Act (“TAA”). Coun-sel needs to determine which statute will govern the subject arbitration clause. As a practical matter, most arbitration claus-

es will be subject to the FAA.The FAA, enacted by Congress in

1925, specifically provides that agree-ments to arbitrate are “valid, irrevocable and enforceable save upon such grounds as exist at law or in equity for the re-vocation of any contract.”14 The FAA is very broad in its scope and applies to all claims involving interstate commerce and maritime transactions. A few exceptions are identified in the statute.15 The amount of interstate commerce considered in the contract need not be substantial for the FAA to apply.16 The FAA will extend to any contract affecting commerce as far as the Commerce Clause of the United States Constitution will reach.17

Factors determining if the FAA pre-empts the TAA include whether: (1) the agreement is in writing, (2) it involves interstate commerce, (3) it can withstand scrutiny under traditional contract de-fenses, and (4) state law affects the en-forceability of the agreement. However, the mere fact that a contract affects inter-state commerce, thus triggering the FAA, does not preclude enforcement under the TAA as well. The FAA only preempts con-trary state law, not consonant state law.18

Due to the FAA’s breadth, most mov-ants in a motion to compel arbitration at-tempt to establish the right to arbitrate under the FAA and submit an affidavit attached to the motion that sets out facts establishing how the transaction affects interstate commerce. Nevertheless, some Texas courts have held that merely nam-ing the FAA in an arbitration clause is sufficient to compel arbitration without a showing of how the transaction affects interstate commerce.19 In any event, the question of whether the transaction affects interstate commerce, and is thereby gov-erned by the FAA, is a question of fact.20

Whenever possible, the party opposing ar-bitration should contest the application of the FAA because it allows the arbitration of many consumer transactions that are exempt from arbitration under the TAA.

The right to arbitrate under the TAA is more limited than under the FAA. In general, under the TAA, Texas courts have the authority to compel arbitra-tion, stay litigation, stay arbitration, appoint arbitrators, enforce arbitrator’s subpoenas, confirm arbitration awards, vacate arbitration awards, and modify and correct arbitration awards.21 Sec-tion 171.001 of the TAA specifically pro-vides, “A written agreement to arbitrate

San Antonio Lawyer 8 May-June 2009

is valid and enforceable if the agreement is to arbitrate a controversy that: (1) ex-ists at the time of the agreement, or (2) arises between the parties after the date of the agreement. A party may revoke the agreement only on a ground that ex-ists at law or in equity for the revocation of a contract.” Unlike the FAA, the TAA has no requirement that the transaction involve interstate commerce.

Unless the parties agree in writing to arbitrate and the writing is signed by each party and each party’s attorney, Section 171.002 of the TAA exempts the following transactions:

(1) Collective bargaining agree-ments;(2) The acquisition of property, ser-vices, money or credit in which the total consideration is not more than $50,000, unless the parties agree in writing to arbitrate and the agree-ment is signed by each party and each party’s attorney;(3) Personal injury claims, unless each party to the claim, on the ad-

vice of counsel, agrees in writing to arbitrate and the agreement is signed by each party and each party’s attorney;(4) Workers compensation benefits claims; and(5) An agreement made before Jan-uary 1, 1996.

These exemptions prevent the arbitra-tion of most consumer transactions under $50,000 because the contract usually will not be signed each party’s counsel. As a result, most movants attempt to compel arbitration of these types of transactions under the FAA. Movants also attempt to invoke the FAA concerning the arbitra-tion of personal injury claims since FAA has no exemption concerning personal injury claims, unlike the TAA.22 If the movant does not invoke the FAA in one of these transactions, then respondent’s counsel should point out the exemption at the hearing on the motion to compel arbitration. In addition, where an arbitra-tion clause specifically provides for arbi-tration under the TAA, it has been held

that such a choice of law clause excludes the application of the FAA and requires arbitration under the TAA.23

If the court orders the parties to ar-bitration, it must stay the litigation.24 In addition to being required by statute, there are practical reasons for request-ing an order staying court proceedings pending the result of the arbitration. First, there is a ready-made forum for en-forcement, modification, correction and even the setting aside of any award as required by Sections 171.087 and 171.088 of the TAA. Secondly, a stay is not a final order. A party seeking to challenge an order compelling arbitration needs the confirmation of an award and the entry a judgment under Section 171.092 in or-der to appeal an erroneous granting of a motion to compel arbitration.

C. Determining and Applying Respondent’s Arbitration Defenses

Once respondent’s counsel has de-termined the law affecting the motion to compel arbitration, he or she should draft the response to the motion to plead any

1 Review of an order denying arbitration under the Federal Arbitration Act is by mandamus, while an interlocutory appeal must be taken from an order denying arbitration under the Texas Arbitration Act. Global Fin. Servs., L.L.C. v. Estate of McClean, Nos. 04-04-00854-CV, 04-05-00074-CV, 2007 WL 1759940 (Tex. App. — San Antonio Jun. 20, 2007, orig. proceeding).2 An arbitrator’s decision under the Federal Arbitration Act can only be set aside on limited statutory grounds typically involving fraudulent conduct in the arbi-tration proceedings by the prevailing party or the arbitrator or when the arbitrator exceeds his powers. See 9 U.S.C. §1, et. seq. In addition, the Fifth Circuit has recently ruled that a manifest disregard of the law by an arbitrator is no longer a ground for vacating an arbitration award under the Federal Arbitration Act. Citigroup Global Mkt., Inc. v. Bacon, __ F.3d __, No. 07-20670, 2009 WL 542780 (5th Cir. Mar. 5, 2009). The grounds for contesting an arbitration award under the Texas Arbitration Act are described in the statute. See TEX. CIV. PRAC. & REM. CODE §171.001, et. seq. In this respect, a mere mistake of fact or law is not suffi-cient to set aside the arbitration award. Absent a statutory or common-law ground to vacate or modify the award, a reviewing court lacks jurisdiction to review other complaints, including the sufficiency of the evidence supporting the award. See Jamison & Harris v. National Loan Investors, 939 S.W.2d 735, 737 (Tex. App. — Houston [14th Dist.] 1997, pet. denied); J. J. Gregory Gourmet v. Antone’s Imp., 927 S.W.2d 31, 33, 35 (Tex. App. — Houston [1st Dist.] 1995, no writ).3 Webb v. Investacorp, Inc., 89 F.3d 252, 257-58 (5th Cir. 1996); Henry v. Gonzalez, 18 S.W.3d 684, 688 (Tex. Civ. — San Antonio 2000, pet. dism’d by agr.).4 J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003); In re Halliburton, 80 S.W.3d 566, 570 (Tex. 2002) (orig. proceeding). 5 In re First Merit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2004) (orig. proceeding); In re Oakwood Mobile Homes, 987 S.W.2d 571, 573 (Tex. 1999) (orig. proceeding). Due to this burden, arbitration clauses awarding attorney’s fees against a party contesting arbitration should not be enforceable as uncon-scionable and a violation of a contestant’s due process rights.6 Jack B. Anglin Co. Inc., v. Tipps, 842 S.W.2d 266, 269 (Tex. 1992). The procedural aspects of a motion to compel arbitration are more thoroughly dis-cussed in In re Big 8 Food Stores, Ltd., 166 S.W.3d 869, 875 (Tex. App. — El Paso 2005, no pet.). 7 See United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960); Trico Marine Servs., Inc. v. Stewart & Stevenson Technical Servs., Inc., 73 S.W.3d 545, 548 (Tex. App. — Houston [14th Dist.] 2002, orig. proceeding); Phillips v. ACS Municipal Brokers, Inc., 888 S.W.2d 872, 875 (Tex. App. — Dallas 1994, no writ).8 See Mohamed v. Auto Nation USA Corp., 89 S.W.3d 830 (Tex. App. — Houston [1st Dist.] 2002, no pet.).9 A non-signatory may be bound by an agreement to arbitrate in the following circumstances: (1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) equitable estoppel; or (6) third-party beneficiary. See In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005) (orig. proceed-ing) (adopting the rule of direct benefits estoppel); see also In re Weekley Homes, L.P., 180 S.W.3d 127 (Tex. 2005) (orig. proceeding).10 Prudential Secs., Inc. v. Marshall, 909 S.W.2d 896, 900 (Tex. 1995).11 Ikon Office Solutions, Inc. v. Eifert, 2 S.W.3d 688, 696 (Tex. App. — Houston [14th Dist.] 1999, no pet).12 TEX. CIV. PRAC. & REM. CODE § 171.021(b).13 In re Oakwood Mobile Homes, 987 S.W.2d at 573; In re Merrill Lynch Trust Co., 123 S.W.3d 549, 554 (Tex. App. — San Antonio 2003, orig. proceeding). 14 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991); 9 U.S.C. § 2.15 See 9 U.S.C. § 1 (emphasis added). 16 Lost Creek Mun. Utils. Dist. v. Travis Indus. Painters, Inc., 827 S.W.2d 103, 105 (Tex. App. — Austin 1992, writ denied).17 In re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex. 2005) (orig. proceeding).18 In re D. Wilson Constr. Co., 196 S.W.3d 774, 780 (Tex. 2006) (orig. proceeding).19 See Teel v. Beldon Roofing & Remodeling Co., __ S.W.3d __, No. 04-06-00231-CV, 2007 WL 1200070 (Tex. App. — San Antonio Apr. 25, 2007); In re Kellogg Brown & Root, 80 S.W.3d 611, 617 (Tex. App. — Houston [1st Dist.] 2002, orig. proceeding). But see In re People’s Choice Home Loan, Inc., 225

San Antonio Lawyer 9 May-June 2009

applicable defenses to the motion and attach any proof, usually an affidavit, to support the defense. As previously indi-cated, since arbitration agreements are creatures of contract, they are subject to all contractual defenses. An arbitration agreement can be materially breached, illegal, void, waived or rescinded. It can also be so one-sided that it is unconscio-nable and unenforceable. It could further be subject to the contractual defenses of impossibility, duress or coercion, lack of capacity, lack of consideration, and re-vocation. The most common arbitration defenses, however, are fraud, unconscio-nability, illegality, and waiver.25 To suc-ceed in challenging an arbitration agree-ment, these defenses must relate directly to the arbitration provision itself and not merely to the contract as a whole.26

1. Fraud: If a fraud defense relates to the arbitration agreement itself, courts will address the fraud claim under both the FAA and the TAA. If, however, the fraud claim relates to the entire agreement, the arbitrator can decide the fraud claim.27

Several Texas courts have affirmed orders to stay arbitration or have refused to com-pel arbitration based on fraud in the in-ducement of the arbitration agreement.28

2. Unconscionability: Unconscionabil-ity is determined under the applicable state law, and an arbitration agreement determined to be unconscionable is not enforceable.29 Unconscionability is a question of law for the court to decide,30 and the party alleging unconscionabil-ity has the burden of proof to establish it.31 In evaluating the validity of an ar-bitration provision, a court may con-sider both procedural and substantive unconscionability. Procedural uncon-scionability refers to the circumstances surrounding the adoption of the arbi-tration provision, and substantive un-conscionability refers to the fairness of the arbitration provision itself.32

Courts determine unconscionabil-ity by looking at the circumstances sur-rounding the making of the agreement, including but not limited to: (1) the rela-tive bargaining strengths of the parties,

and (2) whether the contract is illegal, against public policy, or oppressive or un-reasonable. This determination is made on a case-by-case basis.33 The test for substantive unconscionability is whether — given the parties’ general commercial background and the commercial needs of the particular trade or case — the clause involved is so one-sided that it is uncon-scionable under the circumstances exist-ing when the parties made the contract. An arbitration clause that limits discov-ery for both parties does not make it per se unconscionable,34 but a clause that prohibits all discovery or unreasonably imposes fees on a plaintiff may be uncon-scionable. Even then, though, if the sub-ject arbitration clause has a severability clause, those unconscionable provisions can be stricken, and the case can then be referred to arbitration.35

Excessive arbitration costs can also support a finding of unconscionability.36 It should be noted, however, that the Texas Supreme Court has held that an arbitration subjecting a party to substan-tial costs and fees does not make an arbi-

S.W.3d 35, 40-41 (Tex. App. — El Paso 2005, orig. proceeding) (noting that parties cannot confer subject matter jurisdiction by agreement).20 In re Educ. Mgmt. Corp., 14 S.W.3d 418, 423 (Tex. App. — Houston [14th Dist.] 2000, orig. proceeding).21 TEX. CIV. PRAC. & REM. CODE § 171.001, et seq.22 In re Nexion Health at Humble, Inc., 173 S.W.3d 67 (Tex. 2005) (orig. proceeding).23 In re Olshan Found. Repair Co., L.L.C., 277 S.W.3d 124 (Tex. App. — Dallas 2009, orig. proceeding).24 TEX. CIV. PRAC. & REM. CODE § 171.021.25 Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S. Ct. 1652, 134 L. Ed. 2d 902 (1966).26 See In re FirstMerit Bank, 52 S.W.3d 749, 756 (Tex. 2001) (orig. proceeding) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967). 27 See Prima Paint Corp., 388 U.S. at 403-04; Miller v. Pub. Storage Mgmt., 121 F.3d 215, 219 (5th Cir. 1997) (citing R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d 534, 538 (5th Cir. 1992)); Henry v. Gonzales, 18 S.W.3d 684, 691 (Tex. App. — San Antonio 2000, pet. dism’d by agr.); Pepe Int’l Dev. Co. v. Pub Brewing Co., 915 S.W.2d 925, 930 (Tex. App. — Houston [1st Dist.] 1996, no writ).28 EZ Pawn Corp. v. Gonzalez, 921 S.W.2d 320, 324-25 (Tex. App.–Corpus Christi 1996, writ denied); Gulf Interstate Eng’g Co. v. Pecos Pipeline & Pro-duction Co., 680 S.W.2d 879, 881 (Tex. App. — Houston [1st Dist.] 1984, writ dism’d w.o.j.).29 Doctor’s Assocs., Inc., 517 U.S. at 687-88; TEX. CIV. PRAC. & REM. CODE § 171.022. 30 Amer. Employer’s Ins. Co. v. Aiken, 942 S.W.2d 156, 160 (Tex. App. — Fort Worth 1997, no writ).31 See In re Oakwood Mobile Homes, Inc., 987 S.W.2d at 574.32 In re Halliburton Co., 80 S.W.3d 566, 571-72 (Tex. 2002) (orig. proceeding).33 In re Turner Bros. Trucking Co., 8 S.W.3d 370, 376 (Tex. App. — Texarkana 1999, no pet.); Am. Employers’ Ins. Co. v. Aiken, 942 S.W.2d at 160.34 See In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 678 (Tex. 2006) (orig. proceeding).35 In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008) (orig. proceeding). 36 See Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 91, 121 S. Ct. at 522, 148 L.Ed.2d 373 (2000).37 See In re FirstMerit Bank, N.A., 52 S.W.3d at 756-57.38 See TEX. CIV. PRAC. & REM. CODE § 154.021(b). 39 In re Turner Bros. Trucking Co., 8 S.W.3d 370 (Tex. App. — Texarkana 1999, orig. proceeding).40 In re RLS Legal Solutions, LLC, 156 S.W.3d 160 (Tex. App. — Beaumont 2005, orig. proceeding). 41 E. Marine Corp. v. Fukaya Trading Co., 364 F.2d 80, 83 (5th Cir. 1966).42 Chattanooga Mailers Union Local No. 92 v. Chattanooga News-Free Press Co., 524 F.2d 1305, 1313 (6th Cir. 1975).43 In re Godt, 28 S.W.3d 732, 738-39 (Tex. App. — Corpus Christi 2000, no pet.).44 See TEX. BUS. & COM. CODE § 39.008(b).45 Williams v. CIGNA Fin. Advisors, Inc., 56 F.3d 656, 661 (5th Cir. 1995).46 In re Certain Underwriters at Lloyd’s, 18 S.W.3d 867, 871 (Tex. App. — Beaumont 2000, no pet.).47 Marble Slab Creamery, Inc. v. Wesic, Inc., 823 S.W.2d 436, 438 (Tex. App. — Houston [1st Dist.] 1992, no writ).48 EZ Pawn Corp. v. Gonzalez, 921 S.W.2d 320, 324 (Tex. App. — Corpus Christi 1996, writ denied).49 An order compelling arbitration is interlocutory and generally not appealable under the FAA and the TAA. See F.C. Schaffer & Assocs., Inc. v. Demech Contractors, Ltd., 101 F.3d 40 (5th Cir. 1996); Tex. Civ. Prac. & Rem. Code §171.098; In re Palacios, 221 S.W.3d 564 (Tex. 2006) (orig. proceeding); In re Godt, 28 S.W.3d 732 (Tex. App. — Corpus Christi 2000, no. pet.).

San Antonio Lawyer 10 May-June 2009

tration agreement per se unconscionable. Rather, the objecting party must present specific evidence they would be charged excessive fees, i.e., specific evidence of the future costs and the likelihood of incurring such costs.37 To meet this bur-den, respondent needs an affidavit from counsel concerning the costs of the pro-posed arbitration, which can be based on counsel’s experience with similar arbi-trations. An affidavit is also needed from the client, stating that he or she cannot afford these arbitration costs.

A leading case where excessive ar-bitration costs and fees were shown is Olshan Foundation Repair Co. v. Ayala, 180 S.W.3d 212 (Tex. App. — San Antonio 2005, pet. denied). In that case, a dispute arose over the work done by Olshan pursuant to a $22,650 foundation-stabilization con-tract for the Ayalas’ home. The contract required arbitration with a panel of three structural engineers appointed by the AAA. After the court compelled the par-ties to arbitrate based on the arbitration clause, the parties were each notified by AAA to pay $33,150 in costs, in advance, for the arbitration. The Ayalas went back to the trial court and claimed the costs made the arbitration agreement substan-tively unconscionable. The trial court agreed, citing In re First Merit Bank, N.A. and denied the motion to compel arbitra-tion. The Fourth Court of Appeals, in a 2-1 decision, affirmed the trial court’s holding that the disparity between the amount in controversy and the amount charged to arbitrate the controversy was so large that the trial court acted within its discretion in finding the ar-bitration clause unconscionable. The Texas Supreme Court denied Olshan’s petition for review.

Trial courts are often very interest-ed in the amount of fees and expenses charged to arbitrate cases, especially the fees and expenses required by AAA. Even with a single arbitrator from AAA, the fees and expenses for a mid-sized case can exceed $20,000. Many clients cannot afford to pay $10,000 to arbitrate their claims in addition to the cost of any expert witness testimony, effectively preventing them from prosecuting their claims. In addition to obtaining affida-vits concerning these costs, it is good practice to write a letter to opposing counsel offering an agreed bench trial in-stead of litigating over the enforceability of the arbitration clause. If the opposing

party refuses this offer, attach the let-ter as an exhibit to the response oppos-ing the motion to compel arbitration to show what steps the plaintiff is willing to undertake to avoid the excessive costs of arbitration. This letter has been effec-tive in showing that the opposing party’s refusal of a non-jury trial and insistence that the parties use AAA is more about imposing excessive burdens and costs on the party resisting arbitration than it is about resolving the claim. In this respect, the practitioner can also argue that the court has inherent power under the al-ternative-dispute-resolution procedures statutes to structure an arbitration that is reasonable to avoid the high costs of arbitrating with AAA, even if the clause requires such an arbitration.38

In another case, the Texarkana court of appeals held that obtaining an arbitra-tion agreement from a functionally illit-erate young man with a reading disor-der was procedurally unconscionable.39 Where the employer refused to provide a paycheck for previous work until the em-ployee signed an arbitration agreement, the Beaumont court of appeals found the agreement was unenforceable because it was coerced by economic duress.40

3. Illegality: An arbitration agreement can be unenforceable if the contract is void for illegality.41 Courts may enforce arbitra-tion clauses upon a finding that the illegal clause in the contract is not so central to the contract as to require the voiding of the entire contract, even if the contract did not contain a savings or severability clause.42 Arbitration agreements under the TAA may be held unenforceable either for violating state law unrelated to the arbi-tration issues or for failing to comply with the provisions of the TAA.43 An example of illegality would be if a consumer contract violated the Home Solicitation Act, which renders the entire contract void, including any arbitration clause therein.44

4. Waiver: An agreement to arbitrate can be waived just like any other contractual right. Generally, courts find waiver when a party has substantially invoked the judi-cial process to the detriment or prejudice of the other party.45 Factors to be consid-ered include: (a) how long the litigation has been proceeding; (b) the activity in and status of litigation; (c) the advantage gained by the litigation activity, such as conducting discovery not available in

arbitration; (d) the delay and expense in-volved; and (e) the rulings obtained from the court.46 Waiver can be found when a party did not seek arbitration until one month before trial.47 Waiver can also be based on the delay in seeking arbitration by participating in the judicial process for almost one year and on the resulting prejudice to the other party.48

The Supreme Court of Texas has recently addressed waiver of an arbitra-tion agreement in Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008) and in In re Fleetwood Homes of Texas, L.P., 257 S.W.3d 692 (Tex. 2008). Perry Homes v. Cull dealt with waiver of arbitration by conduct during litigation, which is a question of law for the court, not the arbitrator. The Supreme Court of Texas held that the homeowners waived their right to arbi-tration under the FAA because their con-duct substantially invoked the judicial process and unfairly manipulated the litigation to the detriment or prejudice of the builder. The facts of Perry Homes are somewhat unique, in that the homeown-ers first objected to going to arbitration. After almost completing discovery in the case over a fourteen-month period and just four days prior to trial, the hom-eowners then changed their minds and moved to compel arbitration, which the trial court granted. The Supreme Court of Texas held that the homeowners’ switch-ing back and forth prejudiced the build-er. The Court did not give a checklist for determining when a party has waived its right to arbitration but held that such waiver is determined on a case-by-case basis. More importantly, the Court ad-opted a totality-of-the-circumstances test in deciding waiver issues.

In re Fleetwood Homes of Texas, L.P., involved waiver concerning an arbitra-tion agreement contained in a dealer agreement. After the agreement was cancelled, the dealer filed suit. Defen-dant did not move to compel arbitration for some time. The dealer contended that arbitration was waived due to several emails from the defendant concerning a trial setting. The court held that the evi-dence was legally insufficient to support a finding of prejudice to the dealer based on the exchange of emails. The court not-ed that the communications were merely a factor to be considered, that no disposi-tive motions were filed by the defendant,

- continued on page 22 -

San Antonio Lawyer 22 May-June 2009

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and that the motion to compel arbitration was not filed on the eve of trial. In addi-tion, even though the arbitration clause limited discovery, the court rejected the dealers’ contention that the arbitration clause was unconscionable.

III. ConclusionDue to the problems inherent in

the arbitration process, which may not be known until later, motions to com-pel arbitration should be strenuously contested. Even if a party is wrongfully compelled to arbitrate, which is gener-ally not reviewable by mandamus or interlocutory appeal,49 the party can appeal the erroneous order compelling of arbitration after the entry of an arbi-tration award and its confirmation in a

judgment from the trial court. Such an appeal can give the party opposing arbi-tration a possible second “bite at the ap-ple” if it is dissatisfied with the arbitra-tion award. This second bite, however, may not be available unless the motion to compel arbitration has been properly contested and all complaints have been preserved for appellate review.

Mr. Loree is the senior partner with Loree, Her-nandez & Lipscomb, spe-cializing in representing plaintiffs in civil litiga-tion. Mr. Loree has prac-ticed law in Texas for over 30 years and is board cer-tified in Civil Trial Law

by the Texas Board of Legal Specialization.

Contesting the Motion toCompel Arbitration

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Malfontance \ [mal-FON-tuh nz]

noun Law

Loss of credibility due to fudging of ink in a demand letter.

use

“Judge, in all my years of practice, I’ve never seen such mal-fontance. I’m entitled to verbal sanctions at the very least.”