I Was Sued in Court, But my Contract Calls for Arbitration. What Are my Options?

When parties enter into contractual relationships, the language of the contract will define and govern their rights and duties. Sometimes, that includes an agreement to resolve any contractual disputes through arbitration rather than litigation.

If you signed a contract that contains an arbitration clause, a lawsuit filed against you in civil court can come out of left field. But, depending on the specific facts and circumstances involved, you do have options:

1. You can litigate. Even though your contract states otherwise, you don’t have to arbitrate if both parties agree to proceed with litigation. You can waive that requirement in your contract or arbitration agreement and proceed with litigation.
2. Or, you can compel the other party to arbitrate. When only one contracted party wants to arbitrate a dispute subject to an arbitration agreement, that party may file a motion or claim to compel the other to arbitrate.

Texas Arbitration Act or Federal Arbitration Act?

If you choose to compel arbitration, your next steps will be governed by either state or federal law – the Texas Arbitration Act or the Federal Arbitration Act. Which statute governs depends largely on whether the contract involves in-state or interstate commerce (or maritime transactions), with some exceptions.

Which arbitration act applies to your situation?

• The Texas Arbitration Act (TAA) can apply to any contract within Texas’ jurisdiction, which generally covers contracts with Texas residents or contracts performed, in part or in whole, in Texas.
• The Federal Arbitration Act (FAA) applies when contract disputes concern interstate or overseas commerce.

Sometimes, an arbitration clause will specify whether the TAA or FAA will apply. If the clause does not specify, both could apply should the dispute involves interstate commerce. Generally, however, the FAA will only overrule state law if state law refuses to enforce an arbitration clause that the FAA would otherwise enforce.

There is one advantage offered by the TAA not available under the FAA; the Texas law allows for expanded access to judicial review of arbitration awards if stipulated in the arbitration agreement. This addresses one weakness of the arbitration process: Unlike litigation, which allows either party to appeal the court’s decision, an arbitrator’s decision is final and binding with only a few narrow exceptions. The FAA, like the TAA, specifically lists these exceptions for which a court may vacate or modify an arbitration award. The TAA, however, allows parties to expand those available challenges to an arbitrator’s decision and even include appellate options in the arbitration clause. Keep this in mind when negotiating an arbitration clause.

Motion to Compel Arbitration in Texas

Both the TAA and the FAA have procedures for the enforcement of arbitration agreements, although Texas procedures generally apply regardless of which statute is invoked.

Under TAA procedures, a contracted party may pursue an action to compel arbitration in court when the other party resists arbitration – either as its own claim when there is no litigation or as a motion to compel if the resisting party has already initiated litigation. This will stay (but not dismiss) any pending litigation until the case is referred to arbitration or the motion to compel is denied.

Both the TAA and FAA apply a similar analysis to determine whether litigated disputes must be referred to arbitration:

1. Is there a valid agreement to arbitrate?
2. If so, does the dispute fall within the scope of the arbitration clause?

The burden of proof for the existence of a valid arbitration agreement falls to the party attempting to compel arbitration. Once it is established that a valid arbitration agreement exists, courts must then decide whether the dispute falls within the scope of the arbitration clause. These questions are generally decided through summary proceedings (prompt, simple court proceedings held before a judge).

Challenges to the validity of the whole contract (not just the arbitration clause) must be decided by the arbitrator and not tried before the courts. In other words, a court may not refuse to refer a dispute to arbitration because the disputed claim lacks merit.

Challenges to the Enforcement of Arbitration Agreements

The party that is resisting the motion to compel arbitration may attempt to establish grounds for revoking the arbitration agreement, such as:

• Fraud
• Unconscionability (referring to the fairness of the provision) or duress
• Failure to satisfy a condition precedent to arbitration (i.e., notice, demands, or time limits)
• Illegality
• Waiver of the right to seek arbitration (a legal position that occurs when the party’s opponent allows litigation to progress and then later seeks to arbitrate the same issue)

These defenses, however, must apply specifically to the arbitration agreement, not to the contract as a whole. If any of these claims apply to the entire contract, the court should refer the claim to be decided by an arbitrator.

Counsel for Arbitration-Related Litigation in Texas

Arbitration-related litigation is a nuanced and consequential precursor to resolving complicated contractual disputes. And though there exists a strong presumption in favor of arbitration, there also exist many arguments and defenses that can muddle the process or threaten the enforceability of a contract or its arbitration provision.

At Hendershot Cowart P.C., our contract lawyers have extensive experience representing business owners, executives, and high-net-worth individuals in a range of contract disputes and litigation – in and out of the courts. To speak with an attorney about your matter, call or contact us online.