The following post is courtesy of Daniel Dorfman at Harris Winick Harris, LLP.
A Texas Court of Appeals has recently handed down an
important opinion addressing the applicability and enforceability of
arbitration provisions. The case offers important lessons to
developers and owners in the construction industry whose contracts generally
contain arbitration provisions. Seven Hills Commercial LLC v. Mirabal Custom Homes Inc., No. 05-13-01306-CV, --- S.W. 3d ----, 2014 Tex. App. LEXIS 8705 (Tex. App.--Dallas Aug. 7, 2014, no pet. h.).
The appeals court in the Seven Hills decision made clear
that even non-signatories to an arbitration clause may be compelled to
arbitrate their disputes, depending upon the terms of the contract. This means that corporate owner representatives
can compel or be compelled to arbitrate claims pursuant to agreements that they
did not enter into, or which they may not even had knowledge of before the
claims arose.
Moreover, the Seven Hills case demonstrates that it is
permissible for a court to make the initial determination as to whether claims
asserted by any individual actor are subject to arbitration, by comparing the
arbitration clause to the claims being asserted. In other words, the court in Seven Hills
served as a gatekeeper to arbitration: It simply determined that the arbitrator
has the primary responsibility to decide whether parties to a dispute are bound
by an arbitration provision.
Factual Background
In November 2009, the Post Real Estate Group (PREG), Mirabal
Custom Homes, Inc. (MCHI), and the D&G Investment Group (D&G) formed a
construction development group in Texas by the name of Seven Hills Commercial,
LLC (Seven Hills). To formalize the
relationship among the partner-companies and to create the entity Seven Hills,
PREG, MCHI, and D&G executed an original operating agreement.
Within months of executing this agreement, PREG transferred
its membership interest to another entity called Post-Investment Group
(Post-Investment) who then subsequently transferred its membership to an entity
called the Catenary Group (Catenary) – all of whom were owned and operated by
an individual by the name of Jason Post.
Likewise, D&G transferred its interest to another entity called FST
Group (FST), also owned by Mr. Post.
Catenary, PREG, MCHI (owned and operated by an individual by
the name of Jason Mirabal), FST, and D&G (owned and operated by Gary Guion)
then signed an amended and restated operating agreement which was substantively
similar to the first agreement. Two
individuals signed this document twice: Mr. Jason Post as Manager of Catenary
and then as President of PREG; and Mr. Gary Guion as Manager of FST and then as
president of D&G. Interestingly,
this agreement was signed by partner-companies who were not signatories to the
original operating agreement.
The following is a diagram of the parties (and transfer of
interest) for the construction development group of Seven Hills:
Both operating agreements provided that all disputes between
the parties arising out of Seven Hills would be subject to arbitration. Not surprisingly, disputes arose among the
partners after the execution of the amended operating agreement, involving various
claims against each of the partner-companies, the entity Seven Hills, and
against certain individuals involved in the development.
Despite the arbitration provision in the agreements, the
disputes were litigated in state court and there was a combined trial of the
various claims arising out of Seven Hills—although not all parties to the
lawsuit appeared for trial of the matter (objecting to the jurisdiction of the
court), including Seven Hills, Catenary, PREG, Post-Investment, and Mr. Post. The trial court awarded damages against all
of the parties not present at the trial of the matter. Thereafter, Seven Hills, Catenary, PREG,
Post-Investment and Mr. Post filed motions to compel arbitration pursuant to
the operating agreements. MCHI, Mr.
Mirabal, FST, D&G, and Mr. Guion opposed such motions.
The issue before the appeals court was jurisdictional, in
that it needed to decide which parties and claims were subject to the
arbitration clause, and which parties could enforce the arbitration clause (and
thereby determine whether the findings of the trial court would be
upheld). The broad arbitration clause as
stated in both operating agreements read as follows:
Any dispute, claim or controversy arising out of or relating
to this Agreement or breach, termination, enforcement, interpretation or
validity thereof, including the determination of the scope or applicability of
this Agreement to arbitrate, shall be determined by arbitration….
Court Holding
In interpreting this broad arbitration provision, and
sorting through the various claims in the case, the court held as follows:
Catenary, PREG, and Mr. Post can compel arbitration of MCHI’s claims.
MCHI (the remaining original member of Seven Hills) claimed
that the other members and individuals affiliated with Seven Hills, being
Catenary, PREG and Mr. Post, engaged in improper distributions from the Seven
Hills development company to their own accounts. Since MCHI, Catenary and PREG signed the
amended operating agreement, and thus agreed to arbitration, the court rightly
ruled that Catenary and PREG could compel arbitration of MCHI’s claims.
The more interesting question became that of Mr. Post. Mr. Post executed the operating agreements,
not in an individual capacity, but as manager of Catenary and president of
PREG. The court ruled, however, that Mr.
Post can compel arbitration of MCHI’s claims.
As explained by the court:
Mr. Post, the human
agent, is alleged to have been the person who committed the alleged offenses…
by agreeing to arbitrate all disputes ‘arising out of or related to’ the
Operating Agreement [], the parties generally intend to include actions of
their agents such as Mr. Post because actions of corporate agents on behalf of
their entity are generally deemed to be the corporation’s acts.
In so ruling, the court explained that corporations only act
through their human agents, and here, Catenary and PREG acted through their
human agent, Mr. Post. While the
operating agreement did not concern, nor specifically mention Mr. Post, Mr. Post
as agent of the corporations that signed the operating agreements, could compel
arbitration. In a word, the court found
that the arbitration provision was broad enough to encompass the actions of
agents of companies that signed the operating agreement.
Nevertheless, PREG, Post-Investment and Mr. Post cannot compel arbitration of the claims by D&G and Mr. Guion.
Unlike MCHI claims, Mr. Guion and his entity, D&G claims
did not concern improper distributions under the operating agreement. In fact, the claims being asserted by Mr.
Guion and D&G had nothing to do with the operating agreement. Rather, the claims being asserted against
PREG, Post-Investment, and Mr. Post arose out of claims of breach of an independent
employment agreement and for personal claims of emotional distress. In reviewing these claims, as compared to the
scope of the arbitration clause, the court, as the initial decision maker,
determined that the personal claims of D&G and Mr. Guion arising out of
Seven Hills, but not out of the actual operating agreements, could not be (and
should not be) subject to arbitration – even through PREG, D&G, Mr. Guion
and Mr. Post executed the operating agreements (the latter two as agents of
their respective companies).
Lessons
While the facts of the case are rather complicated, the
reasoning of the court and the law is really not. In fact, one may draw two major lessons from
the Texas court:
- Non-signatories to an arbitration clause may be compelled to arbitrate their disputes under principles of contract and agency law. This means that corporate representative (as in this case) can compel or be compelled to arbitrate claims pursuant to agreements that they did not enter or may not have had knowledge of before the claims arose.
- It is permissible for a court to make the initial determination as to whether claims asserted by any individual actor are subject to arbitration, by simply comparing the arbitration clause to the claims being asserted. A court may make this initial determination so long as the arbitration provision itself does not provide otherwise.
From a practical standpoint, the implication of this ruling
is that developers, and corporate representatives, need to carefully evaluate
the scope of an arbitration provisions within their contracts, understand who
can compel arbitration and who can (or may be) compelled to arbitrate –
including non-signatories to any arbitration provision.
Daniel Dorfman is a construction lawyer in
Chicago, Illinois, with the law firm of Harris Winick Harris LLP. Daniel focuses
his construction practice on the representation of owners and developers in all
types of construction disputes. In particular, Daniel, a LEED® Green
Associate, has a focus in sustainable (“green”) building and the renewable
energy markets. Daniel is a frequent guest lecturer on the subject of
construction law at academic institutions, such as, Chicago-Kent College of
Law, J.L. Kellogg Graduate School of Management, Illinois Institute of
Technology School of Architecture, and Northwestern School of Law. In
addition, Daniel routinely lectures at privately held companies, publicly held
companies, and prominent trade organizations on a variety of legal issues
affecting the construction industry. Daniel is licensed to practice in
the State of Illinois, United States District Court for the Northern District
of Illinois, and the United States Court of Appeals for the Seventh
Circuit. Daniel received his J.D., cum
laude, from Northwestern University School of Law in 2005.
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