The Texas Supreme Court will hear a pair of cases that present significant questions for the beginning and the end of the arbitration process. Those include whether an “unconscionable attorney fees” provision voids an arbitration agreement and what parties must do to vacate an arbitration award for alleged evident partiality.
Those issues arise in Venture Cotton Cooperative and Noble Americas Corp. v. Shelby Alan Freeman and Ponderosa Pine Energy LLC v. Tenaska Energy Inc., on which the high court granted review Nov. 22.
The issue in Venture Cotton, which is set for oral argument Jan. 9, 2014, is whether a trial court was correct in denying a party’s motion to compel arbitration in a business dispute because the arbitration agreement contained a “one-sided” provision that allowed one party to recover attorney fees if the other party was found to have breached a contract—but not vice versa.
In a Jan. 11 decision, Eastland’s Eleventh Court of Appeals upheld the trial court’s ruling that the attorney-fees provision of the arbitration agreement was “unconscionable.”
A primary issue for the high court to decide in the case is whether the parties who challenged the enforceability of the agreement have waived the argument, according to the lawyer for the parties seeking to enforce the arbitration agreement.
“The court of appeals’ decision raises two significant issues concerning the proper standard for setting aside arbitration agreements in Texas,” Sean Jordan, a partner in Austin’s Sutherland Asbill & Brennan who represents Venture Cotton and Noble Americas in the case, wrote in an email in response to a request for comment.
“First, can an arbitration provision be held to be unconscionable when the party opposing arbitration could not actually suffer prejudice if it is enforced? Second, will arbitration agreements be treated less favorably than other contracts regarding the application of the severance doctrine?” Jordan wrote.
“Further, the court of appeals’ opinion is the first reported decision of a Texas court refusing to sever an unconscionable contract provision based on a theory of waiver. Texas courts have long applied the severance doctrine regardless of whether the contract at issue included a severability clause and, likewise, without any mention of the need for a party seeking to enforce a contract to assert an affirmative claim for severance, failing which the remedy would be waived,” Jordan wrote.
Don Martinson, a partner in Dallas’ Fanning, Harper, Martinson, Brandt & Kutchin who represents Shelby Alan Freeman and the other appellants in the case, declined comment.
The issue in Ponderosa Pine, which is set for oral argument on Jan. 7, 2014, is whether a trial court was correct in vacating a $125 million arbitration award because an arbitrator allegedly showed “evident partiality” by failing to disclose business contacts he had with a party’s law firm [See "5th Court Reverses $125 Million Arbitration Vacatur," Texas Lawyer, Sept 17, 2012, page 1.]
Much like in Venture Cotton, a primary issue in Ponderosa Pine is whether the parties challenging a $125 million arbitration award waived their “evident partiality” claim against an arbitrator by bringing it up too late.
In its Aug. 20, 2012, decision, Dallas’ Fifth Court of Appeals concluded that the trial court erred by vacating the arbitration award on the basis that the arbitrator failed to fully disclose his relationships. The Fifth Court also decided that parties Tenaska and Illinova had waived their evident-partiality challenge of the award because they “had enough information” regarding the arbitrator’s alleged relationships with the opposing party’s law firm but failed to object at the time the information was disclosed.
The following did not return one call each seeking comment: Reagan Simpson, a partner in YetterColeman in Houston who represents Ponderosa Pine in the case; Deborah Hankinson of Dallas’ Hankinson LLP who represents Tenaska; Mike Hatchell, of counsel at Locke Lord in Austin who represents Illinova; and Wanda McKee Fowler, a partner in Houston’s Wright & Close who represents appellee Continental Energy Services.