Business Law: Forced To Binding Arbitration Even When Did Not Sign An Arbitration Clause

The desirability of using private binding arbitration to resolve disputes as opposed to using conventional litigation is an ongoing debate for those in business.

The historical rationale for using arbitration clauses in contracts was that arbitration was perceived as a less expensive and faster way to resolve disputes.

Unfortunately, arbitrating private disputes now can cost as much as conventional litigation. An additional disadvantage to binding arbitration is that it can result in a decision from which there is little judicial review or control. The arbitrator can be wrong about the facts and the law, and a judge will typically not vacate or reverse the arbitration award.

In Seven Hills Commercial, LLC v. Mirabal Custom Homes, Inc., 2014 WL 3867837, NO. 05-13-01306-CV, Aug. 7, 2014, reh. overruled Oct. 14, 2014, a Texas appellate court determined that parties who had not signed an arbitration agreement were nevertheless required to arbitrate disputes.

In this case, a limited liability company (LLC) brought an action against current and former corporate members and members' principals, alleging breach of fiduciary duty and breach of an operating agreement. In the same action, the manager of the LLC brought claims against certain members, and various members brought claims against other members.

The trial court denied motions to compel arbitration. The LLC and certain members appealed.

The appellate court held that:

1. The issue of arbitrability of a particular member's action was to be decided by an arbitrator.

2. The breach of contract claim against the principal of a former member, brought by a principal of another former member, did not arise out of the LLC operating agreement and thus was not subject to the agreement's arbitration clause.

3. The intentional infliction of emotional distress claim brought by the principal of the LLC member against the principal of another member did not arise out of the operating agreement and thus was not subject to the agreement's arbitration clause.

4. The LLC was not required to sign the operating agreement before it could enforce the agreement's arbitration provision.

5. The LLC did not substantively invoke judicial process before moving for arbitration, and therefore the LLC did not waive the contractual right to compel arbitration.

This case is important because it highlights that a person in business needs to review all of the relevant contracts, documents, and circumstances before determining that a dispute between parties will be subject to binding arbitration or can proceed to litigation.