Jody James Farms v. Altman Grp., Inc.

• Decision Date: 11 May 2018
• Docket Number: No. 17–0062,17–0062
• Citation: 547 S.W.3d 624
• Parties: JODY JAMES FARMS, JV, Petitioner v. The ALTMAN GROUP, INC. and Laurie Diaz, Respondents
• Court: Texas Supreme Court

547 S.W.3d 624

JODY JAMES FARMS, JV, Petitioner

v.The ALTMAN GROUP, INC. and Laurie Diaz, Respondents

No. 17–0062

Supreme Court of Texas.

Argued March 20, 2018

OPINION DELIVERED: May 11, 2018

Jody D. Jenkins, Jenkins, Wagnon & Young, P.C., P.O. Box 420, Lubbock TX 79408–0420, for Petitioner.

Anna M.W. McKim, J. Paul Manning, Field Manning Stone Hawthorne & Aycock, P.C., 2112 Indiana Avenue, Lubbock TX 79410, for Respondents.

Justice Guzman delivered the opinion of the Court.

Arbitration is a creature of contract between consenting parties.¹ Nevertheless, as may be required by principles of contract law and agency,² a person who has agreed to arbitrate disputes with one party may be required to arbitrate related disputes with non-parties.³ This, however, is not one of those cases.

Determining whether a claim involving a non-signatory must be arbitrated is a gateway matter for the trial court, not the arbitrator, which means the determination is reviewed de novo rather than with the deference that must be accorded to arbitrators. Applying the appropriate standard of review, we hold the lower courts erroneously required a signatory to arbitrate its non-contractual claims against non-signatories. We therefore vacate the arbitrator's take-nothing award and remand the case to the trial court for further proceedings.

I. Background

Jody James Farms, JV purchased a Crop Revenue Coverage Insurance Policy from Rain & Hail, LLC, through the Altman Group, an independent insurance agency. The insurance policy, which was reinsured by the Federal Crop Insurance Corporation (FCIC) under the authority of the Federal Crop Insurance Act,⁴ contains an arbitration clause in section 20(a):

If you and we fail to agree on any determination made by us except those specified in section 20(d), the disagreement may be resolved through mediation in accordance with section 20(g). If resolution cannot be reached through mediation, or you and we do not agree to mediation, the disagreement must be resolved through arbitration in accordance with the rules of the American Arbitration Association (AAA), except as provided in sections 20(c) and (f), and unless rules are established by FCIC for this purpose. Any mediator or arbitrator with a familial, financial or other business relationship to you or us, or our agent or loss adjuster, is disqualified from hearing the dispute.⁵

The policy defines "us" and "we" as referring to the insurer (Rain & Hail) and "you" as referring to the named insured (Jody James). Neither the Altman Group nor any of its employees is expressly named in the policy, and neither the Altman Group nor any of its employees signed the agreement.

This dispute follows Rain & Hail's denial of coverage for a grain sorghum crop loss Jody James suffered. Though Jody James claims it promptly called an Altman Group agent, Laurie Diaz, to report the loss, Rain & Hail denied the claim on several bases, including that Jody James "failed to provide a timely notice of damage which has resulted in [Rain & Hail's] inability to make necessary and required loss determinations for indemnity under your ... policy."

Jody James disagreed with Rain & Hail's coverage determination, so the parties arbitrated the dispute as required by the insurance policy. Jody James lost. The arbitrator agreed with Rain & Hail that Jody James did not "timely present[ ] notice of its claim in accordance with the provisions of the crop insurance policy" and, further, "did not state a presentable loss" because crops from performing and non-performing farm units were commingled.

Based on the adverse arbitration ruling, Jody James sued the Altman Group and Diaz (collectively, the Agency) for breach of fiduciary duty and deceptive-trade practices.⁶ Jody James asserts the Agency's failure to timely submit the crop-loss claim resulted in denial of coverage and a $68,000 pecuniary loss. Jody James seeks damages equal to the amount of the loss, plus attorney's fees and interest.

The Agency moved to compel arbitration under the insurance policy, which Jody James opposed and the trial court granted. Following an unsuccessful motion for reconsideration, the case proceeded to arbitration where Jody James continued to assert its right to proceed in court against the Agency, a non-signatory to the arbitration agreement. The arbitrator resolved that issue and the merits of the dispute in the Agency's favor, issuing a take-nothing arbitration award.

The Agency asked the trial court to confirm and enforce the arbitrator's award, while Jody James moved to vacate it, again asserting that no valid arbitration agreement exists between the parties. The trial court's final judgment confirmed the award, denied Jody James's motion, and denied the Agency's request for attorney's fees. Applying a deferential standard of review to the arbitrator's determinations, the court of appeals affirmed.⁷

We granted Jody James's petition for review, which challenges the arbitrator's authority to determine whether a non-signatory can compel a signatory to arbitrate.

II. Discussion

Jody James and the Agency disagree about (1) whether the Agency is liable for Jody James's loss; (2) whether they agreed to arbitrate the merits of that issue; and (3) whether the trial court or the arbitrator should decide whether they agreed to arbitrate the merits. The third matter—who answers the question of arbitrability—is the primary focus of this appeal. Jody James asserts that the trial court must determine, as a threshold matter, whether an arbitration agreement exists between it and the Agency. The Agency argues it makes no difference who actually holds the power to determine arbitrability, because both the trial court and the arbitrator concluded Jody James must arbitrate.

We disagree with the Agency. Who may properly adjudicate arbitrability is critical to ascertaining the appropriate standard of review. A trial court's arbitrability determinations are reviewed de novo,⁸ while an arbitrator's determinations are entitled to deference.⁹ Under the Federal Arbitration Act, an arbitration award must be confirmed except in extremely limited circumstances, such as corruption, fraud, undue means, evident partiality, and lack of authority.¹⁰ The answer to the third question is thus significant and ultimately dispositive of this appeal, because it controls the standard of review we apply in evaluating the arbitrator's authority.

A. Standard of Review

Whether parties have agreed to arbitrate is a gateway matter ordinarily committed to the trial court¹¹ and controlled by state law governing "the validity, revocability, and enforceability of contracts generally."¹² Parties can, however, agree to arbitrate arbitrability. Arbitration is a matter of contract, and that which the parties agree must be arbitrated shall be arbitrated.¹³ A presumption favors adjudication of arbitrability by the courts absent clear and unmistakable evidence of the parties' intent to submit that matter to arbitration.¹⁴ The unmistakable clarity standard follows "the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration" and protects unwilling parties from compelled arbitration of matters they reasonably expected a judge, not an arbitrator, would decide.¹⁵

The court of appeals held that an arbitration agreement incorporating the American Arbitration Association (AAA) rules evinces clear and unmistakable intent to arbitrate arbitrability because the AAA rules declare that an "arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence ... of the arbitration agreement or to the arbitrability of any claim or counterclaim."¹⁶ Jody James and Rain & Hail's arbitration agreement expressly incorporates the AAA rules, so the court of appeals applied a "narrow and deferential review" to the arbitrator's determination that Jody James's claims against the Agency were arbitrable.¹⁷

While such deference may be the consequence of incorporating the AAA rules in disputes between signatories to an arbitration agreement,¹⁸ which we need not decide, the analysis is necessarily different when a dispute arises between a party to the arbitration agreement and a non-signatory. As to that matter, Texas courts differ about whether an arbitration agreement's mere incorporation of the AAA rules shows clear intent to arbitrate arbitrability.¹⁹ We hold it does not. Even when the party resisting arbitration is a signatory to an arbitration agreement, questions related to the existence of an arbitration agreement with a non-signatory are for the court, not the arbitrator.

The involvement of a non-signatory is an important distinction because a party cannot be forced to arbitrate absent a binding agreement to do so.²⁰ The question is not whether Jody James agreed to arbitrate with someone, but whether a binding arbitration agreement exists between Jody James and the Agency. What might seem like a chicken-and-egg problem is resolved by application of the presumption favoring a judicial determination.²¹ A contract that is silent on a matter cannot speak to that matter with unmistakable clarity, so an agreement silent about arbitrating claims against non-signatories does not unmistakably mandate arbitration of arbitrability in such cases.²²

To the extent Jody James and Rain & Hail's agreement expressed any intent to arbitrate arbitrability, it did so only with respect to one another. Jody James's agreement with Rain & Hail requires disagreements to "be resolved through arbitration in accordance with the rules of the [AAA]" only "[i]f [Jody James] and [Rain & Hail] fail to agree on any determination made by [Rain & Hail]." The insurance policy directly incorporates the AAA rules only for these disputes, not for disputes between Jody James and unspecified third parties. The contract also does not "expressly provide[ ] that certain non-signatories are considered parties" or...