Shamrock Foods Co. v. Munn & Assocs., Ltd.

• Decision Date: 15 January 2013
• Docket Number: No. 06–12–00081–CV.,06–12–00081–CV.
• Citation: 392 S.W.3d 839
• Parties: SHAMROCK FOODS CO., Appellant v. MUNN & ASSOCIATES, LTD., Appellee.
• Court: Texas Court of Appeals

392 S.W.3d 839

SHAMROCK FOODS CO., Appellant

v.MUNN & ASSOCIATES, LTD., Appellee.

No. 06–12–00081–CV.

Court of Appeals of Texas,

Texarkana.

Submitted: Nov. 27, 2012.

Decided: Jan. 15, 2013.

Bart Sloan, Bobby M. Rubarts, Koning Rubarts, LLP, Dallas, TX, for Appellant.

Frank M. Mason, Frank M. Mason, PC, Longview, TX, for Appellee.

Before MORRISS, C.J., CARTER and MOSELEY, JJ.

OPINION

Opinion by Chief Justice MORRISS.

In the contract dispute arising out of Munn & Associates, Ltd.'s agreement to provide consulting services to Shamrock Foods Company, Munn sued Shamrock and alleged not more than $60,000.00 in damages. The trial court overruled Shamrock's responsive motion to require arbitration as provided by the consulting contract, finding that Munn would likely be charged excessive arbitration fees and that, therefore, the arbitration provision was unconscionable. No party denies the existence of the arbitration agreement or that it covers the dispute at hand. The ultimate issue is whether the agreement is unconscionable because the cost of such arbitration is prohibitive. We reverse because—although (1) Munn properly raised the unconscionability claim—(2) Munn relied on inadmissible evidence to support its unconscionability claim and, (3) even considering all its evidence, Munn failed to prove unconscionability.

In 2004, Shamrock and Munn entered into a consulting agreement under which Munn would provide certain consulting services to Shamrock. The agreement provides for arbitration:

[A]ny controversy between the parties involving the construction or application of any term, covenant, or condition of this Agreement will, on the written request of one party served on the other, be submitted to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Arbitration shall be in Longview, Texas. Each of the parties to this Agreement is entitled to appoint one person as an arbitrator to hear and determine the dispute, and each party will attempt in good faith to agree with the other as to a third arbitrator. If the parties should prove unable to agree in this way, then two arbitrators already chosen will select a third impartial arbitrator. The expenses of arbitration will be borne by the losing party.¹

In addition to providing that the expenses of arbitration will be borne by the losing party, the agreement further provides that “the prevailing party will be entitled to reasonable attorney's fees, costs, and necessary disbursements in addition to any other relief to which that party is entitled,” in the circumstance that “any action at law or in equity is necessary to enforce or interpret the terms” of the agreement.²

Munn did not use its original petition to allege that the agreement's arbitration provision was unconscionable or otherwise unenforceable. Instead, Munn raised the issue in its response to Shamrock's motion to compel arbitration.³ Munn claimed it was not refusing to arbitrate but instead was seeking “cooperation and mutual discussion regarding the manner in which the arbitration process will be conducted, in order to reduce unnecessary costs.” Because Shamrock wished to proceed strictly in accordance with the arbitration process as described in the agreement, Munn claimed the provision was rendered “ineffective because of substantive unconscionability.”

In its order denying Shamrock's motion to stay and compel arbitration, the trial court found that “the Plaintiff is in all probability likely to be charged excessive arbitration fees in light of the dispute at issue and the likely costs to be incurred through the Texas judicial system, and therefore, the Arbitration Clause in the contract is unconscionable.” No findings of fact or conclusions of law were requested or filed.⁴

In this accelerated, interlocutory appeal ⁵ of the order denying a motion to compel arbitration, we review de novo the trial court's legal determinations and its factual determinations under a “no evidence” standard. In re Trammell, 246 S.W.3d 815, 820 (Tex.App.-Dallas 2008, orig. proceeding). We defer to the trial court's factual determinations if they are supported by the evidence. Cleveland Constr., Inc. v. Levco Constr., Inc., 359 S.W.3d 843, 851–52 (Tex.App.-Houston [1st Dist.] 2012, pet. dism'd). In reviewing the trial court's factual determinations, we must credit favorable evidence if a reasonable fact-finder could and disregard contrary evidence unless a reasonable fact-finder could not. Kroger Tex. Ltd. P'ship v. Suberu, 216 S.W.3d 788, 793 (Tex.2006). If the facts relevant to the arbitration issue are not disputed, we are presented only with issues of law and, therefore, review de novo the trial court's order. Trammell, 246 S.W.3d at 820. A “no evidence” point requires the appellate court to consider only the evidence and inferences tending to support the finding under attack and to disregard all evidence and inferences to the contrary. Id. Because no findings of fact or conclusions of law were filed, we must uphold the trial court's decision if there is sufficient evidence to support it on any legal theory asserted. Wetzel v. Sullivan, King & Sabom, P.C., 745 S.W.2d 78, 81 (Tex.App.-Houston [1st Dist.] 1988, no writ).

(1) Munn Properly Raised the Unconscionability Claim

Shamrock argues that Munn waived the issue of unconscionability by failing to plead same as a defense to the arbitration provision. Although Arizona law may govern the issue of whether the arbitration provision is substantively unconscionable, Texas procedural rules—including pleading rules—control. Moonlight Invs., Ltd. v. John, 192 S.W.3d 890, 894 (Tex.App.-Eastland 2006, pet. denied).

Generally, an affirmative defense is waived if it is not pled. “In pleading to a preceding pleading, a party shall set forth affirmatively ... any other matter constituting an avoidance or affirmative defense.” Tex.R. Civ. P. 94. Shamrock relies on Corbindale, L.P. v. Kotts Capital Holdings Ltd. P'ship, 316 S.W.3d 191 (Tex.App.-Houston [14th Dist.] 2010, no pet.), in support of its waiver argument. In that case, Kotts brought a declaratory judgment action against Carbindale. Id. at 194. In response, Carbindale filed a general denial answer subject to a motion to stay litigation and compel arbitration. Id. In opposition to the motion to compel arbitration, Kotts argued that the arbitration agreements were not properly authenticated and, therefore, were insufficient evidence of a valid agreement to arbitrate. The motion to compel arbitration was denied. Id.

On appeal, Kotts argued for the first time that the arbitration agreements were invalid because they were unconscionable. The court recognized that “an allegation that a provision in a contract is void, unenforceable, or unconscionable is a matter in the nature of avoidance and must be affirmatively pleaded.” Id. at 196 (citing Tex.R. Civ. P. 94; Parks v. Developers Sur. & Indem. Co., 302 S.W.3d 920, 924 (Tex.App.-Dallas 2010, no pet.)). Because Kotts failed to assert unconscionability of the arbitration agreements in the trial court, this argument was waived and not considered on appeal. Id.

This case can be distinguished from Corbindale. In that case, the issue of unconscionability was raised for the first time on appeal. Here, while Shamrock did not assert its right to arbitration in its answer, it filed a motion to compel arbitration. Munn filed a separate response to that motion, wherein it maintained that Shamrock refused to discuss “the manner in which such arbitration process will be conducted, in order to reduce unnecessary costs and delay in the arbitration process.” As a result of this refusal, Munn asserted that the “arbitration process ... will result in prohibitive costs” thus rendering “the arbitration provision ineffective because of substantive unconscionability.”

The arbitration provision here is properly invoked “on the written request of one party served on the other....” Shamrock properly invoked the arbitration provision on filing of its motion to stay and compel arbitration. Munn properly responded, alleging substantive unconscionability, which issue was tried before the court. Shamrock claims, in essence, that Munn was required to offensively assert the alleged unconscionability of the arbitration provision, before its invocation.⁶ We disagree. Rule 94 expressly applies when “[p]leading to a preceding pleading....” Munn did all that was necessary to raise this issue before the trial court by asserting the unconscionability of the arbitration provision in its response to Shamrock's motion to compel arbitration. We overrule this point of error.

(2) Munn Relied on Inadmissible Evidence to Support Its Unconscionability Claim

Shamrock complains of two exhibits admitted over its hearsay objections at the hearing on its motion to compel arbitration. The first exhibit ⁷ is captioned “Financial History,” and purports to come from the American Arbitration Association (AAA). Munn represented this exhibit to be a financial history of a previous arbitration between the same parties to the same contract “that went close to final conclusion.” The exhibit purports to reflect costs charged to Munn in the previous arbitration. Shamrock objected, claiming the document was hearsay. The trial court overruled the objection and received the exhibit in evidence.

On appeal, Munn contends the financial statement was not hearsay, claiming the prior arbitration was a quasi-judicial proceeding to which Shamrock was a party. Munn further contends that both Munn and Shamrock designated the AAA as agent for purposes of serving as the designated arbiter in the previous proceeding. It thus maintains that the financial history issued by the AAA was created within the scope of the AAA's employment by the parties during the existence of the agency relationship. Accordingly, Munn contends that, in accordance with Rule 801(e)(2)(D) of the Texas Rules of Evidence,...