The Supreme Court of Texas has ruled that a contract signatory was erroneously “required to arbitrate its non-contractual claims against non-signatories” in a crop insurance dispute.  According to a prior Disputing blog post:

In Jody James Farms, JV v. The Altman Group, Inc. and Laurie Diaz, No. 17-0062, Jody JamesFarms (“JJF”) purchased crop insurance from Rain & Hail through an insurance agency, the Altman Group, in 2010.  The insurance policy contained a lengthy arbitration provision which stated any disputes related to a claim determination made by the insurer must be resolved using arbitration.

Not long after purchasing the policy, JJF suffered a sorghum crop loss.  Although the farm notified an agent who was employed by the Altman Group, Diaz, via telephone, JJF did not submit a claim directly to Rain & Hail until much later.  Once JJF’s notice of loss was finally submitted to Rain & Hail, the insurer denied the claim as untimely.  Because JJF disagreed with the insurer’s decision, the issue was submitted to arbitration.  An arbitrator ultimately ruled in favor of Rain & Hail.

Next, JJF filed a lawsuit against the Altman Group and Diaz in Floyd County, Texas.  According to JJF, the insurance agency and Diaz “breached a fiduciary duty and violated the Texas Deceptive Trade Practices Act when they failed to submit the claim in a timely fashion.”  In response, the Altman Group and its agent filed a motion to compel arbitration which was granted by the trial court.  Next, an arbitrator denied JJF’s motion to dismiss the arbitration and ordered that the farm take nothing.

On appeal to Texas’s Seventh District Court of Appeals in Amarillo, JJF claimed the trial court improperly compelled its dispute with the Altman Group and Diaz to arbitration because there was no agreement to arbitrate between the parties.  In addition, JJF argued the farm’s claims against the appellees were beyond the scope of any arbitral agreement that may have existed.

The Seventh District Court of Appeals affirmed the trial court’s order compelling arbitration.  After that, the Texas Supreme Court granted JJF’s petition for review and heard oral argument in the case.  On Friday, the state’s highest court overturned the Amarillo appellate court’s decision.

In its written opinion, the Supreme Court of Texas first addressed the appropriate standard of review.  According to the court “questions related to the existence of an arbitration agreement with a non-signatory are for the court, not the arbitrator” to decide.  The court added:

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. 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. 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.

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 otherwise expressly extend the contract’s benefits to third parties. And no agreement between Jody James and the Agency incorporates the AAA rules as to disputes between them.

Given the absence of clear and unmistakable evidence that Jody James agreed to arbitrate arbitrability in disputes with non-signatories, compelled arbitration cannot precede a judicial determination that an agreement to arbitrate exists. The trial court was therefore charged with determining whether a valid agreement to arbitrate exists between Jody James and the Agency before any issue may be referred to arbitration. We review the resolution of that question de novo, because arbitrators lack authority to resolve a dispute absent a valid arbitration agreement.

After examining the case further, the Supreme Court of Texas ultimately concluded:

No party may be compelled to arbitrate unless they have agreed to arbitrate or are bound by principles of agency or contract law to do so. Jody James and the Agency did not agree to arbitrate any matter—not the question of arbitrability and not the merits of this dispute. Nor may Jody James be compelled to arbitrate under agency, third-party-beneficiary, or estoppel theories. We therefore reverse the court of appeals’ judgment, vacate the arbitration award, and remand to the trial court for further proceedings.

The entire opinion of the court is available online.