Background: Arbitration Clauses May Apply To Trust Disputes

The Texas Supreme Court held that arbitration clauses in trust documents may be enforced regarding claims by beneficiaries against trustees. In Rachal v. Reitz, a beneficiary sued a trustee for failing to provide an accounting and otherwise breaching fiduciary duties. 403 S.W.3d 840 (Tex. 2013). The trustee filed a motion to compel arbitration of those claims due to an arbitration provision in the trust instrument. After the trial court denied that motion, the trustee appealed. The Texas Supreme Court reversed the court of appeals and held that the arbitration clause was enforceable. Id. The Court did so for two primary reasons: 1) the settlor determines the conditions attached to her gifts, which should be enforced on the basis of the settlor’s intent; and 2) the issue of mutual assent can be satisfied by the theory of direct-benefits estoppel, so that a beneficiary’s acceptance of the benefits of a trust constitutes the assent required to form an enforceable agreement to arbitrate. See id. The court of appeals had held that there was no mutual asset as the beneficiary and trustee did not sign the trust document. The Texas Supreme Court resolved the issue of mutual assent by looking to the theory of direct-benefits estoppel. Because the plaintiff had accepted the benefits of the trust for years and affirmatively sued to enforce certain provisions of the trust, the Court held that the plaintiff had accepted the benefits of the trust such that it indicated the plaintiff’s assent to the arbitration agreement. The Court ordered the trial court to grant the trustee’s motion to compel arbitration.

Some Courts Have Held That Incorporating The AAA Rules Does Delegate Arbitrability Issues To The Arbitrator

Parties can agree to delegate to the arbitrator the power to resolve gateway issues regarding the validity, enforceability, and scope of an arbitration agreement. AT&T Technologies, Inc. v. Communications. Workers, 475 U.S. 643 (1986) (holding parties may agree to arbitrate arbitrability); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1985) (holding question of primary power to decide arbitrability “turns upon what the parties agreed about that matter”).

An arbitration provision can state that any dispute shall be settled by arbitration in accordance with the rules then in effect of the American Arbitration Association. Rule 7(a) of the Commercial Arbitration Rules of the AAA grants an arbitrator “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the Arbitration Agreement.” COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION, Rule 7(a) (http://adr.org/aaa/faces/rules).

Federal courts have concluded that an arbitration agreement’s incorporation of rules empowering an arbitrator to decide arbitrability and scope issues clearly and unmistakably evidences the parties’ intent to allow the arbitrator to decide those issues. See, e.g., Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671 (5th Cir. 2012) (We agree with most of our sister circuits that the express adoption of these rules presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”); Fallo v. High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009) (“[W]e conclude that the arbitration provision’s incorporation of the AAA Rules . . . constitutes a clear and unmistakable expression of the parties’ intent to leave the question of arbitrability to an arbitrator.”); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1372-73 (Fed. Cir. 2006) (concluding that agreement’s incorporation of AAA rules clearly and unmistakably showed parties’ intent to delegate issue of determining arbitrability to arbitrator); Terminix Int’l Co., LP v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1332-33 (11th Cir. 2005) (holding that by incorporating AAA Rules into arbitration agreement, parties clearly and unmistakably agreed that arbitrator should decide whether arbitration clause was valid); Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir. 2005) (“[W]hen . . . parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.”); CitiFinancial, Inc. v. Newton, 359 F. Supp. 2d 545, 549-52 (S.D. Miss. 2005) (holding that by agreeing to be bound by procedural rules of AAA, including rule giving arbitrator power to rule on his or her own jurisdiction, defendant agreed to arbitrate questions of jurisdiction before arbitrator); Sleeper Farms v. Agway, Inc., 211 F. Supp. 2d 197, 200 (D. Me. 2002) (holding arbitration clause stating that arbitration shall proceed according to rules of AAA provides clear and unmistakable delegation of scope-determining authority to arbitrator).

In Texas, generally, courts have held that as between parties to a contract, that the incorporation of the AAA rules does delegate arbitrability issues to the arbitrator. For example, in T.W. Odom Mgmt. Servs. v. Williford, the court of appeals reversed a trial court’s decision denying a motion to compel arbitration in an employee injury suit where the employment agreement clearly provided that the AAA rules would apply. No. 09-16-00095, 2016 Tex. App. LEXIS 9353 (Tex. App.—Beaumont August 25, 2016, no pet.). The court stated:

The 2013 agreement states that “[t]he arbitration will be held under the auspices of the American Arbitration Association (“AAA”)[,]” and “shall be in accordance with the AAA’s then-current employment arbitration procedures.” The agreement also references the AAA National Rules for Resolution of Employee Disputes. Under the AAA’s Employment Arbitration Rules, Rule 6, the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” … [The parties] agreed that any arbitration would be conducted in accordance with the AAA’s employment arbitration procedures, and the agreement references the AAA’s National Rules for Resolution of Employee Disputes. The parties agreed to a broad arbitration clause that expressly incorporated rules giving the arbitrator the power to rule on its own jurisdiction and to rule on any objections with respect to the existence, scope, or validity of the agreement.

Id. at *12-13. The court therefore ordered that the trial court should have ruled that the arbitrator could make the decision on the scope and enforceability of the clause. Id.

Texas Supreme Court Recently Holds That Incorporating The AAA Rules Does Delegate Arbitrability Issues To The Arbitrator

In Jody James Farms, JV v. Altman Grp., Inc., the Texas Supreme Court refused to rule on whether the incorporation of AAA rules in an arbitration clause would send arbitrability issues to the arbitrator as between signatories. No. 17-0062-CV, 2018 Tex. LEXIS 405 (Tex. May 11, 2018). The Court, however, held that such an incorporation did not send arbitrability issues to the arbitrator as between nonsignatories to an agreement. Id. The Court stated:

While such deference may be the consequence of incorporating the AAA rules in disputes between signatories to an arbitration agreement, to the text of the note 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. 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. 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.

Id. at *8-9.

Conclusion: The Incorporation Of AAA Rules In Trusts And Wills Will Likely Not Delegate Arbitrability Issue To The Arbitrator

To enforce an arbitration clause, the party wanting arbitration must generally prove in court the existence of an arbitration agreement and that the claims asserted fall within the scope of the agreement. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex. 1999). Accordingly, the Jody James Farms case will likely impact how arbitration clauses in trusts or wills are litigated. Those clauses may contain an incorporation of the AAA rules. If such an incorporation was effective to send arbitrability issues to arbitration, then the arbitrator would determine whether claims fell within the scope, whether a trustee waived the right to arbitrate, whether the settlor was mentally competent to execute the trust document or will, etc. Arbitrators are generally inclined to keep claims and parties in arbitration where courts may be more unbiased on those issues. So, now, where the beneficiary or trustee does not sign the trust/will, the court will determine these issues and not the arbitrator. This may greatly impact the enforceability of arbitration clauses in trusts and wills in Texas.