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.
One Texas court of appeals has rejected the enforcement of an arbitration clause in a will where the court determined that direct-benefits estoppel did not apply. In Ali v. Smith, a successor administrator of an estate sued the former executor for breach of fiduciary duties arising from his management of the finances of the estate, converting assets of the estate, and using estate funds. 554 S.W.3d 755 (Tex. App.—Houston [14th Dist.] 2018, no pet.). The court of appeals held that the party asserting a right to arbitration has to prove a binding arbitration agreement. “Typically, a party manifests its asset by signing an agreement.” Id. The parties agreed that they were not signatories to the will. “But the Texas Supreme Court has ‘found assent by nonsignatories to arbitration provisions when a party has obtained or is seeking substantial benefits under an agreement under the doctrine of direct benefits estoppel.’” Id. (citing Rachal v. Reitz, 403 S.W.3d 840, 843 (Tex. 2013)). Under the facts of the case, the court held that the plaintiff was not seeking any relief under the will, but was seeking relief under Texas statutes and common law and thus direct-benefits estoppel did not apply. This result would likely have been very different if the arbitrator (and not the court) had the right to decide the issue of direct-benefits estoppel.
Issues often arise in trust and estate disputes whether the arbitration agreement is enforceable due to scope issues (construction vs. administration) or enforceability issues (mental competence/undue influence). The initial fight is whether the trial court or the arbitrator should determine these threshold issues. Generally, a plaintiff can assert in court that his or her claims fall outside of the scope of the dispute resolution clause. Lost Maples Gen. Store, LLC v. Ascentium Capital, LLC, No. 14-18-00215-CV, 2019 Tex. App. LEXIS 3549, 2019 WL 1966671 (Tex. App.—Houston [14th Dist.] May 2, 2019, no pet.) (party argued that claims fell outside of scope of contractual jury waiver). Courts may require a party to submit a dispute to arbitration only if the party has agreed to do so. Seven Hills Commer., LLC v. Mirabal Custom Homes, Inc., 442 S.W.3d 706, 714 (Tex. App.—Dallas 2014, pet. denied). A party seeking to compel arbitration must establish a valid arbitration agreement exists and that the claims asserted are within the scope of the agreement. Id. at 715. So, the general rule is that a court (and not the arbitrator) determines whether a dispute falls within the scope of an arbitration clause or whether the clause is enforceable.
However, Texas courts enforce express provisions in arbitration agreements that refer or delegate enforceability and scope issues to the arbitrators. See Darling Homes of Tex., LLC v. Khoury, No. 01-20-00395-CV, 2021 Tex. App. LEXIS 3756, 2021 WL 1918772, at *8 (Tex. App.—Houston [1st Dist.] May 13, 2021, no pet.); Dow Roofing Sys., LLC v. Great Comm’n Baptist Church, No. 02-16-00395-CV, 2017 Tex. App. LEXIS 7370, 2017 WL 3298264, at *3 (Tex. App.—Fort Worth Aug. 3, 2017, pet. denied) (mem. op.) (stating that parties can agree to arbitrate questions concerning validity of arbitration agreement, including asserted defense that arbitration agreement is unconscionable). As the Texas Supreme Court held:
Whether parties have agreed to arbitrate is a gateway matter ordinarily committed to the trial court and controlled by state law governing ‘the validity, revocability, and enforceability of contracts generally.’ 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.
One issue that has split the courts of appeals is whether the incorporation of the AAA Rules, without any other express delegation language, effectuates a delegation of threshold issues to the arbitrator. That issue has now been resolved. The Texas Supreme Court recently held that issues concerning the enforceability and scope of an arbitration clause should be compelled to arbitration due to the incorporation of AAA Rules. In TotalEnergies E&P USA, Inc., v. MP Gulf of Mexico, LLC, two oil and gas operators had a dispute arising out of the costs of certain systems in the production of minerals in the gulf of Mexico. No. 21-0028, 2023 Tex. LEXIS 315 (Tex. April 14, 2023). MP Gulf of Mexico and Total E&P owned an oil-and-gas processing system that serviced leases in the Gulf of Mexico. The parties signed two contracts to govern the system, the System Operating Agreement and the Cost Sharing Agreement. The dispute began when MP Gulf demanded that Total E&P pay certain costs incurred under the Cost Sharing Agreement. Total E&P refused and sued for a declaration construing that agreement. MP Gulf, however, initiated an arbitration proceeding before the AAA based on a provision in the System Operating Agreement stating that “any dispute or controversy aris[ing] between the Parties out of this Agreement . . . shall be submitted to arbitration . . . in accordance with the rules of the AAA.” MP Gulf argued that this provision, which incorporated the AAA Rules, required the AAA arbitrator to decide whether the parties agreed to submit their controversy to arbitration. The trial court granted Total E&P’s motion to stay the arbitration. The court of appeals reversed, holding that by agreeing to arbitrate before the AAA and in accordance with its rules, the parties delegated the arbitrability issue to the arbitrator. The Texas Supreme Court affirmed the court of appeals.
The Court agreed with the majority of other courts that an agreement to arbitrate under the AAA means that the parties agreed to delegate issues of arbitrability: “We agree with the vast majority of courts that, as a general rule, an agreement to arbitrate in accordance with the AAA or similar rules constitutes a clear and unmistakable agreement that the arbitrator must decide whether the parties’ disputes must be resolved through arbitration.” Id. at *18-19. The Court explained: “By this language, the parties incorporated the AAA rules into their arbitration agreement, and thus the rules are binding, at least absent any conflict between the two. As a result, the AAA rules are ‘part of’ the parties’ agreement as if they were set forth within the agreement itself.” Id. at *19.
And although parties can contractually limit their delegation of arbitrability to only certain claims, the Court concluded that the agreements did not do so here. The delegation provision incorporated the AAA Rules, and nothing in that provision or in those rules limited the scope of the delegation. The Court held:
[W]e conclude that any limitation contained within these parties’ arbitration agreement does not affect the agreement’s clear and unmistakable delegation of arbitrability issues to the arbitrator. Although we agree that parties can contractually limit their delegation of arbitrability issues to only certain claims and controversies, we do not agree that the arbitration clause contained within the System Operating Agreement accomplishes that result.
Id. at * 25. The Court rejected the position that a trial court had to determine carve-outs and limitations “because it ignores the severability rule and conflates the parties’ agreement to arbitrate disputes with their agreement to delegate arbitrability issues to the arbitrator.” Id. at *28. The Court held:
[U]nder the severability rule, not only is the broader contract (the System Operating Agreement) severable from the provision within it requiring arbitration of claims arising out of that Agreement (article 16.16), but that arbitration provision is in turn severable from the provision within it that delegates arbitrability issues to the arbitrators (the provision incorporating the AAA rules). So we must carefully distinguish between the parties’ disputes over (1) the scope of the arbitration provision (what it includes and carves out) and (2) the delegation provision (who decides the scope of the arbitration provision).
Here, the delegation provision is the clause that incorporates the AAA rules, and nothing in that provision or in those rules limits the scope of the delegation. Total E&P contends that the arbitration clause limits the scope of the delegation by limiting the claims that must be arbitrated to those “arising out of” the Agreement. But under the severability rule, our conclusion that the delegation provision (the incorporation of the AAA rules) clearly and unmistakably delegates arbitrability issues to the arbitrator requires that we enforce that provision as written and allow the arbitrator to decide the scope of the arbitration provision… We thus conclude that the fact that the parties’ arbitration agreement may cover only some disputes while carving out others does not affect the fact that the delegation agreement clearly and unmistakably requires the arbitrator to decide whether the present disputes must be resolved through arbitration.
Id. at *38-30. So, as between signatories to a contract, the incorporation of AAA Rules does effectuate a delegation of threshold issues to the arbitrator.
The Court, however, previously held in Jody James Farms that an arbitration agreement’s incorporation of the AAA Rules did not clearly and unmistakably demonstrate an agreement to delegate arbitrability of claims against a non-signatory to the arbitrator because parties “cannot be forced to arbitrate absent a binding agreement to do so.” 547 S.W.3d at 632. 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. So, there appears to be a dichotomy at this time on the incorporation of AAA Rules. Such incorporation is effective as against signatories to a contract to delegate threshold issues to the arbitrator, but are not effective as against non-signatories.
Courts in other jurisdictions have since reached the opposite result of Jody James Farms in cases involving non-signatories. See, e.g., Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 845 (6th Cir. 2020); Wiggins v. Warren Averett, LLC, 307 So. 3d 519, 523 (Ala. 2020). The Court in TotalEnergies noted this disagreement, but stated: “Because MP Gulf and Total E&P are both signatories to the agreements at issue, neither party asks us to reconsider that holding here.” 2023 Tex. LEXIS 315, n. 10. Was the Court asking parties in the future to ask for it to reconsider Jody James Farms?
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 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 may be the correct party to 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, 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. If the Texas Supreme Court revisits Jody James Farms, and the rule in TotalEnergies becomes the law for both signatures and non-signatories, then the incorporation of the AAA Rules will delegate to the arbitrator these important threshold issues.