Texas Courts Continue Their Romance With Arbitration

Originally published by Charles Sartain.

Posted by Charles Sartain

The lessons in Craddick Partners Ltd. v. EnerSciences Holdings, LLC are three: Parties who have not signed an agreement to arbitrate have standing to compel arbitration; artful pleading to avoid arbitration won’t work; and Texas courts remain eager to send cases to arbitration.

EnerSciences’ two subsidiaries sell products in the oil field. Tom Craddick approached EnerSciences to sell products to Craddick’s Permian Basin clients. EnerSciences created PB Ventures as a subsidiary through which Craddick would sell their products.

A sales agreement between Craddick Partners and PB Ventures compelled arbitration of all disputes, excluding claims “brought by either party seeking injunctive, declaratory or preliminary relief”.

Pardon me while I digress

Some parties agree to litigate some claims and arbitrate others. Why? Don’t do it. It only complicates matters, potentially increasing the cost of the dispute by fighting it in two different places. And injunctive relief is addressed by the courts and the rules of the arbitration bodies.

The dispute

Craddick Partners sued PB Ventures, EnerSciences, and its two subs, asserting negligent misrepresentation, negligence, and tortious interference (all of which are torts), and seeking a declaration that the sales agreement had terminated.

The defendants, no doubt seeking to avoid a generous portion of hometown justice, sought arbitration, alleging that Craddick artfully pleaded tort actions to avoid arbitration and that the claims were really for breach of contract. Craddick said the EnerSciences parties were non-signatories to the sales agreement and thus lacked standing.

“Direct-benefits estoppel”?

The doctrine permits a non-signatory to compel arbitration of a signatory’s claim “if liability arises solely from the contract and must be determined by reference to it”.  Said the court, a “meddlesome stranger” cannot compel arbitration by merely pleading a claim that quotes someone else’s contract. A party can’t have it both ways:  on one hand seek to hold the non-signatory liable for duties imposed by an agreement with an arbitration provision, but on the other hand deny arbitration because a defendant did not sign it.

The court denied Craddick’s argument that its claims arose from general obligations imposed by law (the tort claims). All of Craddick’s claims depended on the existence of the sales agreement. The claims not only made reference to or presumed the existence of the agreement but relied upon it for viability. EnerSciences had no obligations to Craddick other than those arising out of the contract.

A factor in the tortious interference claim was that the non-signatories were so close to the contract that they were an integral component of it; they were affiliates, and not strangers to the agreement.  Craddick could not avoid arbitration by recasting its claims as tortious interference. That claim also relied on the sales agreement for viability.  If PB Ventures had not breached the sales agreement there would be no tortious interference.

Fancy pleading doesn’t help

The court concluded that the declaratory judgment request was merely an artfully pleaded breach of contract claim. To render a declaratory judgment the court would have had to determine whether PB Ventures breached the sales agreement.

To appreciate today’s musical interludes, consider what early 1950’s  mainstream radio sounded like. Along came Chess Records with Chester Burnett, McKinley Morganfield and plenty of others.

So, Phil Chess RIP.

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