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May 19, 2016

THE INFAMOUS “ARBITRATION AGREEMENT” - WHO MAKES THE INITIAL DETERMINATIONS ON ENFORCEABILITY, VALIDITY AND SCOPE: THE COURT OR THE ARBITRATOR?

In FirstLight Federal Credit Union v. Loya, 478 S.W.3d 157 (Tex. App. – El Paso, Oct. 7, 2015), the appellate Court reversed and remanded the trial court’s decision denying FirstLight Federal Credit Union’s (“FirstLight”)Motion to Compel Arbitration.

Former employee, Martha Loya, filed claims of discrimination and retaliatory discharge against FirstLight based on age, sex, and race and for reporting an inappropriate relationship involving a supervisor.  After filing the required Charge of Discrimination with the TCHR, Martha received her Notice of Right to Sue and filed her petition in state court.  FirstLight filed a motion to compel arbitration based on a 2011 arbitration agreement that it asserted applied to Martha’s claims.

The major questions that were answered by the Court in determining that the trial court abused its discretion in failing to enforce the arbitration agreement were:

Did an arbitration agreement actually exist, in other words was a contract properly formed to begin with?

The initial issue in this case was whether Martha was required to arbitrate her claims when she never signed the signature block on the arbitration agreement at issue.  The Court decided that a contract was formed even without her signature because (1) there was uncontroverted evidence that she was notified electronically of the arbitration agreement and she electronically acknowledged receipt and (2) the arbitration agreement specifically said that she would be bound by it by continuing her employment with FirstLight after receiving electronic notice, which she did. 

Under the Federal Arbitration Act, it is not required that an arbitration agreement be signed by the parties.  The Court further stated that “to make a signature a condition precedent to enforcement of a contract – including an arbitration agreement – the agreement must clearly and explicitly require a signature before it becomes binding.”  FirstLight’s arbitration agreement had no such signature requirement.


What effect does a delegation clause have on the power of the Court to resolve gateway issues regarding the validity and enforceability of the arbitration agreement?

Since the Court found that even without a signature, the arbitration agreement was an existing contract, it next looked to the delegation clause contained within the arbitration agreement to determine its jurisdiction in deciding validity and enforceability.  A delegation clause is contractual language contained in the arbitration agreement where the parties can agree to delegate to the arbitrator the power to resolve issues regarding the validity and enforceability of the arbitration agreement instead of leaving this power with the Courts if/when a lawsuit is filed.

The Court determined that FirstLight’s arbitration agreement did contain a delegation clause that “clearly and unmistakably provides that the issues of validity and enforceability are to be decided by the arbitrator and not the court.” 


The next question for the Court was… What is the reach of the delegation clause?  Or, in other words, what specific matters fall within, “validity and enforceability”?

Martha claimed that the arbitration agreement was illusory because it contained a modification provision.  The Court determined that because of the delegation clause, the determination of whether the arbitration agreement was illusory was a matter of its validity and thus, was to be determined by the arbitrator.

Further, the Court analyzed whether the delegation clause put the determination of whether Martha’s claims fell within the scope of the arbitration agreement in the hands of an arbitrator or the Court?

The Court determined that the issue of scope was not covered by the arbitration agreement’s delegation clause because it only provided for a delegation of issues of validity and enforceability to the arbitrator.  The Court warned, “[W]e must be mindful that delegation clauses must “clearly and unmistakably” delegate issues to the arbitrator.”  Since the arbitration agreement did not specifically delegate issues concerning the scope of the arbitration agreement to the arbitrator than scope was rightfully an issue for the trial court.

Inevitably, the Court determined that the claims alleged in Martha’s lawsuit fell within the scope of the arbitration agreement and therefore would not be decided by the Court.