Corpus Christi COA Refuses to Compel Arbitration

The Corpus Christi Court of Appeals has refused to order a dispute to arbitration where a clause in a general partnership agreement provided for mediation.

In Appling Farms & Appling Interests, Ltd. v. Turner Mgmt., Inc., No. 13-09-00051-CV, (Tex. App. – Corpus Christi, January 27, 2011), Appling Farms, Appling Interests and Turner Management, entered into a limited partnership agreement to run a fish farm, Lonestar Aquafarms, Ltd., located in Texas. John Turner, President of Turner Management, owned thirty-three and one-third percent, Turner Management owned one percent, and the two Appling entities owned a combined sixty-six and two-thirds percent of Lonestar. Under the partnership agreement, Turner management acted as the general partner of Lonestar. John Turner was Turner Management’s primary employee and performed the daily management of Lonestar.

In 2007, the Appling entities (collectively “Appling”) sued both John Turner and Turner Management for misappropriation of trade secrets and customer lists and for entering into unfair competition with Lonestar by starting a competing fish farm. After 18 months of discovery and motion practice and one month before trial was set to begin, Appling sought arbitration on the issue of removing Turner Management as general partner of Lonestar pursuant to a clause in the parties’ partnership agreement.

The clause at issued stated,

8.7 Removal of General Partner. Upon thirty (30) days’ prior written notice, and with written consent of a majority of the Limited Partners, a General Partner may be removed for any act which constitutes fraud, gross negligence or willful misconduct that has a detrimental effect on the Partnership, as determined by an independent third-party mediator appointed by agreement of the Limited Partners, provided that the written consent of the Limited Partners designates a substitute General Partner.

After Turner Management refused to consent to arbitration, Appling filed a motion to compel arbitration with the trial court. Turner Management responded stating the “clause did not constitute an agreement to arbitrate and, alternatively, that Appling had waived its right to arbitration by substantially invoking the judicial process to Turner Management’s detriment.” The trial court denied Appling’s motion and Appling appealed.

First, The Corpus Christi Court stated “whether an enforceable agreement to arbitrate exists here is a legal question subject to de novo review.” Next, the court declared, “the only issue before us is whether an agreement to arbitrate exists.”

According to the Court of Appeals,

Mediation, the only type of third-party dispute resolution directly referenced in the clause here, is defined as a “method of nonbinding dispute resolution involving a neutral third party who tries to help the disputing parties reach a mutually agreeable solution.” BLACK’S LAW DICTIONARY 1070-71. Looking to the plain language of the contract to ascertain the parties’ intentions, see Dynegy Midstream Servs., L.P., 294 S.W.3d at 168; Frost Nat’l Bank, 165 S.W.3d at 311-12, we cannot conclude that the clause’s requirement of a mediator manifests a plain, clear, and certain intention to submit the partner removal issue to a third-party for binding and final resolution. See Bates, 177 S.W.3d at 422. Neither does the clause manifest an intent to submit the issue to a third-party in substitution for the courts. See Jack B. Anglin Co., Inc, 842 S.W.2d at 268. Rather, arbitration and mediation are fundamentally different methods of dispute resolution, and we believe the parties’ use of the word “mediator” and the absence of any terms indicating that third-party resolution is mandatory and/or binding is key.

Because “a party cannot be required to arbitrate unless it has agreed to do so,” the Corpus Christi Court of Appeals denied Appling’s motion to compel arbitration and affirmed the trial court’s ruling.

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