In this entry of the Texas Civil Trial Blog, we are wondering what the Texas Supreme Court is going to say about your contract’s severability clause. Specifically, whether a general severability clause in a contract applies to an arbitration provision that does not have a separate severability clause.
The Texas Supreme Court heard oral argument yesterday on that issue in a case where the contract contained a severability provision, but the arbitration provision did not. We will soon know if you have to specifically insert a severability clause in your arbitration provision. If the Texas Supreme Court decides you do, we suggest you immediately revise all of your arbitration provisions to include one.
The Court of Appeals for the 11th District of Texas has ruled that trial court did not err when it did not sever the unconscionable terms of an arbitration agreement from the remainder of the agreement and invalidated the entire arbitration agreement.
Venture Cotton Cooperative & Noble Americas Corp. v. Freeman, 395 S.W.3d 272 (Tex. App.-Eastland 2013, pet. filed).
Noble Americas and Venture Cotton filed a motion to compel arbitration against several farmers who sued to challenge terms of their contracts for Noble Americas to market their cotton. The farmers argued an arbitration agreement governing the dispute was unconscionable because it would allow the companies, but not the farmers, to recover attorneys’ fees.
Noble Americas and Venture Cotton argued that, when considering a motion to compel, the trial court should consider the arbitration agreement separate and apart from the remainder of the contract. The farmers then contended that the companies waived this argument because, in their motion to compel arbitration, Noble Americas and Venture Cotton argued that the severability clause saved the contract as a whole from the unconscionable arbitration agreement, not that the severability clause saved arbitration agreement itself from its unconscionable terms.
The Court’s analysis:
The court determined that while it is true that the contract contains a severability clause, neither the arbitration agreement nor the arbitration rules do. Thus, when the companies sought enforcement of the arbitration agreement in the trial court, they could not have been seeking enforcement of the severability clause because it was not included in the arbitration agreement or in the arbitration rules.
Proceedings in the Supreme Court:
In hearing this case, the Texas Supreme Court will clarify whether a severability clause contained in an overarching contract, which also contains an arbitration agreement, will remove the unconscionable provisions from the arbitration agreement. This will be interesting because an arbitration agreement is usually considered separate from the entire contract. However, the Court has largely favored arbitration. If this decision were to stand, you could potentially end up with a situation where counsel seeking to compel arbitration could waive arbitration for their client by failing to argue a motion to compel correctly.