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Ambiguity in Arbitration Agreements

On Behalf of | Oct 18, 2022 | Firm News

Ambiguity and Enforcement of Arbitration Agreements

The Texas Supreme Court concluded in a per curiam ruling on March 18, 2022, that three provisions in a written contract between a gentlemen’s club and a deceased employee are not so ambiguous as to render the contract’s arbitration agreement void.

In Baby Dolls Topless Saloons Inc. v. Sotero, 642 S.W.3d 583 (2022), the Supreme Court overturned the appellate court’s conclusion that there was no meeting of the minds and that the contract and its arbitration provision were unenforceable because the terms “relationship,” “license,” and “this agreement” are not always perfectly clear.

The family of Stephanie Sotero Hernandez, who died in a high-speed crash while riding in a car driven by a coworker after the two adult entertainers had left work at Baby Dolls Topless Saloons (the Club), filed the underlying lawsuit. The family claimed that the Club continued to serve Salazar alcohol despite her being inebriated.

Hernandez and the Club had signed a contract two years prior granting Hernandez permission to perform at the Club. A comprehensive arbitration clause was inserted in the contract. In response to the lawsuit, the Club filed a motion to compel arbitration. The trial court denied this motion.

A divided court of appeals affirmed the trial court’s decision, agreeing with the family that the contract’s lack of definiteness and vagueness in its use of the terms “relationship,” “license,” and “this agreement” rendered it unenforceable. Specifically, the court of appeals pointed to an inconsistency in the treatment of the terms “this agreement” and “the license” throughout the contract.

In reversing the appellate court’s decision, the Court explained that courts should construct contracts to prevent forfeitures whenever possible, including by implying conditions that can be fairly implied.

In concluding that the agreement was not ambiguous, the Court was particularly interested in a passage concerning the contract’s duration clause: “This Agreement . . . shall terminate on December 31 [2017] . . . . The License shall thereafter be automatically extended for successive one-year periods running from January 1 through December 31 of each year thereafter.”

According to the Court, the provision can be interpreted as an automatic renewal because it states that Hernandez’s license will be automatically renewed until the parties agree otherwise. The duration provision, according to the Court, refers the parties to other parts of the contract for examples of “License Termination” events. The section “indicates that the agreement itself contains the conditions specifying and managing the license” by referring to additional contract articles, resolving any purported ambiguity.

“The family’s claim, and the court of appeals’ ruling, that Hernandez and the Club never reached an agreement on the contract obscures the fact that they worked under it for over two years, week after week, before Hernandez’s terrible death.” The Court wrote, “We hold that the parties established the agreement indicated in the contract they signed.”

The Court also addressed the family’s claim that, even if a legitimate contract existed at one time, it had lapsed by the time Hernandez was killed. According to the Federal Arbitration Act’s separability concept, an arbitrator should answer such a question.

The Court reversed the court of appeals’ judgment and remanded the case to the trial court with instruction to grant the motion to compel arbitration.

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