Challenges to overall enforceability of a contract can be determined by an arbitrator

October 17, 2017

The parties to a dispute entered into an informal written settlement agreement, which contemplated execution of a more-formal settlement agreement later. The informal settlement agreement stated that “any disagreement result[ing] from negotiation and completion of this documentation” would be submitted to arbitration. One party argued the informal settlement agreement was wholly unenforceable because it was not approved by that party’s Board of Directors.

The court of appeals analyzed whether the arbitrator or the trial court should decide whether the entire informal settlement agreement was enforceable. The parties’ dispute concerned a challenge to the enforceability of the entire contract, rather than a challenge specifically to the arbitration provision. Under these circumstances, the court held that the arbitrator should decide whether the contract is enforceable.

It seems rather ironic that the parties are required to use the arbitration process, as set forth in the agreement, to determine whether the agreement (which contains the arbitration clause) is indeed enforceable. On the other hand, if a party challenged only the enforceability of the arbitration clause (but not the enforceability of the entire contract), most cases have held that a court should decide that dispute.

Human Biostar, Inc. v. Celltex Therapeutics Corp. , 514 S.W.3d 844 (Tex. App.–Houston [14th Dist.] Jan. 19, 2017, pet. denied).

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