IN THE SUPREME COURT OF
TEXAS
J. M. Davidson,
Inc.
v.
Chelsey J. Webster
On Petition for Review from
the
Court of Appeals for the
Thirteenth District of Texas
Argued on December 11, 2002
Justice Schneider, joined by Justice O=Neill,
dissenting.
I
respectfully dissent. The
controversy in this case involves a company=s
arbitration policy that an employee agreed to sign after beginning his
employment. When the company sought
to enforce the arbitration policy, the trial court denied the motion to compel
arbitration. A divided court of
appeals affirmed the trial court=s
order. The Court says that the
wording in the arbitration policy is ambiguous and that the case should be sent
back to the trial court to hear evidence concerning the parties=
intent. But I would not be as hasty
as the Court to send this matter back to the trial court because I cannot
imagine what such a hearing would look like. I would, in the first instance, hold
that the policy provisions are not ambiguous. Then, in the second instance, I would
hold the employee is entitled to complete relief in this Court. The arbitration promise made by the
company is illusory, and because it is, I would affirm the court of appeals=
judgment denying the motion to compel arbitration.
FACTS
Chelsey Webster (AWebster@)
went to work for J.M. Davidson, Inc. (ADavidson@). A few days after beginning employment,
Webster signed the agreement that is at the heart of the controversy in this
matter. The document, prepared by
Davidson, is titled AAlternative
Dispute Resolution Policy@
(AADR Policy@). It is undisputed that Webster was
employed by Davidson at the time he signed the agreement.
Approximately
eleven months after commencing his employment, Webster was injured on the
job. Webster filed for workers=
compensation benefits. Then, about
one month later, Davidson terminated Webster. Webster filed suit, alleging Davidson
fired him in retaliation for filing a workers=
compensation claim. Davidson sought
to enforce the arbitration clause contained in the ADR
Policy that Webster had signed.
A hearing on Davidson=s
Motion to Compel Arbitration was held before the trial court. During the hearing, Davidson introduced
a copy of the arbitration policy signed by Webster. Davidson never signed the
agreement. But, Webster has never
complained about the absence of Davidson=s
signature.
Davidson
had the initial burden of proof to establish the arbitration agreement's
existence and to show that the claims asserted against it fell within the
arbitration agreement's scope.
See Williams Indus. Inc. v. Earth Dev.
Sys. Corp., 110 S.W.3d 131, 134
(Tex. App.BHouston
[1st Dist.] 2003, no pet.). If
Davidson had met its burden of proof, then the burden would have shifted to
Webster to show why the arbitration agreement did not apply.
Id. At the Motion to Compel Arbitration
hearing, the trial court properly considered the pleadings of the parties, the
motion to compel arbitration, and responses. See Jack B. Anglin Co. Inc. v. Tipps, 842
S.W.2d 266, 269 (Tex. 1992) (Athe
trial court may summarily decide whether to compel arbitration on the basis of
affidavits, pleadings, discovery, and stipulations.@). But, the trial court heard no live
testimony about the ADR Policy. Cf. id. (noting
that Aif
the material facts necessary to determine the issue are controverted, Athe
trial court must conduct an evidentiary hearing to determine the disputed
material facts@).
After
considering the evidence, the trial court denied the motion to compel
arbitration without stating a reason for the denial. The record must be construed in a light
favorable to supporting the judgment.
See Keller v. Nevel, 699 S.W.2d 211, 212
(Tex. 1985). Davidson appealed, and the court of
appeals affirmed the trial court.
ANALYSIS
In
deciding the motion to compel arbitration, the trial court should have
considered two issues: 1) was there a valid arbitration agreement; and 2) if so,
did the agreement encompass the claim?
See In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573
(Tex. 1999);
Dallas Cardiology Assocs., P.A. v. Mallick, 978
S.W.2d 209, 212 (Tex. App.BTexarkana
1998, pet. denied); Dalton Contractors, Inc. v. Bryan Autumn Woods, Ltd.,
60 S.W.3d 351, 353 (Tex. App.BHouston
[1st Dist.] 2001, no pet.). The
first of these issues is the subject of this appeal; thus, we must decide if the
trial court was correct in concluding there was no valid arbitration
agreement.
A. Standard of Review
We
review a trial court=s
decision to deny a motion to compel arbitration under a legal sufficiency or
Ano
evidence@
standard of review when factual findings are in dispute. See Certain Underwriters v. Celebrity
Inc., 950 S.W.2d 375, 377 (Tex. App.BTyler
1996, writ dism=d
w.o.j.).
However, in this case, the only issue before us is the trial court=s
legal interpretation of the arbitration clause; no findings of fact were
made. Thus, de novo review
is appropriate.
Id.; see also
Nationwide of Bryan, Inc. v. Dyer, 969 S.W.2d 518, 520 (Tex. App.BAustin
1998, no pet.); Dalton Contractors, Inc., 60 S.W.3d at 353.
B. Construction of the ADR Policy
Under
the guise of a de novo review of the trial court=s
legal interpretation of the agreement, the Court may not create an agreement for
the parties that is different from the one they
entered. But, the Court attempts to
do just that. The ADR Policy expressly reserves Davidson=s
right to Aunilaterally
abolish or modify any personnel policy without prior notice.@ The Court raises ambiguity as an issue
sua sponte and
concludes that this unilateral termination provision in the ADR Policy is ambiguous because Ait
is not possible to determine from the document itself whether the unilateral
termination right applies to the parties=
agreement to arbitrate, or only to >personnel
policies=
concerning the at-will employment relationship.@
__ S.W.3d __. But neither Webster,
Davidson, the trial court, nor the Court of Appeals have suggested the language
quoted above is ambiguous. I would
hold that this language regarding the unilateral termination right unambiguously
applies to the entire agreement, including the agreement to arbitrate. Although ultimately
the contract fails for lack of consideration (see discussion below), it cannot
be said that the ADR Policy is ambiguous.
1.
The ADR Policy is not ambiguous.
There
are several reasons why the document can be unambiguously read so that the
universal termination right language applies to the entire document. First, the document is entitled AAlternative
Dispute Resolution Policy,@
which suggests that the unilateral termination right contained within it would
apply to arbitration, as the title would be applicable to the entire
document. See e.g. Neece v. A.A.A. Realty Co.,
322 S.W.2d 597, 606 (Tex. 1959) (Calvert, J., dissenting) (recognizing that
the title of an agreement can have the legal effect of importing words into the
contract).
Secondly,
the unilateral termination right applies to Aany
personnel policy,@
and it is reasonable to conclude that an arbitration policy would fall under the
category of a personnel policy.
Arbitration agreements are often a part of employee manuals or personnel
policies. See e.g., In re Tenet
Healthcare Ltd., 84 S.W.3d 760, 763 (Tex. App.BHouston
[1st Dist.] 2002, orig. proceeding) (analyzing a legally binding arbitration
agreement appearing in an employee handbook containing personnel policies). Moreover, the ADR Policy was provided by an employer to be signed by an
employee, suggesting it is a personnel policy. It is not only reasonable to believe the
arbitration provision is a personnel policy of the company, it is unreasonable to reach any other
conclusion. The Court seems to
suggest that the Apersonnel
policy@
must be one or the otherBeither
a policy, or an agreement. Surely a
reasonable interpretation is that it could be both.
Webster
even promises to abide by all of Davidson=s
Apolicies@
in the ADR Policy, and it is reasonable to conclude
that Davidson wanted to retain the right to unilaterally terminate all parts of
the ADR Policy because the policy did not specifically
exempt the arbitration agreement from the unilateral termination right.
Finally,
neither Davidson nor Webster have ever argued that the
unilateral termination right did not apply to the arbitration agreement. The actions of both the parties
throughout their litigation reflect the belief that the arbitration policy is a
personnel policy. They both came to
the Motion to Compel Arbitration hearing arguing about several issues, none of
which ever raised the question of whether the arbitration policy was a personnel
policy. All of their actions
throughout the litigation are consistent with the notion that the right to
unilaterally terminate applied to the arbitration policy.
Webster
and Davidson do offer different interpretations of the unilateral termination
clause. But their differences have
nothing to do with factual issues; rather, they differ in the legal significance
of the arbitration policy.
Nevertheless, the fact that their explanations differ does not render the
contract ambiguous. See Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589
(Tex. 1996) (noting that an
ambiguity does not arise simply because parties offer conflicting
interpretations of the contract).
For an ambiguity to exist, both explanations must be reasonable.
Id. Conversely, a contract is ambiguous if
its language is subject to two or more reasonable interpretations. See Monsanto v. Boustany, 73 S.W.3d 225, 229
(Tex. 2002). Here, there is only one reasonable
interpretation of the ADR Policy, and the Court=s
insistence that it is ambiguous flies in the face of well-established rules of
construction.
2.
Finding the ADR Policy ambiguous is contrary to
well-established rules of construction.
One
of the basic tenets of contract interpretation is the assumption that the
parties intend every part of an agreement to mean something. When construing a written contract, we
are to ascertain the intent of the parties as expressed in the instrument. Nat=l
Union Fire Ins. Co. of Pittsburgh,
PA. v. CBI Indus. Inc.,
907 S.W.2d 517, 520 (Tex.
1995); 718 Assocs., Ltd. v. Sunwest N.O.P., Inc., 1 S.W.3d 355, 360 (Tex. App.BWaco
1999, pet. denied) (courts will enforce an Aunambiguous
instrument as written, and ordinarily, the writing alone will be deemed to
express the parties intentions@). Contracts are to be read as a whole, and an interpretation that gives effect to every part
of the agreement is favored so that no provision is rendered meaningless or as
surplusage.
See Westwind Exploration
Inc. v. Homestate Savings Ass=n.,
696 S.W.2d 378, 382 (Tex.
1985).
The
Court ignores these well-settled principles of contract interpretation when it
concludes the agreement is ambiguous.
Davidson=s
right to unilaterally abolish or modify any personnel policy without
prior notice must be given its plain and ordinary meaning. Thus, the unilateral termination
language must mean that Davidson can cancel or alter any personnel policy
without informing Webster. Although
I ultimately conclude that the ADR Policy is not
binding because it is illusory, the agreement is not ambiguous.
C. The ADR Policy
is unenforceable because it is illusory.
In
my view, the unilateral termination right in the ADR
Policy makes Davidson=s
performance optional as to the entire policy, and thus, renders the ADR Policy illusory.
Thus, I would find that the agreement between Davidson and Webster fails
to rise to the level of a contract as it lacks consideration.
1.
The ADR Policy does not contain
consideration.
Consideration
is an essential element for a valid, enforceable contract. Federal Sign v.
Texas S.
Univ., 951 S.W.2d 401, 408-09 (Tex.
1997). If mutual, reciprocal
promises are binding on both parties, they may constitute consideration for a
contract. Texas Gas Util. Co. v. Barrett, 460 S.W.2d 409, 412
(Tex. 1970);
Johnson v. Breckenridge-Stephens Title Co., 257 S.W. 223, 225 (Tex. Com.
App. 1924).
But,
if the terms of a promise make performance optional, the promise is illusory and
cannot constitute valid consideration. Light v. Centel Cellular Co. of
Texas, 883
S.W.2d 642, 645 (Tex. 1994) (AWhen
illusory promises are all that support a purported bilateral contract, there is
no contract.@);
Restatement (Second) of Contracts
''
2 cmt. e; 77 cmt. a. Valid consideration exists if a
party reserves the right to terminate an agreement with notice. See Restatement (Second) of Contracts '
77 cmt. b, illus. 5. But, a
termination clause that allows a party to terminate the contract at will makes performance optional, and thus, makes any promise
illusory. See Light, 883
S.W.2d at 645; see also, Tenet Healthcare Ltd. v. Cooper, 960 S.W.2d 386,
388-89 (Tex. App.BHouston
[14th Dist.] 1998, pet. dism=d
w.o.j.).
Here,
the ADR Policy reserves Davidson=s
right to Aunilaterally
abolish or modify any personnel policy without prior notice.@ Under the plain language of the
contract, Davidson reserved the right to abolish or modify any personnel
policy. As explained above, the
unilateral termination right would also apply to the agreement to arbitrate all
claims. By retaining the right to
terminate the ADR Policy at any time, Davidson can
avoid arbitration. Thus, Davidson
is not bound to its promise to arbitrate, and its promise to avoid litigation
does not amount to consideration.
See In re Halliburton, 80 S.W.3d 566, 570
(Tex. 2002) (reciprocal promises
are not sufficient if one party can avoid its promise). Because there is no
consideration for the ADR Policy, the agreement is
illusory and unenforceable.
2.
Davidson=s
attempts to create consideration fail.
In
an attempt to create consideration where none exists, Davidson claims that the
language regarding the unilateral termination right complied with contractual
mutuality requirements because, AIf...Davidson
changed the ADR policy, or abolished it altogether,
the changes would have applied to both parties.@ However, because Davidson alone had the
unilateral right to terminate or change the agreement, the agreement is
illusory. It is irrelevant that any
changes made by Davidson would apply to both parties.
Davidson
also argues that the promise to arbitrate is not illusory because, under
Halliburton, 80 S.W.3d at 570, it is bound to resolve any dispute
according to the ADR plan in effect at the time the
dispute arises. However, the
express contract terms we relied on to find the Halliburton agreement
enforceable are missing here. The
plain language of the Halliburton ADR plan required
the employer to provide notice before enacting any modifications or terminating
the plan. Davidson suggests that
because the agreement we upheld in Halliburton required notice and
prospective application, the same protective language can be implied here. I disagree.
In
Halliburton, we relied on the ADR policy=s
notice provisions to conclude that Halliburton could not Aavoid
its promise to arbitrate by amending the [policy] or terminating it
altogether.@ Halliburton, 80
S.W.3d at 570. Here, we
cannot imply the obligations that precluded Halliburton from avoiding its
promise to arbitrate. The
agreement=s
plain language establishes Davidson=s
unhindered right to modify or terminate the agreement without notice. It is not proper to imply terms that
contradict the express contract language.
See Haws & Garret Gen. Contractors, Inc. v. Gorbett Bros. Welding Co., 480 S.W.2d 607,
609-610(Tex. 1972) (the terms of
an implied contract are inferred from the circumstances).
Davidson
further attempts to explain the unilateral termination language as simply
acknowledging an employer=s
right to make changes to at-will employment terms, as in Hathaway v. Gen.
Mills, Inc., 711 S.W.2d 227, 229 (Tex. 1986). But, the arbitration agreement=s
language contradicts Davidson=s
explanation.
In
Hathaway, we held that an employer may enforce changes to an at-will
employment contract if the employer unequivocally provides notice of a definite
change and the employee accepts the change by continuing employment. Hathaway, 711
S.W.2d at 229. Here, the
contract expressly allows Davidson to effect a change in the ADR plan=s
terms without notice. Thus, it is
inconsistent to explain the reservation language as merely restating our holding
in Hathaway, because the arbitration agreement=s
terms contradict the Hathaway requirements.
Additionally,
whether an employer has satisfied the Hathaway requirements is a separate
inquiry from the determination of whether the arbitration agreement is
enforceable under traditional contract principles. If an employer seeks to change the terms
of an employment relationship by implementing an agreement to arbitrate all
disputes, the employer must show the arbitration agreement, standing alone,
satisfies all requisite elements of a valid contract. See Light, 883 S.W.2d at 645-46;
Halliburton, 80 S.W.3d at 569.
This showing is separate from the employer=s
duty to meet the Hathaway requirements of notice and acceptance.
Id.
Davidson=s
attempts to create consideration via an alternate reading of the language
of the agreement are not reasonable.
When the meaning of an agreement is plain and unambiguous, a party=s
construction is immaterial. 718
Associates, Ltd., 1 S.W.3d at 360.
I would find the contract unenforceable because it fails for lack of
consideration and is illusory.
3.
The Court incorrectly concludes that the unilateral termination right
is ambiguous.
The Court sends this case back for the trial court to consider parol evidence, finding that a fact issue exists concerning
the applicability of the language in question to the arbitration agreement. But, as discussed above, the language
unambiguously gives Davidson the right to unilaterally terminate any part of the
agreement. Thus, there is no fact
issue to be determined by the trial court and there is no need for parole
evidence to be taken.
4.
The unilateral termination right does not only apply
prospectively.
Although
I agree with Justice Smith that the contract is unambiguous and the arbitration
agreement is a personnel policy subject to Davidson=s
unilateral termination right, I cannot agree that the right to abolish or modify
personnel policies only applies prospectively with contemporaneous notice. The ADR Policy
allows Davidson to unilaterally abolish or modify any personnel policy Awithout
prior notice.@ Justice Smith looks to
England to
determine how to interpret the phrase Awithout
prior notice.@
However,
applicable precedent can be found closer to home. For example, in Shumway v. Horizon Credit Corp., 801 S.W.2d
890 (Tex. 1991), we held that the
language Awithout
prior notice@
waived the right to all notice.
801 S.W.2d at 893-94. Similarly, in Musgrave v. HCA Mideast,
Ltd., 856 F.2d 690 (4th Cir. 1988), the court interpreted a contract
providing that the employer had the right to terminate an employee=s
service Awithout
prior notice.@ The Fourth Circuit concluded that this
language Astates
simply that [the employee] could be terminated during the probation period
without notice.@ 856 F.2d at
694. Justice Smith=s
interpretation that Awithout
prior notice@
means Awith
contemporaneous notice@
is not supportedBand
indeed, is contradictedBby
caselaw from American jurisdictions.
Justice
Smith is essentially inserting a qualifying phrase into Davidson=s
unilateral, unqualified right to terminate. Even though the ADR Policy permits Davidson to Aunilaterally
abolish or modify any personnel policy without prior notice,@
Justice Smith interprets this as requiring contemporaneous notice. The agreement contains no such
limitation.
Justice
Smith also attempts to distinguish our holding in Hathaway by noting that
in that case, while we required an employer making a change to an at-will
employment policy to provide notice, we did not specify that the notice had to
be given before the change was made.
Justice Smith contends that under our decision in Hathaway, notice
could be Aeither
in advance of or contemporaneous with the policy change.@
__ S.W.3d __.
However, Justice Smith misunderstands our holding in Hathaway. In Hathaway, we explained the
employee must have knowledge of the employer=s
proposed modification to an at-will employment policy to constitute effective
notice; that is, the employee must Aknow
the nature of the changes and the certainty of their imposition.@ Hathaway, 711
S.W.2d at 229. Requiring the
employer to prove unequivocal notification of changes to the employment terms
was based, in part, on fairness to the employee. See id. The requirement that an employee
be aware that changes to the employment policy are certain to be imposed implies
that there must be prior notice. It
is unreasonable to conclude contemporaneous notice of a policy change is
permissible under Hathaway. Indeed, permitting an employer to give
contemporaneous notice of changed employment terms undermines
Hathaway=s
concerns for fairness to an employee and stretches our holding in
Hathaway too far.
Moreover,
Justice Smith confuses the Hathaway requirements for changes to an
at-will employment agreement with the requirements for a valid, enforceable
arbitration agreement. They are two separate inquiries. Even assuming Justice Smith is correct
that Davidson may give contemporaneous notice of a change to the terms of
Webster=s
employment terms under Hathaway, the arbitration clause of the ADR Policy remains illusory and unenforceable. If contemporaneous notice to cancel the
arbitration agreement is permissible, Davidson retains the right to discontinue
performance at any time. Under this
scenario, there is no consideration, as Davidson is not giving up a benefit or
suffering a detriment. See e.g.,
In re C&H News Co., No. 13-02-529-CV,
2003 WL 131770 at *4 (Tex. App.BCorpus
Christi 2003, orig. proceeding).
Thus, the arbitration clause would still be illusory and
unenforceable.
D. Enforceable arbitration agreements must
bind both the employer and the employee.
There
is no mystery to drafting an enforceable arbitration agreement. Capable counsel
know that limitations on an employer=s
right to terminate the agreement are necessary so the agreement is not
illusory. See, e.g., In re Tenet
Healthcare, Ltd., 84 S.W.3d at 766-67 (arbitration provision was enforceable
because the right to terminate the agreement specifically excepted the
arbitration agreement); In re Kellogg Brown & Root, 80 S.W.3d 611,
616 (Tex. App.BHouston
[1st Dist.] 2002, orig. proceeding) (arbitration agreement enforceable because
it provided that it could be amended or terminated by the company by giving at
least 10 days notice to employees and that such amendment would not apply to a
dispute that had been initiated); In re Jebbia,
26 S.W.3d 753, 758 (Tex. App.BHouston
[14th Dist.] 2000, orig. proceeding).
In
this agreement, however, there was no limitation to Davidson=s
right to terminate, amend, or cancel the agreement. The only consideration for the
agreement was continued at-will employment, which amounts to no
consideration. Light, 883 S.W.3d at 644.
Thus, the arbitration agreement is illusory and unenforceable.
CONCLUSION
I
disagree with the Court=s
determination that the arbitration agreement is ambiguous. I also believe the agreement is
illusory. In Halliburton, we
said that an arbitration agreement=s
terms must bind both the employer and employee if the agreement relies on mutual
promises to arbitrate for consideration.
Davidson=s
ADR Policy lacks the protections we relied on in
Halliburton to find the promises to arbitrate mutually binding. The unilateral right to modify or
terminate the agreement without notice allows Davidson to avoid its promise at
any time. Accordingly, I would hold
that the arbitration agreement between Davidson and Webster fails to bind
Davidson, and thus, the promise is illusory and the agreement is unenforceable
for want of consideration. I would
affirm the court of appeals=
judgment.
__________________________________
MICHAEL
H. SCHNEIDER
JUSTICE
OPINION
DELIVERED: December 31, 2003