432 S.W.3d 470
Tex. App.2014Background
- Schmidt Land Services and UniFirst entered sequential customer service agreements in 2010 and 2012 for uniform rental/cleaning services; Schmidt later alleged poor performance and terminated the 2012 Agreement.
- Schmidt sued in district court seeking declaratory relief, alleging the 2012 Agreement was obtained by fraud in the inducement and was rescinded; it also sought a declaration that the 2010 Agreement was terminated.
- Both the 2010 and 2012 Agreements contained broad arbitration clauses covering disputes "arising out of or relating to the negotiation, formation or performance of this Agreement."
- UniFirst moved to compel arbitration; the trial court dismissed Schmidt’s declaratory-judgment action and ordered arbitration.
- On appeal Schmidt argued the whole contract (including the arbitration clause) was void ab initio because fraud vitiated its consent, so a court—not an arbitrator—should decide the fraud claim.
- The Fourth Court of Appeals evaluated whether Schmidt challenged the arbitration clause specifically or only the contract as a whole and applied federal/severability precedent.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Who decides alleged fraud in the inducement of the contract containing an arbitration clause? | Schmidt: fraud vitiated consent to the entire contract, so the court must decide formation/voidness (arbitration clause unenforceable). | UniFirst: arbitration clause is severable; because Schmidt challenges the contract as a whole (not the arbitration clause), arbitrator decides validity. | Held: Arbitrator decides. Schmidt challenged the contract as a whole and did not specifically attack the arbitration clause or its scope; under federal severability precedent the arbitration agreement is enforceable and arbitrator decides fraud. |
Key Cases Cited
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (arbitration clause severable; challenge to entire contract goes to arbitrator)
- Rent-A-Ctr., West, Inc. v. Jackson, 561 U.S. 63 (party-specific challenge to arbitration clause must be decided by court; challenges to contract as a whole go to arbitrator)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (fraud in inducement of entire contract is for arbitrators unless arbitration clause itself is challenged)
- Granite Rock Co. v. Int’l Brotherhood of Teamsters, 561 U.S. 287 (disputes about contract formation are generally for courts, but does not displace severability rule where contract was formed)
- In re Labatt Food Serv., L.P., 279 S.W.3d 640 (Tex.) (distinguishing challenges to arbitration clause vs. whole contract)
- Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex.) (fraud must relate specifically to arbitration provision to render it unenforceable)
- In re Rubiola, 334 S.W.3d 220 (Tex.) (scope challenges to arbitration are for courts)