In a recent decision, Lennar Homes of Texas v. Rafiei, No.22-0830, 2024 WL 1470909, (Tex. April 5, 2024), the Texas Supreme Court addressed, again, the respective roles of arbitrators and courts in determining “arbitrability” questions in disputes potentially subject to arbitration agreements.

The arbitration agreement stated the arbitration would be in accordance with AAA rules. Under Texas law and in most jurisdictions that have considered the issue, when an arbitration agreement is subject to the rules of AAA or similar organizations, the arbitrator decides most “arbitrability” issues. The arbitrator’s role in such cases includes ruling on an assertion by a party that the arbitration agreement was unconscionable due to prohibitive costs, thus rendering the agreement to arbitrate unenforceable.

While reaffirming that arbitrators generally decide arbitrability in matters subject to AAA rules, the Court acknowledged in this case that the trial court must decide when a party asserts that even submitting the arbitrability issue to arbitration is cost prohibitive.

The ruling arose when a homebuyer contested the enforceability of an arbitration clause, arguing it was unconscionable due to prohibitive costs. The homebuyer argued that even submitting the question of arbitrability to the arbitrator was cost prohibitive. The trial court ruled that arbitration was prohibitively costly and refused to compel arbitration. The Court ruled that the trial court’s role in such a case was to determine if the party resisting arbitration has demonstrated that having the arbitrator determine arbitrability was cost prohibitive (as opposed to the arbitration itself being cost prohibitive). The Court ruled that the evidence on this point “fails to support a finding that the parties’ delegation clause is itself unconscionable due to prohibitive costs to adjudicate this threshold issue in arbitration.” The Texas Supreme Court remanded the case to the trial court and expressly did not address if the arbitration agreement as a whole was unconscionable, as that is left to the arbitrator.

Material for this case of interest was prepared by James E. Smith, a colleague and shareholder in the Environmental Practice of Crain Caton & James.

No information in this communication is intended to constitute specific legal advice.  For specific legal advice, please contact an attorney, and if you have any such questions or would like more information about this issue, please contact William “Pat” Huttenbach at 713.752.8616, or email at phuttenbach@craincaton.com.

Thanks,

Pat

William “Pat” Huttenbach | Shareholder | Banking Litigation
Crain Caton & James | Attorneys & Counselors
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Lennar Homes of Texas Inc v Rafiei.pdf