in Re Stewart & Stevenson, LLC, MTU Detroit Diesel, Inc.

Citation: Not availableDocket: 01-09-00111-CV

Court: Court of Appeals of Texas; November 4, 2009; Texas; State Appellate Court

Original Court Document: View Document

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On November 5, 2009, the Court of Appeals for the First District of Texas issued a memorandum opinion regarding a consolidated interlocutory appeal and a petition for writ of mandamus involving Stewart Stevenson, LLC, and MTU Detroit Diesel, Inc. (collectively, "Stewart Stevenson") as appellants against Galveston Party Boats, Inc. and Boat Service of Galveston, Inc. (collectively, "GPB") as appellees. The appeal challenged the trial court’s December 17, 2008 order that denied Stewart Stevenson’s motion to compel arbitration in a lawsuit arising from faulty marine engines manufactured by MTU and sold by Stewart Stevenson, for which GPB sought recovery.

Stewart Stevenson raised three issues claiming the trial court abused its discretion by (1) denying the motion to compel arbitration, (2) not holding an evidentiary hearing on the motion, and (3) allowing inadmissible evidence in GPB’s response. The appellate court dismissed the interlocutory appeal for lack of jurisdiction and denied the writ of mandamus.

The background involves a business relationship established in 2000 between Stewart Stevenson and GPB. In 2004, GPB sought funding from the Texas Commission on Environmental Quality (TCEQ) to purchase low-emission diesel engines. GPB submitted a grant application and informed TCEQ of the assignment of payment rights to Stewart Stevenson for engines and generators purchased under a prospective grant contract. On August 25, 2004, GPB entered into a contract with TCEQ for reimbursement of up to $445,350 for the engine replacement, contingent upon meeting TCEQ's conditions and proper documentation of expenses. The contract allowed GPB to assign payments to entities providing the goods or services, subject to TCEQ’s approval.

In September 2004, the Texas Commission on Environmental Quality (TCEQ) issued a Notice to Proceed to Galveston Party Boats, Inc. (GPB) for a contract worth $445,350, contingent upon receiving funds for the grant. This allowed GPB to commence activities outlined in the contract and submit Requests for Reimbursement. Stewart. Stevenson subsequently sent a sales quote to GPB on September 22, 2004, confirming TCEQ's approval of the grant and providing project specifications. The project's total cost was $587,626, with TCEQ reimbursing $445,350, leaving GPB responsible for the remaining $142,276. 

The sales quote included costs for engines, generators, and installation, alongside terms for payment and buyback of scrapped cores. GPB's M/V Cavalier began its voyage with new engines on April 12, 2005, and four additional engines were installed in the M/V New Buccaneer by May 17, 2005. GPB made a down payment of $60,006 to Stewart. Stevenson on August 17, 2005, after TCEQ funded the engine costs. A series of invoices documented these transactions, including a verbal sale for the initial two engines and subsequent invoices for four more, detailing shipping dates and commissions paid to an emission reduction specialist. Each invoice stipulates that sales are governed by stated terms and conditions, which include a binding arbitration clause for any disputes related to the sales.

Definitions included in the invoice clarify key terms: "Goods" refers to machinery and equipment sold by the Seller; "services" denote labor provided by the Seller; "Seller" is the entity selling these Goods or Services; and "Buyer" is the recipient of such Goods and Services. Stewart Stevenson contends that GPB did not object to the arbitration clause within the invoices, while GPB claims it did not receive the invoices on the specified dates and alleges that Stewart Stevenson fraudulently created them ten months after engine installation. GPB asserts it received these invoices in January 2006, signing a handwritten agreement with Stewart Stevenson on January 31, 2006, which acknowledged a total invoiced amount of $505,356, including various credits and payments. GPB reports significant issues with the engines shortly after installation, leading to multiple warranty claims and additional expenses. The service work by Stewart Stevenson was also invoiced under the same arbitration clause. Subsequently, GPB filed a lawsuit against Stewart Stevenson, MTU Detroit Diesel, and other engine component manufacturers, citing multiple causes of action including fraud and breach of warranty. On August 1, 2008, Stewart Stevenson moved to compel arbitration based on the invoices' arbitration provision and argued that GPB's long-standing relationship with them indicates GPB was aware of this provision. Stewart Stevenson also moved to transfer venue. The Arbitration Program outlined in the invoices allows for arbitration of any disputes arising from the agreement or related documents, regardless of the legal basis.

Incidents causing injury between parties, including acts, omissions, or any aspect of their relationships, are defined as a "Dispute" and will be resolved through binding arbitration under the Arbitration Program terms. Any party may seek court action to compel arbitration. The arbitration will be administered by the American Arbitration Association (AAA) and governed by its Commercial Arbitration Rules and the Federal Arbitration Act (FAA), which takes precedence over any conflicting state laws. GPB contends it did not receive Stewart & Stevenson’s Arbitration Program prior to the dispute and filed a motion challenging the validity of the arbitration terms in the invoices, arguing there was no valid contract for arbitration due to a prior verbal agreement. On December 17, 2008, the trial court denied the motion to compel arbitration, ruling the terms on the invoices unenforceable and the agreement to arbitrate invalid. The court granted GPB's motion for partial summary judgment. The applicability of the FAA or the Texas General Arbitration Act (TAA) is examined, with the FAA preempting state laws under the Supremacy Clause, as it applies to contracts involving interstate commerce, evidenced by various factors including locations of business operations and transactions.

The party seeking to compel arbitration must demonstrate its entitlement under the Federal Arbitration Act (FAA). In this case, the arbitration clause explicitly stated that the FAA applied, concerning a transaction involving engines manufactured by MTU Detroit Diesel and parts from Honeywell International, which involved interstate commerce. Therefore, the FAA is applicable. Mandamus relief may be granted if the trial court failed to compel arbitration, with the requirement that a petition for writ of mandamus must be filed following a trial court's denial of arbitration or a stay of litigation.

Stewart & Stevenson contends the trial court wrongly denied its motion to compel arbitration, arguing the court abused its discretion by deeming the invoice terms unenforceable, asserting that a valid arbitration agreement existed or was modified through GPB's acceptance of the engines, that an implied contract arose from the parties' dealings, or that GPB ratified the arbitration provision by accepting the engines. 

The standard for mandamus relief focuses on correcting a clear abuse of discretion or violation of legal duty when no adequate legal remedy exists. To compel arbitration under the FAA, the existence of a valid arbitration agreement and the inclusion of claims within its scope must be shown. The trial court's ruling on the validity of the arbitration agreement is reviewed de novo, with state contract law guiding such determinations. While there is a strong presumption favoring arbitration, this arises only after proving a valid arbitration agreement exists.

Arbitration is fundamentally contractual, meaning that parties are not compelled to arbitrate unless they have mutually agreed to do so, as established by the Federal Arbitration Act (FAA). The court must first ascertain the existence of a valid arbitration agreement. In the case at hand, Stewart & Stevenson contends that GPB challenges the entire contract instead of the arbitration clause specifically, asserting that the issue of contract validity should be resolved by an arbitrator, referencing the Supreme Court's ruling in Buckeye Check Cashing, which stated that questions of a contract's legitimacy, including arbitration clauses, are determined by arbiters unless the agreement itself is void for illegality.

However, GPB argues there was never an agreement to arbitrate. The trial court’s role is to evaluate whether a valid arbitration agreement exists, as noted in precedents. Stewart & Stevenson claims that an arbitration agreement was formed through invoices labeled "Engine Purchase and Service Contracts," asserting GPB's payment implied acceptance of the arbitration clause. In contrast, GPB maintains there was no meeting of the minds regarding arbitration.

For a valid contract, there must be an offer, acceptance, mutual agreement on terms, and execution that shows intent to be bound. Both written and oral contracts require these elements to be enforceable. A meeting of the minds, essential for contract validity, is determined by an objective assessment of the parties' communications and actions. The completeness of a contract is judged by whether it includes all necessary terms, a matter of law evaluated on a case-by-case basis.

In T.O. Stanley Boot Co. v. Bank of El Paso, the Texas Supreme Court emphasizes that contracts should be assessed individually to identify their material terms. A valid contract for sale requires three key elements: (1) the object of the contract, (2) the price or consideration, and (3) the mutual consent to exchange the object for the price. The contract at issue involved Stewart Stevenson supplying engines to GPB under a TCEQ contract, which included three documents. 

The first document was a contract from TCEQ to GPB, dated August 25, 2004, where TCEQ agreed to reimburse GPB up to $445,350 for replacing old engines, contingent on GPB documenting receipt of goods and the payment owed to Stewart Stevenson. The second document was a Notice to Proceed from TCEQ to GPB in mid-September 2004, indicating fulfillment of the conditions for GPB to continue with the project. The final document was a sale quote letter from Stewart Stevenson to GPB, detailing project specifications, total costs of $587,626, and GPB's responsibility for the remaining $142,276.

The court found that the agreement encompassed all necessary terms for a binding contract, confirmed by the parties' performances. Notably, the agreement did not include an arbitration provision; such a provision appeared only in invoices related to an existing agreement between Stewart Stevenson and GPB. These invoices were deemed acknowledgments of the existing contract rather than new agreements, lacking specific negotiated terms. Thus, there was no meeting of the minds regarding the arbitration clause. Additionally, Stewart Stevenson contended that GPB's purchase of extended warranties was separate and that there was an agreement on the arbitration provision due to GPB's acceptance and use of the warranties.

Stewart Stevenson’s claims regarding the arbitration provision related to the purchase of extended warranties for engines lack evidentiary support. The warranties were integrated into the overall transaction, as reflected in the same invoices, and there was no indication of a separate agreement to arbitrate terms. The court found that there was no meeting of the minds between GPB and Stewart Stevenson on this matter. 

Contract modification is considered an affirmative defense, requiring proof of the parties' intentions and a meeting of the minds supported by consideration. Stewart Stevenson failed to demonstrate any modification of their agreement with GPB to include an arbitration provision, as GPB’s acceptance and payment for the engines adhered to the original contract terms.

Additionally, GPB did not accept the arbitration provision through its subsequent dealings with Stewart Stevenson. An implied-in-fact contract necessitates mutual intention to contract, determined by the parties’ conduct. A valid contract does not require signatures from both parties, but mutual assent must be evident from the parties' actions. The concept of a course of dealing establishes a common understanding that aids in interpreting the parties' conduct. The court noted that acquiescence to a contract could be implied through affirmative actions, such as continued acceptance of goods and services.

Failure to object to a unilateral interest charge does not imply an agreement to pay interest between the parties. Similarly, GPB's lack of objection to Stewart Stevenson’s inclusion of an arbitration clause in an invoice does not signify an agreement to arbitrate. GPB’s acceptance of goods and services does not demonstrate acceptance of the arbitration provision, particularly as there was no prior similar transaction between the parties. Texas law indicates that acceptance and payment for goods do not equate to acceptance of all terms in a seller's acknowledgment. Courts have varied in their approaches to establishing arbitration agreements through a course of dealing, typically requiring that arbitration be a recognized custom in the industry. Given that GPB and Stewart Stevenson had an existing contract without an arbitration clause and lacked prior dealings under similar agreements, GPB's actions did not establish notice of mandatory arbitration. Furthermore, GPB did not ratify the arbitration provision, as ratification requires explicit acknowledgment or performance under the contract, which GPB did not provide. Lastly, the argument that the invoices were incorporated into a prior handwritten agreement between the parties is based on the doctrine of incorporation by reference, which allows unsigned documents to be included in signed agreements.

The document emphasizes the importance of explicit references in agreements for incorporating terms from other writings. A general mention, such as "invoiced amounts," fails to sufficiently notify a party of related provisions, thereby not establishing a valid arbitration agreement between Stewart & Stevenson and GPB. Consequently, the trial court did not err in denying the motion to compel arbitration. 

Additionally, Stewart & Stevenson claimed that the trial court should have conducted an evidentiary hearing due to conflicting affidavits. However, the court can decide on arbitration motions based on existing documents without a hearing unless material facts are in genuine dispute. In this case, the affidavits did not present such facts, leading to the conclusion that the trial court acted correctly in its findings.

Stewart & Stevenson further contended that the trial court improperly considered inadmissible evidence in GPB's response to the motion. However, since the key issue revolved around the existence of a valid arbitration agreement, which was determined without the contested evidence, the court found that it was unnecessary to address the admissibility of the affidavits. The interlocutory appeal was dismissed for lack of jurisdiction, and the petition for writ of mandamus was denied.