Opinion issued May 22, 2003
In The
Court of Appeals
For The
First District of Texas
NO. 01-02-01228-CV
IN RE KRAFT FOODS NORTH AMERICA, INC. AND SUPERIOR AGRESOURCE, INC., Relators
Original Proceeding on Petition for Writ of Mandamus
MEMORANDUM OPINION
By petition for writ of mandamus, relators, Kraft Foods North America, Inc. (Kraft) and Superior AgResource, Inc., challenge the trial court’s September 30, 2002 order denying their motion to compel arbitration between them and real party in interest, Trafalgar Holdings, Inc. (Trafalgar). We conditionally grant the petition.
Factual and Procedural Background
Kraft manufactures food products. As a result of the manufacturing process, Kraft produces food-waste byproducts. Kraft built a facility in Goshen, California to process the food waste into animal feed. The Goshen facility never became fully operational, and Kraft decided to sell it. Kraft determined that the buyer of the facility should possess expertise in the processing of food waste. Kraft also desired to enter into a contract to process its food waste on a nationwide basis with whomever purchased the Goshen facility. To this end, in 1994, Kraft began negotiations with Trafalgar, a company that had extensive experience in managing and operating plants that processed food waste into animal feed. As part of the negotiations, Kraft and Trafalgar entered into an “Interim Agreement” on April 17, 1997.
With regard to its purpose and term, the Interim Agreement provided as follows:
(a) Purpose. The purpose of this Agreement is to document the arrangement whereby [Trafalgar] is granted the opportunity to observe the operation of the Goshen facility first-hand and to make suggestions to [Kraft] management regarding changes to the operation of the Goshen Facility which will enable [Trafalgar] to determine whether the Goshen Facility has processing and economic viability to and for [Trafalgar’s] purposes, such that [Trafalgar] desires to purchase it. Additionally, [Trafalgar] will undertake such activities as it deems necessary to enable itself to determine whether it desires to construct facilities to process the Organic Waste streams of [Kraft’s] facilities in those regions under a supply agreement whereby [Trafalgar] will handle, transport, and process [Kraft’s] Organic Waste streams from all or the vast majority of its manufacturing facilities nation-wide (“Supply Agreement”) . . . .
(b) Term. [Trafalgar] understands and agrees that [Kraft’s] needs dictate that a decision be made on or before July 31, 1997, as to whether [Kraft] will sell and [Trafalgar] will buy the Goshen facility, [Trafalgar] will construct a facility to service [Kraft’s] facilities in the Northeast, and [Kraft] and [Trafalgar] will enter into a Supply Agreement. Therefore, [Trafalgar] must advise [Kraft] in writing on or before such date that it intends to purchase the Goshen facility and to enter into a Supply Agreement and to construct a facility in the Northeast in order to perform its services under the Supply Agreement, all subject to the execution of mutually agreed contracts for same. If [Kraft] does not receive such notice by such date, this Agreement shall be terminated thereafter, and neither party shall have any further obligations hereunder, other than such as arose prior to such termination, unless this Agreement is extended by the written agreement of the parties.
The Interim Agreement gave Trafalgar a “Right of First Negotiation,” described as follows:
In the event that on or before July 31, 1997, [Trafalgar] notifies [Kraft] in writing that, it has completed its due diligence relating to the Goshen Facility, [Kraft’s] Organic Waste streams, and the proposed Northeast animal feed facility, and, as a result thereof, has determined that it desires to purchase the Goshen facility, to enter into the Supply Agreement with Company, and that it intends to construct an animal feed facility . . . [,] [t]he parties hereby agree to negotiate in good faith for a mutually acceptable definitive agreement for the sale and purchase of the Goshen facility; and for a mutually acceptable Supply Agreement.
Although it had not yet “observed” the Goshen facility, Trafalgar sent a letter to Kraft dated July 31, 1997, stating that Trafalgar desired to begin negotiations to purchase the facility and to execute the Supply Agreement. In response, Kraft’s in-house counsel sent Trafalgar a letter dated August 5, 1997, acknowledging that Kraft had received Trafalgar’s July 31 letter. Kraft’s August 5 letter also stated that Trafalgar had failed to complete its due diligence of the Goshen Facility and outlined numerous other concerns that Kraft had that were related to Trafalgar’s proposal. Kraft concluded the letter by stating,
[P]lease understand that Kraft cannot commit to commencing negotiations under the Interim Agreement for either the sale of Goshen facility or a long-term supply agreement until such time as it has sufficient information to determine whether Trafalgar’s proposal is feasible, cost effective, timely and will fulfill Kraft’s needs.
On August 28, 1997, Kraft’s in-house counsel sent another letter to Trafalgar, which stated in relevant part as follows:
Please be advised that we will not at this time extend the Interim Agreement which expired July 31, since Trafalgar still has not provided enough specific information to Kraft for Kraft to be able to evaluate the proposal for Trafalgar to purchase Kraft’s Goshen facility and to provide organic waste disposal services to Kraft. The information Kraft needs was discussed at some length this morning, and this letter will reconfirm those needs. . . .
We are looking to Trafalgar to send to us a detailed written proposal and terms for the purchase of the Goshen facility, and a separate detailed written proposal for implementation of the organic waste disposal system Trafalgar is recommending for Kraft’s Lowville facility. . . .
. . . .
As you know, we continue to fight time constraints in addressing and resolving our organic waste disposal issues, . . . . Therefore we must ask that you respond to all of the above, other than the Lowville information no later than October 1, 1997. If we do not receive all of the requested information by that date, we will be forced to recommence also pursuing third party alternative solutions for disposing of our organic wastes.
As we discussed today, we continue our data collection efforts for Lowville, as well as our efforts to ready the Goshen facility for a full speed production run. We ask that you sign this letter below and return it to me. To acknowledge and confirm the above and that the provisions set forth in Sections 6 [“No Conflict of Interest; Proper Conduct; Covenant Not to Compete”], 7 [“Confidential Information and the Results of Services”], and 11 [“Indemnification”] will apply with respect to Kraft’s confidential information and with respect to Trafalgar’s actions in furtherance of the above. . . .
Trafalgar later signed the August 28 letter and returned it to Kraft. Despite continued negotiations between Kraft and Trafalgar, Kraft ultimately sold the Goshen facility to another party in 2000.
Trafalgar and Peter Smetek & Associates, Inc. filed suit against Kraft and Superior AgResource, Inc. asserting claims based on fraudulent inducement, negligent misrepresentation, quantum meruit, breach of contract, breach of fiduciary duty, unjust enrichment, conversion, and misappropriation of trade secrets. In its Second Amended Petition—the live pleading at the time that the trial court denied the motion to compel arbitration—Trafalgar made the following factual allegations in support of its claims:
• In 1994, Kraft approached Trafalgar to enter into a transaction to purchase certain assets, including the Goshen facility and the right to procure all organic waste from Kraft (“subject assets”).
• In November 1994, Kraft represented that the value of the subject assets over a 10-year period would be $1,300,000,000.
• Trafalgar began an investigation of the representations made by Kraft regarding the subject assets. Trafalgar discovered that many of the representations were false or inaccurate.
• In September 1997, Trafalgar visited the Goshen plant. Trafalgar discovered that the processes at the facility were flawed and inefficient.
• Throughout the parties’ relationship, Kraft requested Trafalgar to formulate recommendations regarding enhancing the profitability of the Goshen facility and assisting Kraft in handling certain environmental problems.
• Trafalgar rendered consulting services to Kraft, for which Kraft agreed to pay, or for which it should have to pay.
• In November 1997, representatives of Trafalgar and Kraft met and reached a final agreement on all material terms for Trafalgar to acquire the subject assets.
• The terms and finality of the agreement were confirmed in subsequent meetings; however, the agreement was never reduced to writing.
• With regard to the consulting services that Trafalgar provided to Kraft, Trafalgar set an artificially low fee. Trafalgar did so based on the understanding that it would acquire the subject assets at the conclusion of performing the consulting services.
• Trafalgar continued to render consulting services to Kraft through January 1998.
• Trafalgar’s fee for the consulting services rendered to Kraft was $1,005,000; Kraft paid $319,000 of that fee.
• In November 1997, Kraft suggested that the then-outstanding balance of the fees be applied toward the purchase price of the subject assets. Trafalgar agreed to forego the payment of its fees on this basis.
• Kraft ultimately sold the subject assets to another party.
• In November 1997, Kraft misrepresented its intention to sell Trafalgar the subject assets. Alternatively, if Kraft intended to sell the subject assets to Trafalgar in November 1997, Kraft subsequently decided to sell the subject assets to another party and failed to disclose that fact to Trafalgar.
• Trafalgar relied on these misrepresentations by Kraft to its detriment in (1) continuing to provide consulting services at a reduced fee; (2) agreeing to apply its outstanding fees for consulting services to the purchase price of the subject assets; (3) providing Kraft with Trafalgar’s trade secret information; and (4) spending time, money, and effort in continuing to negotiate with Kraft regarding the purchase of the subject assets.
Kraft filed a motion to compel arbitration based on an arbitration provision found in section 20 of the Interim Agreement, which “provision” provided, in relevant part, as follows:
[Trafalgar] and [Kraft] shall and do hereby irrevocably submit and consent to resolve all disputes, claims, or other actions arising out of or related to this Agreement by arbitration in the State of Illinois in accordance with the then current commercial rules of the American Arbitration Association and hereby irrevocably waive any and all objections to arbitration. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Section 1–16 (as may be amended) . . . .
Importantly, section 24 of the Interim Agreement contained a “survivability” provision, which stated, “The provisions of Sections 6(c), 6(d), 7, 9, 11, 19, 20 and this Section 24 will survive any termination of this Agreement.” Thus, the arbitration provision expressly survived the termination of the Interim Agreement.
Trafalgar filed a response in opposition to Kraft’s motion to compel arbitration. Trafalgar asserted that Kraft’s August 28 letter revoked the arbitration agreement and that its claims in the lawsuit did not arise out of, or relate to, the Interim Agreement. The trial court denied Kraft’s motion to compel arbitration. This petition for mandamus followed.
Standard of Review
In the arbitration provision of the Interim Agreement, the parties agreed to arbitrate under the Federal Arbitration Act (FAA). 9 U. S. C. §§ 1–16. Thus, the trial court’s ruling is reviewable by mandamus, rather than by interlocutory appeal. Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 272 (Tex. 1992).
A writ of mandamus will issue to correct a clear abuse of discretion for which the remedy by appeal is inadequate. Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992). With respect to factual issues, an abuse of discretion is shown if the trial court could reasonably have reached only one decision and failed to do so. Id. at 839-40. With respect to questions of law, however, “[a] trial court has no ‘discretion.’ ” Id. at 840. Therefore, “a clear failure by the trial court to analyze or apply the law correctly will constitute an abuse of discretion.” Id.
Discussion
A. Law of Arbitration under the FAA
When a party asserts a right to arbitrate under the FAA, the question of whether the dispute is subject to arbitration is determined under federal law. Prudential Secs. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex. 1995). As a matter of federal law, any doubts concerning the scope of arbitrable issues are resolved in favor of arbitration, whether pertaining to the construction of the contract or a defense to arbitration. See In re Serv. Corp. Int’l, 85 S.W.3d 171, 174 (Tex. 2002).
In determining whether to compel arbitration, a court must decide two issues: (1) whether a valid, enforceable arbitration agreement exists and, (2) if so, whether the claims asserted fall within the scope of the agreement. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex. 1999). A court has no discretion and must compel arbitration if the answer to both questions is affirmative. In re Tenet Healthcare, Ltd., 84 S.W.3d 760, 765 (Tex. App.—Houston [1st Dist.] 2002, orig. proceeding).
B. Was there a valid, enforceable agreement to arbitrate?
“‘A party cannot be required to arbitrate unless it has agreed to do so.’” Trico Marine Servs., Inc. v. Stewart & Stevenson Technical Servs., 73 S.W.3d 545, 548 (Tex. App.—Houston [1st Dist.] 2002, no pet.) (combined appeal and orig. proceeding) (quoting Hou-Scape, Inc. v. Lloyd, 945 S.W.2d 202, 205 (Tex. App.—Houston [1st Dist.] 1997, orig. proceeding)). “The parties’ agreement to arbitrate must be clear. In this determination, Texas contract law applies.” Trico Marine Servs., 73 S.W.3d at 548 (citations omitted). Trafalgar disputes the existence of a valid, enforceable arbitration agreement. Whether an enforceable agreement to arbitrate exists is a legal question entitled to de novo review. Mohamed v. Auto Nation USA Corp., 89 S.W.3d 830, 835 (Tex. App.—Houston [1st Dist.] 2002, no pet.) (combined appeal and orig. proceeding); In re Kellogg Brown & Root, 80 S.W.3d 611, 615 (Tex. App.—Houston [1st Dist.] 2002, orig. proceeding).
A party seeking to compel arbitration has the initial burden to establish the arbitration agreement’s existence and to show that the claims asserted fall within the agreement’s scope. Mohamed, 89 S.W.3d at 836; Kellogg Brown & Root, 80 S.W.3d at 615. If the party seeking arbitration carries its initial burden, the burden then shifts to the party resisting arbitration to present evidence on its defenses to the arbitration agreement. Oakwood Mobile Homes, 987 S.W.2d at 573; Mohamed, 89 S.W.3d at 836.
Kraft attached a copy of the Interim Agreement, containing the arbitration provision, to its motion to compel arbitration. Thus, Kraft met its burden of presenting evidence of an arbitration agreement between it and Trafalgar. See In re Conseco Fin. Serv. Corp., 19 S.W.3d 562, 569 (Tex. App.—Waco 2000, orig. proceeding). To avoid being compelled to arbitrate claims within the scope of that agreement, Trafalgar had to come forward with “grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. § 2 (1997).
Trafalgar does not deny that the Interim Agreement contained an arbitration provision; rather, it contends that Kraft’s August 28 letter modified the Interim Agreement and constituted a new contract between the parties, taking the place of the Interim Agreement. Trafalgar points out that this new agreement did not incorporate the arbitration provision and, in fact, purposefully excluded it. In support of this contention, Trafalgar cites to the following language in the August 28 letter:
. . . We ask that you sign this letter below and return it to me to acknowledge and confirm the above and that the provisions set forth in Sections 6 [“No Conflict of Interest; Proper Conduct; Covenant Not to Compete”], 7 [“Confidential Information and the Results of Services”], and 11 [“Indemnification”] will apply with respect to Kraft’s confidential information and with respect to Trafalgar’s actions in furtherance of the above. . . .
Trafalgar claims that this language created a new survivability provision. It points out that conspicuously absent from the “new” survivability provision is section 20 of the Interim Agreement—the arbitration provision.
Kraft asserts that the arbitrator, and not the trial court, should decide the effect of the August 28 letter agreement. We disagree.
The facts here are analogous to those in Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (Tex. App.—Houston [14th Dist.] 1999, no pet.). In Valero, the court addressed whether an arbitration clause had been revoked by a subsequent settlement agreement between the parties. Id. at 586. The Valero court recognized that it was for the court to determine whether a later agreement between the parties revoked an arbitration clause because “[w]ithout an agreement to arbitrate, arbitration cannot be compelled.” Id. (quoting Freis v. Canales, 877 S.W.2d 283, 284 (Tex. 1994)). After considering the subsequent settlement agreement between the parties, the court held that it modified only certain enumerated provisions in the parties’ original contract and that the arbitration clause was not one of them. Valero, 2 S.W.3d at 588-89.
Based on Valero, we agree with Trafalgar that it was appropriate for the trial court in this case to determine whether the August 28 letter between the parties served to revoke effectively the arbitration provision. However, also relying on the reasoning in Valero, we disagree that the August 28 letter served to revoke the arbitration agreement contained in the Interim Agreement. Nothing in Kraft’s letter expressly provided that the letter served to “modify” the Interim Agreement or, in particular, its survivability or arbitration provisions. Rather, the August 28 letter terminated the Interim Agreement and evidenced the continued negotiations between Kraft and Trafalgar related to the purchase of Kraft’s assets. The letter outlined additional conditions of performance for Trafalgar, such as providing Kraft with a separate written proposal for its Lowville facility. Thus, the provisions of the August 28 letter evolved from the Interim Agreement, rather than supplanted it. Moreover, the portion of the letter that Trafalgar claims modified the survivability provision stated that the confidentiality, non-competition, and indemnification provisions of the Interim Agreement applied to Trafalgar’s performance of the additional conditions set out in the August 28 letter. That portion of the letter does not state that the survivability or arbitration provisions found in the Interim Agreement were in any manner revoked or amended.
Although the present facts differ from those of Valero, the similarities outweigh the differences. See id. The absence of a clearly expressed intent in the August 28 letter to revoke the arbitration clause is paramount. Moreover, as previously mentioned, we must evaluate this issue within the context of the presumption in favor of agreements to arbitrate under the FAA. See Prudential Secs., 909 S.W.2d at 898. Accordingly, we hold that the arbitration provision in the Interim Agreement remained valid and enforceable.
C. Were the claims within the scope of the agreement?
We next consider whether Trafalgar’s claims fall within the scope of the arbitration provision. Whether a claim is within the scope of an agreement to arbitrate is a matter of contract interpretation and thus a question of law for the court. AT & T Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643, 649, 106 S. Ct. 1415, 1418-19 (1986); Tenet Healthcare Ltd. v. Cooper, 960 S.W.2d 386, 388 (Tex. App.—Houston [14th Dist.] 1998, pet. dism’d w.o.j.); City of Alamo v. Garcia, 878 S.W.2d 664, 665 (Tex. App.—Corpus Christi 1994, no writ).
Federal policy strongly favors arbitration and resolves all doubts concerning arbitrability in favor of arbitration. Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941 (1983); Prudential Secs., 909 S.W.2d at 898; Hou-Scape, 945 S.W.2d at 205. Any doubts as to whether a claim falls within the scope of the agreement must be resolved in favor of arbitration. See Prudential Secs., 909 S.W.2d at 899. Thus, a court should not deny a motion to compel arbitration “‘unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue.’” Id. (quoting Neal v. Hardee’s Food Sys., Inc., 918 F.2d 34, 37 (5th Cir. 1990)).
To determine whether a claim falls within the scope of an arbitration agreement, the court looks at the terms of the agreement and the factual allegations in the petition. Prudential Secs., 909 S.W.2d at 900; Hou-Scape, 945 S.W.2d at 205. Generally, if the facts alleged “touch matters,” have a “significant relationship” to, are “inextricably enmeshed” with, or are “factually intertwined” with the contract that is subject to the arbitration agreement, the claim will be arbitrable. See Hou Scape, 945 S.W.2d at 205-06 (citing cases). In other words, to be within the scope of an arbitration provision, the allegations need only be factually intertwined with arbitrable claims or otherwise touch upon the subject matter of the agreement containing the arbitration provision. See Prudential Secs., 909 S.W.2d at 900. Here, the arbitration provision provided that “all disputes, claims, or other actions arising out of, or related to, [the Interim Agreement]” would be subject to arbitration. Such broad language within the context of an arbitration agreement has been held to favor arbitration. See Hou Scape, 945 S.W.2d at 205-06 (citing cases).
We consider whether the facts alleged by Trafalgar in support of its claims “touch matters” covered by the Interim Agreement. See id. at 205. Trafalgar carefully crafted its Second Amended Petition to omit any reference to the Interim Agreement as a basis for its claims. In fact, the petition unequivocally disavows that Trafalgar’s claims relate to the Interim Agreement. However, the mandamus record belies such assertion.
The Interim Agreement was integral to the negotiation process for the subject assets. It required Trafalgar to perform certain acts of due diligence before it could purchase the assets and gave Trafalgar the right of first negotiation. The August 5 and 28, 1997 letters make clear that the negotiations between the parties, which ultimately culminated in the alleged November 1997 agreement on which Trafalgar bases some of its claims, continued to evolve from the Interim Agreement.
As pointed out by Kraft, the parties disagree about whether they entered into the November 1997 agreement. A determination of whether the agreement was consummated will necessarily entail an examination of (1) the parties’ performance pursuant to the Interim Agreement; (2) the purpose of the Interim Agreement; and (3) the role that the Interim Agreement played in the negotiations that led to the alleged November 1997 agreement.
Moreover, the Interim Agreement expressly contemplated that the parties would contract separately for the purchase of the Goshen facility and to receive Kraft’s food waste. Trafalgar claims that the November 1997 agreement comprised such an agreement. Trafalgar’s breach-of-contract claim, therefore, relates to or touches upon the Interim Agreement. Stated differently, given the obvious purpose of the Interim Agreement to effectuate a later agreement between the parties for the purchase of the subject assets, we are unable to say with positive assurance that the dispute surrounding the existence of the 1997 agreement is not subject to the broadly written arbitration clause contained in the Interim Agreement.
Trafalgar also brings claims against Trafalgar for unpaid consulting-service fees. The Interim Agreement provided that Trafalgar would perform consulting services related to the Goshen facility to Kraft without charge. The Interim Agreement also provided that the parties might agree to consulting services “not otherwise contemplated” by the agreement. Thus, an evaluation of the consulting services performed by Trafalgar under the Interim Agreement vis-a-vis the other consulting services that it performed for Kraft under any other agreements would be necessary to determine Kraft’s liability. Accordingly, Trafalgar’s claim for unpaid consulting-service fees is necessarily intertwined with the Interim Agreement.
Trafalgar also claims that Kraft wrongfully obtained Trafalgar’s trade secrets. However, the Interim Agreement implicitly provided that Trafalgar’s trade secrets would be shared with Kraft during the due-diligence process. Any determination of whether Kraft wrongfully required Trafalgar’s trade secrets will first require a determination of which trade secrets Kraft acquired pursuant to the Interim Agreement. Thus, Trafalgar’s claims regarding Kraft’s wrongful acquisition of trade secrets touch upon, relate to, and are intertwined with the Interim Agreement.
We hold that Trafalgar’s claims lie within the scope of the arbitration provision and are subject to arbitration.
CONCLUSION
Because Kraft established the existence of an arbitration agreement and demonstrated that Trafalgar’s claims were within the scope of that agreement, the trial court had no discretion to deny Kraft’s motion to compel arbitration. See Oakwood Mobile Homes, 987 S.W.2d at 573. We conditionally grant the writ of mandamus and direct the trial court to order that Trafalgar’s claims proceed to arbitration. Writ will
issue only if the trial court fails to do so.
Laura Carter Higley
Justice
Panel consists of Chief Justice Radack and Justices Alcala and Higley.