What happens when a clause in a construction purchase order conflicts with a similar, but not identical clause in a quote made part of the order?  The Houston Court of Appeals recently addressed this issue in the context of dueling arbitration clauses, voiding both of them.

In Links Constr., LLC v. United Structures of America, Inc., the University of North Texas hired Links Construction, LLC (“Links”) to oversee construction of an indoor practice facility. Links subcontracted with United Structures of America (“United”) to design and provide materials for the roof using an executed Purchase Order. Attached to the Purchase Order was United’s Quote and Contract for the work (“Quote”). Both the Purchase Order and Quote had arbitration clauses, though they were not identical.

The Purchase Order dispute resolution clause (the “Purchase Order Clause”) states as follows:

DISPUTES: Any dispute arising under or relating to this Order shall be subject to arbitration under the Construction Industry Arbitration Rules of the AAA, with venue in Denton, Texas. The prevailing party shall be entitled to costs and reasonable attorneys’ fees.

The Quote dispute resolution provision (the “Quote Clause”) states as follows:

Applicable Law and Dispute Resolution: The rights, duties and obligations of the parties hereunder shall be governed and construed in accordance with the laws of the State of Texas, excluding its conflict of laws rules. Any and all disputes arising between USA, its Officers, Owners, Share Holders, Agents, Employees or Representatives and Buyer with respect to this Contract or the Building or Materials covered hereby shall be resolved at USA’s sole option either by (i) arbitration conducted in Houston, Harris County, Texas according to the construction industry’s arbitration rules of the American Arbitration Association or (ii) by the manner and forum USA so chooses.

A payment dispute arose between Links and United, and United filed suit. Links then moved to compel arbitration, citing both the Denton Clause and the Purchase Order Clause. However, the trial court denied Links’ motion to compel arbitration, concluding that the “inconsistency between the [Purchase Order Clause and Quote Clause] is so great that it should void the dispute resolution clauses altogether.” The trial court refused to enforce either of the Clauses or to compel the parties to participate in arbitration. Links appealed to the Houston Court of Appeals.

The Court of Appeals held that the slightly different dispute resolution clauses revealed that Links and United never had a “meeting of minds” about whether disputes would be arbitrated, an essential element of the agreement.  Under Texas law (and most states’ laws), a valid and binding contract is formed only when the parties have a “meeting of the minds” about the contract’s subject matter and essential terms. The agreement must address the essential terms with a degree of certainty and definiteness that allows a court to understand and enforce the parties’ obligations.

The conflict between the two dispute resolution clauses in Links is who decides whether the dispute is arbitrated or litigated.  The Purchase Order requires any dispute relating to the Purchase Order shall be submitted to arbitration.  The clause is broad and nondiscretionary.  In contrast, the Quote Clause states that United has the sole option to elect for arbitration or some other dispute resolution method.  The clause is broad, but discretionary with United having exclusive power to exercise that discretion. Enforcing the Purchase Order Clause would violate the Quote Clause as it would deprive United of sole discretion about whether the dispute should be arbitrated.  Similarly, allowing United to opt out of arbitration under the Quote Clause would violate the broad, non-discretionary arbitration clause in the Purchase Order Clause.  Since the two Clauses could not be read together without nullifying one or the other on its essential terms, the Court of Appeals found that Links and United had not reached a meeting of the minds and that the payment dispute was not arbitrable.

The attorneys in our Austin and Dallas offices routinely negotiate and litigate/arbitrate construction contracts and are available to answer any of your questions. You may contact us at info@gstexlaw.com.

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