Be Careful, Silence May be Deadly to Arbitration Rights

Do not throw that pre-arbitration or pre-lawsuit demand away just yet.  It just may have an impact, or even change, your existing contractual rights.  The San Antonio Court of Appeals in Adcock v. Five Star Rentals/Sales, Inc. held that inaction by a party on a pre-suit letter, and the terms in that letter, modified an existing contractual right—in this case an arbitration clause.

This is what happened.  Jimmy Adcock ("Adcock") had a claim against a former employer Five Star Rentals/Sales, Inc. ("Five Star").  Adcock’s attorney sent a pre-suit letter to Five Star stating if there is an arbitration agreement between Adcock and Five Star, Five Star needed to send a copy of the arbitration agreement within thirty (30) days.  The letter went on to say if Five Star did not, Adcock would file a lawsuit and Five Star’s silence/inability to produce an arbitration agreement in the time frame demanded “will be your acceptance to proceed in state court and your waiver of enforcement of any arbitration agreement”.   As consideration for this new agreement Adcock relied on litigation being less expensive than arbitration, and the letter made reference to the same: “Consideration for this agreement between you and my client will be the fact that proceeding in State Court is less expensive for you…”.

What happens next?  Litigation is stranger than fiction.  Five Star apparently ignores the letter.  Adcock files a lawsuit.  After the initial exchange of documents in the lawsuit, and while preparing for Adcock’s deposition, Adcock’s lawyer learns of the arbitration provision in an employment agreement with Five Star (which had been produced).  Adcock then seeks to enforce the arbitration provision.  Five Star opposes arbitration, arguing the litigation process had been invoked, and Adcock’s pre-suit letter modified the parties’ prior agreement.  The Fourth Circuit agreed and held that Five Star inaction triggered a new contract (to litigate in state court), trumping the written arbitration agreement previously signed by both parties.  The Fourth Circuit did not address the argument surrounding judicially invoking the judicial process reasoning, only that the parties’ new agreement replaced the old one.

Only time will tell if such unilateral modification of a contract based on the silence or inaction of one party will withstand court scrutiny.  But in the absence of properly drafted contract provisions to prevent such unilateral changes, at least one Texas Court found that silence can be deadly to arbitration provisions.

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