The Eastern District Affirms Arbitrator’s Determination That Arbitration Agreement Was Invalid And Unenforceable Under Missouri Law

The Missouri Court of Appeals for the Eastern District recently issued a decision that affirms several important legal principles about arbitration agreements in Missouri. In Caldwell v. UniFirst Corp., the Eastern District primarily considered two issues on appeal:

(1) whether an arbitrator exceeded his authority in applying Missouri law (instead of Massachusetts law) to the question of whether a contract (i.e., an arbitration agreement) was formed between an employer and employee; and

(2) whether an arbitrator exceeded his authority in finding the arbitration agreement at issue failed for lack of consideration.

-- S.W. 3d --, 2020 WL 6278737, at *3-5 (Mo. Ct. App. Oct. 27, 2020).

The underlying case involved disability discrimination and retaliation claims by a former employee—Scott Caldwell (“Caldwell”)—against his former employer—UniFirst Corp. (“UniFirst”). After filing his claims in court, the employer moved to compel arbitration based on an arbitration provision within Caldwell’s employment agreement. After the trial court initially denied this motion, the case went up and down through the appellate courts, including the Missouri Supreme Court.

Eventually, the case landed back before an arbitrator to determine threshold issues of contract formation. The arbitrator decided these contract formation issues, finding the arbitration agreement unsupported by consideration in two respects: (1) Campbell’s at-will employment did not suffice as consideration; and (2) the arbitration agreement lacked mutuality, as UniFirst reserved for itself the right to assert certain claims in court.

The Eastern District began its decision by noting this unique procedural posture: “[t]his well-travelled case has yo-yoed through our court system and now returns here for the third time.” The Court then proceeded to address whether the arbitrator exceeded his authority in finding the arbitration agreement unsupported by adequate consideration.

The Court first addressed UniFirst’s argument that the arbitrator should have applied Massachusetts law, instead of Missouri law, as the arbitration agreement itself stated, “[t]his Agreement shall be governed and construed under the laws of the Commonwealth of Massachusetts.” The Court noted the general rule in Missouri that Missouri courts will honor a choice of law provision in actions between the parties to a contract.

However, the Court cited to a relatively recent Missouri Supreme Court case—that is, Baker v. Bristol Care, Inc., 450 S.W.3d 770, 774 (Mo. banc 2014)—as carving out an exception to this general rule. “In Missouri, issues regarding contract formation must be resolved under the law of this state.” Id. And the Court reasoned that, since consideration is one of the basic elements of contract formation, the arbitrator’s decision to apply Missouri law to the contract formation issues before it was correct. As such, the Court found the arbitrator did not exceed his authority.

The Court then addressed UniFirst’s argument that the arbitrator misapplied the law (including the Missouri Supreme Court’s recent Soars v. Easter Seals Midwest, 563 S.W.3d 111 (Mo. banc 2018)) in concluding the arbitration agreement failed for lack of consideration. The Court began its analysis by reiterating that Missouri law governs this question.

The Court then stressed the principle of severability as “critical in this context because there are actually three separate contracts here—the underlying employment agreement, the arbitration agreement, and the delegation clause—each of which must independently satisfy the basic contract formation principles of offer, acceptance, and consideration.” Focusing on just one of these three contracts—that is, the arbitration agreement itself—the Court rejected UniFirst’s arguments for the following reasons.

First, the Court rejected UniFirst’s argument that Soars required a finding that Caldwell’s at-will employment supplied the consideration for the arbitration clause at issue. The Court did so by distinguishing the issues in the two cases: in Soars, the Court only addressed the validity of a delegation provision (i.e., a provision that purports to delegate the determination of certain threshold questions, like contract formation, to an arbitrator), whereas here, the Court addressed the contract formation issues themselves as decided by the arbitrator. In other words, according to the Court, “this case, from a procedural standpoint, has already moved past the scope of Soars.”

Turning to the arbitrator’s decision, the Court affirmed the arbitrator’s finding that the arbitration agreement, as a whole, was invalid and unenforceable because it lacked mutuality of promises. In particular, the Court noted that one provision of the employment agreement “reserved for [UniFirst] the right to seek injunctive relief in court against Caldwell on certain claims, thereby sidestepping the arbitration process, while Caldwell remained bound to arbitrate any claims he has likely to have.”

Citing to the well-established principle of mutuality in contracts that “neither party is bound unless both are bound,” the Court reasoned that UniFirst’s promise to arbitrate in exchange for Caldwell’s promise to arbitrate was essentially illusory. This is because the practical effect of the arbitration agreement was to bind only one party to the agreement—Caldwell, but not UniFirst. The Court cited to additional Missouri precedent in support of its conclusion: Jimenez v. Cintas Corp., 475 S.W.3d 679, 686 (Mo. Ct. App. 2015). Accordingly, the Court affirmed the arbitrator’s finding.

It remains to be seen whether further appellate consideration of this decision will occur. In the meantime, there are at least two significant takeaways:

First, employers and employees should be mindful that courts in Missouri will likely apply Missouri law to issues of contract formation in the context of arbitration agreements, even if the parties generally identified some other state law as governing such agreements.

Second, employers and employees should be mindful that, for an arbitration agreement to be valid and enforceable, mutuality of obligation is a must. In other words, both parties to an arbitration agreement generally must commit to arbitration of disputes to the same extent for the arbitration agreement to be valid and enforceable in Missouri. For example, one party should not have a right to go directly to Court under certain circumstances while the other does not.

For more developments, stay tuned.