Plaintiffs and defendants often attempt to argue that they are not bound by the arbitration agreements contained in the contracts they sign. The Texas Supreme Court recently issued two opinions that benefit both builders and developers who wish to enforce the terms of arbitration agreements.
Many lawyers have long used a litigation strategy for construction defect claims that involved handling claims under the purchase contract in arbitration while also filing separate lawsuits in state court on behalf of a spouse and / or minor children for personal injuries resulting from the conditions related to the defects. Texas courts would then refuse to order all related claims to arbitration. But this year, the Texas Supreme Court put a stop to these practices, binding spouses, children, and subsequent purchasers to the underlying arbitration agreements, strengthening builders' and developers' positions with regard to the validity of the arbitration provisions contained in their purchase and sale agreements.
All Family Member Plaintiffs are Bound by Contractual Arbitration Agreements
In Taylor Morrison v. Ha, the parents and three minor children sued Taylor Morrison alleging that construction defects caused mold to grow, resulting in physical illness. Taylor Morrison sought to have all claims sent to arbitration. Because only the father, Mr. Ha, signed the purchase contract, his claims were subject to the mandatory arbitration required under the agreement, while two lower courts did not require his wife and children's claims to be sent to arbitration. This essentially created two separate legal proceedings litigation the exact same facts in different forums.
In its decision reversing both the trial and appellate court, the Texas Supreme Court found that non-signatory spouses and children who live in and benefit from the home and its related purchase agreement can be compelled to arbitrate when the various family members sue for the same facts that gave rise to the construction defect claims.
Subsequent Purchasers Are Now Also Bound by Arbitration Agreements
In Lennar Homes v. Whiteley, the second home purchaser (a subsequent purchaser) sued Lennar Homes, alleging defects led to mold growth. While the court granted the motion to compel arbitration and the parties arbitrated the claims, afterward the court refused to confirm the arbitration award, holding the case should not have been sent to arbitration.
The plaintiff and subsequent home buyer, Whiteley, argued that the arbitration agreement in the original purchase contract was inapplicable because she only asserted common law claims and not contract-based claims, and because her purchase was via contract with the prior homeowner, not with the defendant Lennar under its prior purchase and sale agreement with the original buyer.
The Texas Supreme Court held that Whiteley's warranty claims were subject to the original contract as they are implicit in the contract between the builder and original purchaser, and are thus automatically assigned to subsequent purchasers. In addition, since the plaintiff had incorporated express warranties from the actual contract in her claims, these claims could not and did not stand as claims independent of the contract. Therefore, the Texas Supreme Court held that subsequent purchaser plaintiffs cannot avoid contractual provisions contained in the purchase agreement by pleading only non-contract-based claims.
Builders and Developers in Texas Will Benefit from These Two Decisions
These two Texas Supreme Court decisions will make it easier for builders and developers to enforce arbitration agreements contained in purchase and sale agreements as well as in other types of contracts. Therefore, litigation costs should decrease for construction businesses in Texas.
Arbitration is an important form of alternative dispute resolution which conserves judicial resources and makes it more likely that the overall cost of litigation will be lower. Also, it is important for business entities to decide if they want to include binding or nonbinding arbitration clauses in their contracts. The best course of action business owners can take is to consult with Texas attorneys experienced in drafting contracts in the construction industry, as well as litigating business disputes.
Builders and Developers Must Stay Abreast of Changes in Both State and Federal Laws
Construction contracts often concern large sums of money to get projects up and running. Therefore, it is necessary for general contractors, subcontractors, builders, and developers to all remain aware of changes in the law. These two decisions will enable builders and developers to enforce arbitration agreements, and these decisions will help business entities craft more effective and robust arbitration agreements, which can save valuable resources.
Sometimes, it may seem that the law is complex, but with regard to contracts, it is essential to understand how a court will interpret them by applying legal principles. Interpretation is essential, and working with a team of skilled litigators is an effective way to ensure that your business continues to benefit from changes in Texas law as well as applicable federal laws and regulations.
Business entities need to ensure they maximize productivity and reduce costs by working with an experienced and established business law firm to draft, negotiate, and modify the contracts that govern their business relationships. These two recent Texas Supreme Court opinions will potentially help businesses lower their litigation costs if applicable arbitration clauses are appropriately tailored to allow them to benefit from these holdings.
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