COURTLAND BUILDING COMPANY, INC., Appellant v. JALAL FAMILY PARTNERSHIP, LTD, Sohail Jalal, Individually and Yasmeen Jalal, Individually, Appellees.
No. 14-12-00249-CV.
Court of Appeals of Texas, Houston (14th Dist.).
Nov. 20, 2012.
403 S.W.3d 265
Accordingly, I concur in the judgment, but I respectfully decline to join in the panel majority‘s opinion.
Philoan Marie Tran, Houston, TX, for Appellees.
Panel consists of Justices FROST, CHRISTOPHER, and JAMISON.
OPINION
TRACY CHRISTOPHER, Justice.
Courtland Building Company, Inc. brings this interlocutory appeal challenging the trial court‘s denial of its motion to compel arbitration and to stay further judicial proceedings. Because the claims for which Courtland seeks to compel arbitration are within the scope of a valid arbitration agreement, and because the respondents failed to establish that Courtland waived its right to enforce the agreement, we reverse and remand the case to the trial court with instructions to stay further litigation of those claims pending arbitration, and to determine whether it is appropriate to stay further litigation of those claims that Courtland does not seek to arbitrate.
I. FACTUAL AND PROCEDURAL BACKGROUND
Sohail and Yasmeen Jalal entered into a written “cost-plus” residential construction contract with builder Courtland Building Company, Inc. In the contract, the Jalals were identified collectively as “Owner,” and they represented that they had “full ownership of, or a unilateral right to pur-
16. RESOLUTION OF DISPUTES. The Parties desire prompt, inexpensive and efficient dispute resolution procedures and therefore agree that their disputes shall be governed by the following:
(c) Mediation-Binding Arbitration/Waiver of Jury Trial. The Owner and Builder agree that all controversies, claims (and any related settlements), or matters in question arising out of or relating to (i) this Contract, (ii) any breach or termination of this Contract, (iii) the construction of the Home and/or its repairs, (iv) any acts or omissions by the Builder (and its officers, directors or agents), and/or (v) any actual or purported representations or warranties, express or implied, relating to the Property and/or the Home (herein referred to collectively as a “Dispute“) shall be submitted to binding arbitration. The Parties will attempt to resolve any Dispute through informal discussions, and the Dispute may be submitted to non-binding mediation under the Construction Industry Mediation Rules of the American Arbitration Association (“AAA“). In the event that one or both Parties do not desire to mediate, or the Dispute is not resolved by direct discussions and/or mediation, the Dispute shall be submitted to the AAA for binding arbitration in accordance with the Construction Industry Arbitration Rules of the AAA. The Parties will share equally all filing fees and administrative costs of the arbitration, however, any Award rendered may equitably reallocate those costs. The arbitration shall be governed by Texas law and the U.S. Arbitration Act,
9 U.S.C. §§ 1-16 , to the exclusion of any provisions of state law that are inconsistent with the application of the Federal Act.
A dispute arose concerning the construction contract, and Courtland apparently sued the Jalal Family Partnership, Ltd. (“the Family Partnership“).1 In May 2011, Courtland filed a motion to have the case referred to mediation. The Family Partnership did not oppose mediation, and the trial court granted the motion; however, the mediation apparently did not take place.
In August 2011, Courtland amended its pleadings to add claims against the Jalals in their individual capacities and as co-trustees of an entity referred to as “the Jalal Management Trust.” According to Courtland‘s pleadings, the Jalal Management Trust is the general partner of the Family Partnership.2 Courtland asserted claims against all of these parties for (a)
About five weeks after the Jalals were served, Courtland filed a motion to compel arbitration and abate further proceedings in the trial court. The Property Owners filed a response opposing the motion. Courtland and the Property Owners then amended their pleadings; in particular, Courtland sued an additional party, Qamar Khan; asserted claims against all of the opposing parties for fraudulent transfer; and added two requests for declaratory judgment, bringing the total number of such requests to three. The trial court denied the motion, and Courtland brought this interlocutory appeal challenging the trial court‘s ruling.3
II. ANALYSIS
When considering a motion to compel arbitration, a court must determine whether a valid arbitration agreement exists, and whether the claims in dispute fall within that agreement‘s scope. In re Rubiola, 334 S.W.3d 220, 224 (Tex.2011) (orig. proceeding). Where, as here, the signatories to the contract have agreed that the federal arbitration act (the “FAA“) applies, courts apply state contract law in determining whether there is a valid agreement to arbitrate. See id. “Whether a valid arbitration agreement exists is a legal question subject to de novo review.” In re D. Wilson Constr. Co., 196 S.W.3d 774, 781 (Tex.2006) (orig. proceeding) (citing J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex.2003)). If a valid arbitration agreement exists, then a strong presumption arises favoring arbitration, and the burden shifts to the party opposing arbitration to raise an affirmative defense to enforcing arbitration. J.M. Davidson, Inc., 128 S.W.3d at 227.
A. A valid contract containing an arbitration provision covers most of the parties’ claims.
A party seeking to compel arbitration can meet its burden to establish that a valid arbitration agreement covers the claims at issue by producing a signed agreement covering these claims. See In re H.E. Butt Grocery Co., 17 S.W.3d 360, 367 (Tex.App.-Houston [14th Dist.] 2000, orig. proceeding) (citing In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex.1999) (orig. proceeding) (per curiam)). Here, Courtland supported its motion to compel arbitration with a copy of the construction contract containing the broad arbitration provision quoted above.4 The
Although the Family Partnership did not sign the contract, it nevertheless is bound by the contract‘s terms under the doctrine of direct benefits estoppel. Under this doctrine, a non-signatory will be compelled to arbitrate if it raises a claim through which “it seeks... to derive a direct benefit from the contract containing the arbitration provision.” In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 741 (Tex.2005) (orig. proceeding). Here, each of the Property Owners—including the Family Partnership—asserted claims against Courtland for breaching various contract provisions. By asserting such claims, the Family Partnership subjected itself to the contract‘s terms. See id. at 739 (“[I]f a nonsignatory‘s breach-of-warranty and breach-of-contract claims are based on certain terms of a written contract, then the non-signatory cannot avoid an arbitration provision within that contract.“); In re FirstMerit Bank, N.A., 52 S.W.3d 749, 755 (Tex.2001) (orig. proceeding) (“[A] litigant who sues based on a contract subjects him or herself to the contract‘s terms.“). Thus, all of the parties’ claims for breach of contract are within the scope of the arbitration agreement.
The Property Owners suggest in their appellate brief that because the non-signatories have also alleged claims for purported violations of
Any doubts as to whether Courtland‘s claims against the Property Owners fall within the scope of the arbitration clause must be resolved in favor of arbitration. See Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex.1995) (orig. proceeding) (per curiam). A court should not deny arbitration unless the court can say with positive assurance that an arbitration clause is not susceptible of an interpretation that would cover the claims at issue. Id. In determining whether a claim falls within the scope of an arbitration clause, we focus on Courtland‘s factual allegations, rather than the legal claims asserted. See In re FirstMerit Bank, N.A., 52 S.W.3d at 754. The presumption of arbitrability is particularly applicable when, as in the case under review, the clause is broad. See Osornia v. AmeriMex Motor & Controls, Inc., 367 S.W.3d 707, 712 (Tex.App.-Houston [14th Dist.] 2012, no pet.). Absent any express provision excluding a particular grievance from arbitration, only the most forceful evidence of purpose to exclude the claim from arbitration can prevail, and the Property Owners have the burden of showing that Courtland‘s claims against them fall outside the broad scope of the arbitration clause. See Marshall, 909 S.W.2d at 900; Osornia, 367 S.W.3d at 712. Nonetheless, the strong policy in favor of arbitration cannot serve to stretch a contractual clause beyond the scope intended by the parties or to allow modification of the unambiguous meaning of the arbitration clause. See Osornia, 367 S.W.3d at 712; IKON Office Solutions, Inc. v. Eifert, 2 S.W.3d 688, 697 (Tex.App.-Houston [14th Dist.] 1999, no pet.).
Although Courtland does not seek to arbitrate its fraudulent-transfer claims and the requests for declaratory judgment added by Courtland‘s second amended petition, see section II.B., infra, the remainder of its claims are subject to arbitration. Courtland‘s claims to foreclose its constitutional and statutory mechanic‘s liens are within the scope of the arbitration provision because the liens arise out of Courtland‘s performance of the contract and the Property Owners’ alleged breach. See
Courtland additionally alleges that the Property Owners breached a fiduciary duty imposed by
If an owner or a person authorized to act on behalf of the owner receives a written payment request from a contractor for an amount that is allowed to the contractor under the contract for properly performed work or suitably stored or specially fabricated materials, the owner shall pay the amount to the contractor, less any amount withheld as au-
thorized by statute, not later than the 35th day after the date the owner receives the request.
As an alternative to its breach-of-contract claim, Courtland also has pleaded for recovery in quantum meruit. This claim arises out of or relates to the construction of the home, its repair, or Courtland‘s acts or omissions. Therefore, this claim is within the broad scope of the arbitration provision. See Cleveland Constr., Inc. v. Levco Constr., Inc., 359 S.W.3d 843, 846, 848, 854 (Tex.App.-Houston [1st Dist.] 2012, pet. dism‘d) (holding quantum meruit claim, pleaded in alternative in construction dispute, fell within the scope of broad arbitration provision and was subject to arbitration).
Courtland contends that the Property Owners fraudulently induced it to enter into the construction contract at issue here. This claim arises out of or relates to the construction contract, the construction of the home, and actual or purported representations relating to the property or the home. This claim is within the broad scope of the arbitration provision. See Moses H. Cone Mem‘l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967)); In re Kaplan Higher Educ. Corp., 235 S.W.3d 206, 208-10 (Tex.2007) (per curiam).
B. Remaining Claims
As previously indicated, Courtland filed its motion to compel arbitration, and then amended its pleadings to add Qamar Khan as a party; assert a claim that Khan and the Property Owners fraudulently transferred money or property; and add two requests for declaratory judgment. Courtland stated at the hearing on its motion that it does not seek to compel Khan to participate in arbitration or to arbitrate its fraudulent-transfer claims; therefore, we do not address those claims further.
What is less clear is the extent to which Courtland seeks to compel arbitration of the two requests for declaratory judgment added in Courtland‘s second amended petition. In that pleading, Courtland asked the trial court to declare that (1) “the lien created by the deed of trust recorded at instrument number 2009007610 of the Fort Bend County Real Property Records has been released and the underlying debt paid in full,” and (2) “the assignment and transfer of lien recorded at instrument number 2012002647 and the modification and extension agreement recorded at instrument number 2012002647 of the Fort Bend County Real Property Records are void.” On appeal, however, Courtland and the Property Owners appear to agree that Courtland does not seek to refer at least one of these requests to arbitration. This is shown by the fact that Courtland and the Property Owners included identical statements in their respective briefs that “Courtland additionally sued [the Property Owners] and Qamar Khan for fraudulent transfer and a declaratory judgment relating to the assignment, modification, and extension of the construction financing lien, which Courtland does not seek to compel to arbitration.” This statement seems to refer, at a minimum, to the request for declaratory judgment concerning the material “recorded at instrument number 2012002647,” but may also include the request for declaratory judgment concerning the material “recorded at instrument
In sum, the trial court erred as a matter of law in failing to conclude that an arbitration agreement exists covering the claims as to which Courtland sought to compel arbitration, i.e., all of the parties’ claims with the exception of Courtland‘s fraudulent-transfer claims and the requests for declaratory judgment added by Courtland‘s second amended petition. The Property Owners had the burden to establish an affirmative defense to enforcement of the arbitration agreement.
C. Courtland did not waive its right to compel arbitration.
In the trial court, the Property Owners argued that Courtland waived its right to enforce the arbitration agreement because it substantially invoked the judicial process by filing a motion for mediation.6 A party waives an arbitration clause by substantially invoking the judicial process to the other party‘s detriment or prejudice. Perry Homes v. Cull, 258 S.W.3d 580, 589-90 (Tex.2008). The Property Owners had the burden of proving that Courtland waived the arbitration clause, and, due to the strong presumption against waiver of arbitration, this is a difficult burden to satisfy. See id. at 590. Whether a party has waived arbitration must be decided on a case-by-case basis, based upon an examination of the totality of the circumstances. See id. at 591. In making this determination, courts consider a wide variety of factors including:
- whether the party who pursued arbitration was the plaintiff or the defendant;
- how long the party who pursued arbitration delayed before seeking arbitration;
- when the party who pursued arbitration learned of the arbitration clause‘s existence;
- how much the pretrial activity related to the merits rather than arbitrability or jurisdiction;
- how much time and expense has been incurred in litigation;
- whether the party who pursued arbitration sought or opposed arbitration earlier in the case;
- whether the party who pursued arbitration filed affirmative claims or dispositive motions;
- how much discovery has been conducted and who initiated the discovery;
- whether the discovery sought would be useful in arbitration;
- what discovery would be unavailable in arbitration;
- whether activity in court would be duplicated in arbitration;
- when the case was to be tried; and
- whether the party who pursued arbitration sought judgment on the merits.
See id. at 591-92.
How much litigation conduct will be “substantial” depends very much on
To establish that Courtland‘s conduct in filing a motion for mediation resulted in a waiver of the right to arbitrate, the Property Owners bore the heavy burden to establish that this conduct was both (1) inconsistent with an intent to rely on the arbitration provision, and (2) prejudicial to the Property Owners. See EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex.1996) (orig. proceeding) (per curiam) (explaining that waiver will not be found unless both elements of the test are met); see also Perry Homes, 258 S.W.3d at 589-90 (“Due to the strong presumption against waiver of arbitration, this hurdle is a high one.“) But, despite their difficult burden of proving that Courtland waived the arbitration clause, the Property Owners offered no argument, authority, or evidence that simply filing a motion for mediation substantially invokes the judicial process or is prejudicial to parties that agree to the motion. Moreover, the arbitration provision in the contract expressly permits mediation: “In the event that one or both Parties do not desire to mediate, or the Dispute is not resolved by direct discussions and/or mediation, the Dispute shall be submitted... for binding arbitration....” The Property Owners accordingly failed to establish that Courtland waived its right to enforce the arbitration provision. See In re Automated Collection Techs., Inc., 156 S.W.3d 557, 559 (Tex.2004) (orig. proceeding) (per curiam) (holding, under analogous analysis, that party did not waive forum-selection clause by substantially invoking the judicial process to opposing party‘s prejudice, in case in which party participated in litigation for four months, served requests for disclosure, requests for production, requests for admissions, and interrogatories, and filed a motion to compel discovery); EZ Pawn Corp., 934 S.W.2d at 89-90 (holding that party did not waive arbitration clause by answering the suit, participating in docket-control conference, propounding requests for production and interrogatories, noticing plaintiff‘s deposition, and entering into an agreed order to reset the original trial date); Walker v. J.C. Bradford & Co., 938 F.2d 575, 576-78 (5th Cir.1991) (holding that party did not waive arbitration clause by propounding interrogatories and requests for production, attending initial pretrial conference, and delaying thirteen months before filing motion to compel arbitration); Tenneco Resins, Inc. v. Davy Int‘l, AG, 770 F.2d 416, 420-21 (5th Cir.1985) (holding that party did not waive arbitration despite serving opponent with interrogatories and requests for production, seeking discovery protective order, and agreeing to a joint motion for extension of the discovery period, during eight months before moving to compel arbitration).
D. Stay of Proceedings in the Trial Court
Under the FAA, a trial court must stay the litigation of issues that are subject to arbitration. See
The more difficult question is whether the trial court also should have stayed litigation of Courtland‘s fraudulent-transfer claim and its two requests for declaratory judgment in connection with the material recorded at instrument number 2009007610 and 2012002647 of the Fort Bend County Real Property Records. To determine whether litigation of the latter claims should be stayed, it is necessary to know whether litigation of those claims would undermine issues to be resolved in arbitration, or whether the arbitration would resolve matters that are material to the litigation of those issues. See In re Merrill Lynch & Co., Inc., 315 S.W.3d 888, 891 (Tex.2010) (orig. proceeding) (per curiam) (explaining that litigation of issues that are not subject to an arbitration agreement should be stayed if the litigation would undermine issues to be resolved in the arbitration); In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 195 (Tex.2007) (orig. proceeding) (“[W]hen an issue is pending in both arbitration and litigation, the Federal Arbitration Act generally requires the arbitration to go forward first; arbitration ‘should be given priority
Under these circumstances, the trial court is better positioned to consider whether litigation of these three claims should be stayed. Cf. Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 61-62 (Tex.2008) (remanding for the trial court to determine whether the claims not ordered to arbitration should be stayed pending the arbitration of the claims ordered to arbitration under the TAA); see also
We sustain the sole issue presented for our review.
III. CONCLUSION
The trial court erred as a matter of law in failing to conclude that an arbitration agreement exists covering the claims as to which Courtland sought to compel arbitration, namely, Courtland‘s own claims for (a) breach of contract, (b) lien foreclosure, (c) declaratory judgment on the validity of the mechanic‘s and materialman‘s liens, (d) breach of fiduciary duty under
TRACY CHRISTOPHER
JUSTICE
