Stanford Dev. V. Stanford Condo. Owners

• Decision Date: 29 January 2009
• Docket Number: No. 01-08-00240-CV.,No. 01-08-00386-CV.,01-08-00240-CV.,01-08-00386-CV.
• Citation: 285 S.W.3d 45
• Parties: STANFORD DEVELOPMENT CORPORATION, Appellant, v. STANFORD CONDOMINIUM OWNERS ASSOCIATION, Appellee. In re Stanford Development Corporation, Relator.
• Court: Texas Court of Appeals

285 S.W.3d 45

STANFORD DEVELOPMENT CORPORATION, Appellant, v. STANFORD CONDOMINIUM OWNERS ASSOCIATION, Appellee In re Stanford Development Corporation, Relator.

No. 01-08-00240-CV.

No. 01-08-00386-CV.

Court of Appeals of Texas, Houston (1st Dist.).

January 29, 2009.

Matthew E. Coveler, Hogan & Hogan, L.L.P., Houston, TX, for Appellant.

David D. Peden, Timothy C. Ross, Porter & Hedges, L.L.P., Houston, TX, for Appellee.

Panel consists of Chief Justice RADACK and Justices HIGLEY and NUCHIA.^*

OPINION

SHERRY RADACK, Chief Justice.

The issue in this interlocutory appeal¹ is whether a condominium homeowners' association that brings suit against the condominium developer on behalf of its homeowners is bound by arbitration agreements in earnest money contracts between the developer and the individual homeowners. We also consider whether (1) subsequent purchasers are bound by the arbitration agreements in their predecessors' earnest money contracts, and (2) the arbitration agreements in the earnest money contracts were merged into the subsequent deeds. We reverse and remand.

BACKGROUND

This cases arises out of a construction-defect lawsuit brought by the Stanford Condominium Owners Association ("the Association") against Stanford Development Corporation ("Stanford"), the builder and developer of the condominium complex. The Association filed suit against Stanford alleging breach of contract, Deceptive Trade Practices, breach of warranty, fraud, and negligent design, construction, and supervision. Stanford moved to compel arbitration based on arbitration clauses in 27 of the 37 homeowners' earnest money contracts, which provide as follows:

All claims for breach of this Contract or otherwise are limited solely to the specific remedies provide for herein. Buyer and Seller hereby further agree that any controversy, claim or dispute arising out of or relating to (a) the Contract, (b) any breach thereof, (c) the sales transaction reflected in the Contract, (d) the construction of the residence which is the subject of the Contract and/or (e) any representations or warranties, express or implied, relating to the Property and the Unit, shall be decided by binding arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. All decisions by the arbitrators shall be final, and any judgment upon the award rendered by the arbitrators may be confirmed, entered and enforced in any court having proper jurisdiction. Any action, regardless of form, arising out of the transactions under this Contract must be brought by Buyer within two (2) years of the Closing Date, regardless of when the cause of action accrues or discovery of a claim by Buyer. (Emphasis added).

After a hearing on Stanford's motion to compel arbitration, the trial court denied Stanford's motion, and this appeal followed.

PROPRIETY OF DENIAL OF MOTION TO COMPEL ARBITRATION

On appeal, Stanford contends the trial court erred in denying its motion to compel arbitration. Specifically, Stanford contends that the trial court erroneously concluded that the Association was not bound by the arbitration clauses in the individual homeowners' contracts.

Standard of Review and Applicable Law

Denial of a motion to compel arbitration generally triggers the abuse-of-discretion standard of review. See In re D. Wilson Constr. Co., 196 S.W.3d 774, 780 (Tex. 2006). A trial court abuses its discretion when it acts arbitrarily or unreasonable and without reference to any guiding rules or principles. See In re Bruce Terminix Co., 988 S.W.2d 702, 705 (Tex.1998); Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992). Because a trial court has no discretion in determining what the law is, which law governs, or how to apply the law, we review this category of discretionary rulings de novo. See In re D. Wilson Constr. Co., 196 S.W.3d at 781. However, when the ruling under review results from the trial court's having resolved underlying facts, we must defer to the trial court's factual resolutions and any credibility determinations that may have affected those resolutions, and we may not substitute our judgment for that of the trial court. See Walker, 827 S.W.2d at 839-40.

A party seeking to compel arbitration must establish (1) the existence of a valid, enforceable arbitration agreement and (2) that the claims asserted fall within the scope of that agreement. Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 581 (Tex.App.-Houston [14th Dist.] 1999, no pet.) (applying Texas General Arbitration Act). Because state and federal policies favor arbitration, a presumption exists favoring agreements to arbitrate, and courts must resolve any doubts about an arbitration agreement's scope in favor of arbitration. Cf. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex.2001) (discussing arbitration under the FAA).

Are arbitration clauses in homeowners' contracts binding on the Association?

When determining the existence of a valid enforceable arbitration agreement, we also consider gateway matters such as whether a valid arbitration clause exists and whether an arbitration clause is binding on a nonparty. In re Weekley Homes, L.P., 180 S.W.3d 127, 130 (Tex. 2005) (orig.proceeding). Courts may not order parties to arbitrate unless they have agreed to do so. Belmont Constructors, Inc. v. Lyondell Petrochem. Co., 896 S.W.2d 352, 356-57 (Tex.App.-Houston [1st Dist.] 1995, no writ [appeal and orig. proceeding]). Consequently, despite a presumption favoring arbitration, a valid agreement to arbitrate remains a threshold requirement. See In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737-38 (Tex. 2005) (orig.proceeding).

It is undisputed that there is an arbitration agreement between Stanford and 27 of the individual homeowners. The issue is whether the arbitration agreements can be enforced against the Association, a nonsignatory to the agreements. Courts have recognized six theories that may bind nonsignatories to arbitration agreements: (1) incorporation by reference, (2) assumption, (3) agency, (4) alter ego, (5) equitable estoppel and (6) third-party beneficiary. Kellogg Brown & Root, 166 S.W.3d at 739.

Stanford argues that the fifth theory for binding nonsignatories—equitable estoppel—applies in this case. Specifically, Stanford argues that because the Association has filed suit based, in part, on the contractual terms found in the homeowners' earnest money contracts, it is estopped from denying the applicability of the arbitration provision in the same contract. We agree.

The supreme court has held that "a litigant who sues based on a contract subjects him or herself to the contract's terms." In re FirstMerit Bank, N.A., 52 S.W.3d at 755-56. When the nonsignatory asserts claims identical to the signatories' contract claims, all must be arbitrated. Id. Additionally, claims must be brought on the contract and arbitrated if liability arises solely from the contract or must be determined by reference to it. In re Weekley Homes, L.P., 180 S.W.3d at 132. If a nonsignatory pursues a claim based "on the contract" of another, and the contract contains an arbitration clause, then the nonsignatory must pursue all claims— tort and contract—in arbitration. Id.

In this case, the Association alleged in its petition that Stanford "failed to comply with the express and implied contractual duties which they owed to [the Association's] Owners. [Stanford] breached [its] contracts." The only contracts giving rise to any express or implied contractual duties in this case are the earnest money contracts between Stanford and the individual homeowners. The Association also alleged that Stanford breached "express and/or implied warranties." The only express warranties are contained in the individual homeowners' earnest money contracts. Because the Association has filed suit seeking the benefits of the earnest money contracts, it cannot deny the applicability of the arbitration agreements in the same contracts. See FirstMerit Bank, 52 S.W.3d at 755; Weekley Homes, 180 S.W.3d at 134-35. As stated by the supreme court, "A nonparty cannot both have his contract and defeat it too." Weekley Homes, 180 S.W.3d at 135.

In addition to the claims based directly "on the contracts" of the individual homeowners, the Association also included DTPA claims, fraud, and intentional or negligent misrepresentation claims, and negligent design, construction, and supervision claims. However, because the Association chose to allege contract claims that are subject to arbitration clauses, and because the arbitration clauses in this case are broad enough to cover both contract and tort claims, the Association must also arbitrate the intertwined tort claims. See Weekley Homes, 180 S.W.3d at 132 (citing Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 271 (Tex.1992)). Therefore, we conclude that equitable estoppel doctrine prevents the Association from denying the applicability of the arbitration clauses found in its homeowners' earnest money contracts.

We also conclude that because the Association is suing "on behalf of" the individual condominium owners, it stands in their shoes and is also bound by any arbitration provisions that bind them. Section 82.102(4) of the Uniform Condominium Act provides that a "unit Owners' Association" may "institute, defend, intervene in, settle, or compromise litigation or administrative proceedings in its own name on behalf of itself or two or more unit owners on matters affecting the condominium." TEX. PROP.CODE ANN. § 82.102(4) (Vernon 2007). It its petition, the Association invokes its authority to bring suit under chapters 81 & 82 of the Condominium Act and alleges that "[t]he claims which [the Association] makes hereinafter on behalf of the unit owners is limited to the common areas and elements for which [the Association] has management responsibility under the condominium declarations and under law." (Emphasis added). The Association...