Teal Construction Co. v. Darren Casey Interests

• Decision Date: 26 April 2001
• Docket Number: No. 03-00-00518-CV,03-00-00518-CV
• Citation: 46 S.W.3d 417
• Parties: (Tex.App.-Austin 2001) Teal Construction Company/Hillside Villas Ltd., Appellants v. Darren Casey Interests, Inc.; Hillside Villas Ltd./Teal Construction Company, Appellees
• Court: Texas Court of Appeals

Page 417

46 S.W.3d 417 (Tex.App.-Austin 2001)

Teal Construction Company/Hillside Villas Ltd., Appellants v. Darren Casey Interests, Inc.; Hillside Villas Ltd./Teal Construction Company, Appellees

No. 03-00-00518-CV

Court of Appeals of Texas, Austin.

April 26, 2001

Rehearing Overruled June 14, 2001.

FROM THE DISTRICT COURT OF HAYS COUNTY, 207TH JUDICIAL DISTRICT NO. 99-1305, HONORABLE DON B. MORGAN, JUDGE PRESIDING

Before Justices Kidd, Yeakel and Powers^*

Kidd, Justice

In this case, we review the application of an arbitration clause in a construction contract. After a dispute arose between Hillside Villas, Ltd. ("Hillside"), the owner, and Teal Construction Company ("Teal"), the contractor, over change orders involving an apartment project, Hillside filed a tort lawsuit claiming fraud, fraudulent inducement, and negligent misrepresentation. After answering, Teal filed a motion to compel arbitration. The trial court, in its order, found that the parties had entered into a binding arbitration agreement, but severed Hillside's claim of fraudulent inducement and ordered the parties to trial on that claim. Teal appeals that portion of the trial court's order retaining the fraudulent inducement claim for trial and abating arbitration until judgment is entered on that claim. Hillside appeals that portion of the trial court's order declaring that the construction contract contained a valid arbitration clause. We will affirm that portion of the order declaring that the contract contained a valid arbitration clause, but we will reverse and remand that portion of the order retaining the fraudulent inducement claim for trial.

BACKGROUND

Hillside is a San Antonio limited partnership engaged in property development in Texas. Teal is a construction contractor based in Houston. Teal entered into a contract with Hillside in January 1999 to construct Phase II of the Hillside Ranch Apartments, located in San Marcos. Phase II consisted of three buildings containing sixty apartment units. The apartments were to be used primarily for housing students at a local university.

In the fall of 1999, during the latter stages of the project, a dispute arose between the parties regarding performance and payment under the contract. Teal had submitted unpaid change orders totaling over $700,000, for which it sought payment. Hillside refused payment, contending that the construction contract contained a guaranteed maximum price of $2.28 million and that Teal's change orders would exceed the construction budget by approximately thirty-three percent. Teal sought to mediate the dispute pursuant to the terms of the contract. Hillside refused to mediate unless Teal withdrew its claim for change orders. Teal refused and on November 16 Hillside filed this lawsuit.

In its original petition, Hillside alleged claims of fraud, fraudulent inducement, and negligent misrepresentation. Although Hillside filed several amended petitions, its basic contentions have remained the same. Hillside claimed that it entered into the contract with the understanding that it was a guaranteed maximum price contract, subject only to additions and deductions made by valid change orders. Hillside alleged that after execution of the contract, Teal fraudulently deleted a term that protected Hillside from charges that would exceed the guaranteed maximum price. In other words, Hillside alleged that the parties negotiated a guaranteed maximum price of $2.28 million, and that after the contract was executed Teal deleted a term, changing the contract into a cost-plus contract without a guaranteed maximum price. In addition, Hillside alleged that during construction Teal missed deadlines, performed in a substandard manner, and submitted change orders that were not approved by Hillside or the architect. In response, Teal filed a general denial and a motion to stay the litigation and compel arbitration.

After several hearings and a failed court-ordered mediation, the trial court entered a final order that is the subject matter of this appeal. First, the court found that the arbitration clause contained in the general conditions was validly incorporated into the parties' contract. Second, the court severed Hillside's claim for fraudulent inducement and retained it for trial. Finally, the court ordered that all disputes arising out of performance of the contract were compelled to arbitration after judgment was entered in the fraudulent inducement trial. From this order, Teal brought both an interlocutory appeal and a mandamus action.¹ Hillside cross appeals, challenging the trial court's determination that the arbitration clause was validly incorporated within the contract.

DISCUSSION

The Arbitration Clause

Hillside argues that the trial court erred in finding a valid agreement to arbitrate between Teal and Hillside. An unmodified, American Institute of Architects ("AIA"), standard-form contract does not contain an arbitration clause within its four corners. The AIA, standard-form, general-conditions document does contain an arbitration clause. Hillside and Teal, however, signed a modified, AIA, standard-form contract that incorporated by reference the general-conditions document.

An unsigned paper may be incorporated by reference in the contract signed by the party sought to be charged. Owen v. Hendricks, 433 S.W.2d 164, 166 (Tex. 1968). The specific language used is not important so long as the contract signed by the defendant plainly refers to another writing. Id. An arbitration agreement is not invalid or unenforceable merely because it is contained in a document incorporated into the contract by reference. D. Wilson Constr. Co. v. McAllen Indep. Sch. Dist., 848 S.W.2d 226, 230 (Tex. App. Corpus Christi 1992, writ dism'd w.o.j.).

Page one of the contract signed by Hillside states that "AIA Document A201-1997, General Conditions of the Contract for Construction, is adopted in this document by reference." This statement plainly refers to the general conditions containing the arbitration clause. The trial court correctly determined that the arbitration clause was validly incorporated within the contract. Hillside's cross appeal is overruled.

Enforcement of the Arbitration Clause

We next address Teal's contention that the trial court erred by not ordering the entire dispute to arbitration. The Texas Supreme Court has expressed a strong policy preference for enforcing arbitration clauses. Capital Income Properties-LXXX v. Blackmon, 843 S.W.2d 22, 23 (Tex. 1992). A party seeking to compel arbitration must establish the existence of an arbitration agreement and show that their claims fall within the scope of that agreement. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex. 1999). Once a claim within the arbitration agreement has been established, the burden shifts to the other party to demonstrate a legal basis for avoiding arbitration. Id. Such grounds include fraud, waiver, or unconscionability. Dallas Cardiology Assocs. v. Mallick, 978 S.W.2d 209,...