The Beaumont Court of Appeals has reversed a trial court order denying a homebuilder’s motion to compel arbitration in a suit brought by second purchasers of a home.
Lennar Homes of Texas Land and Construction, Ltd. and Lennar Homes of Texas Sales and Marketing, Ltd., Successors by Merger to CalAtlantic Homes of Texas, Inc., Successor by Merger to RH of Texas Limited Partnership v. Benjamin Cockerham and Kimberly Cockerham (No. 09-21-0034-CV; submitted November 16, 2023) arose from a 2016 purchase-and-sale agreement between Lennar’s predecessor CalAtlantic Homes and two homebuyers to build a home in Montgomery County. The contract included an arbitration clause and a limited warranty that expressly disclaimed all implied warranties, as well as a disclosure regarding indoor air quality. Two years later the buyers sold the home to the Cockerhams. In 2021 the Cockerhams sued CalAtlantic alleging construction defects that caused water damage and mold. Plaintiffs asserted DTPA violations, breach of implied warranties of habitability and workmanship, and negligence. Lennar answered and moved to compel arbitration. The trial court denied the motion. Lennar appealed.
The court of appeals reversed. Plaintiffs argued that the arbitration clause did not apply to them because they were not parties to the purchase-and-sale agreement with the builder. Lennar countered that the doctrine of direct-benefits estoppel makes the arbitration clause enforceable against a subsequent purchaser. As the court observed, “[w]hen the doctrine of direct-benefits estoppel applies, ‘a non-signatory plaintiff seeking the benefits of a contract is estopped from simultaneously attempting to avoid the contract’s burdens, such as the obligation to arbitrate disputes’” (citation omitted). In general, the court went on, nonparties must arbitrate claims “if liability arises from a contract with an arbitration clause, but not if liability arises from general obligations imposed by law” (citation omitted).
The court then turned to a SCOTX decision from earlier this year in Lennar Homes of Texas Land & Construction v. Whiteley, 672 S.W.3d 367 (Tex. 2023), in which the Court applied the doctrine of direct-benefits estoppel to similar facts (a report on this case may be found on our website). In Whiteley SCOTX rejected the argument made by plaintiffs in this case that their claim arose under common law, not the contract. The Court opined that “a warranty which the law implies from the existence of a written contract is as much a part of the writing as the express terms of the contract.” Consequently, the court of appeals reasoned, “it follows the warranties arising when contracts are signed by buyers and sellers of homes at common law are, in SCOTX’s words, ‘implicit in the contract between the builder/vendor and original purchaser and are automatically assigned to the subsequent purchaser.’”
Applying Whiteley, the court of appeals had no difficulty determining the direct-benefits estoppel applied to plaintiffs’ claims since those claims “cannot stand independently from the contract and Limited Warranty executed in 2016 when the home was originally sold.” The court held further that the arbitration clause was broad enough to require arbitration of those claims and remanded to the trial court to compel arbitration.
Whitely should lay to rest litigation of this sort. It would be interesting to know, however, what the costs and outcomes of arbitration in these cases actually are.
