The Houston [1st] Court of Appeals has granted Kellogg Brown & Root’s petition for writ of mandamus vacating a death penalty sanctions order issued by a Harris County district judge.

The underlying litigation, Constructora Hostotipaquillo, S.A. de C.V. v. Kellogg Brown & Root, LLC (No. 2021-20545, pending in the 295th District Court of Harris County, Hon. Donna Roth presiding), arose from a business deal gone bad. In 2019, a subsidiary of Pemex (PTI Infraestructura de Desarrollo, S.A. de C.V.) planned to build a refinery in Dos Bocas, Tabasco, Mexico. KBR and Hosto agreed to submit a joint bid for a part of the project, which involved a first phase of preliminary engineering and procurement estimates and a second phase of engineering, procurement, and construction. To this end, KBR and Hosto entered into two contracts, the so-called “Teaming Agreement,” executed in English, and the Convenio de Asociación, executed in Spanish. The agreements called for KBR to be the project lead in phase one and Hosto in phase 2. Once PTI awarded the work, KBR and Hosto entered into a third contract, the Prime Contract, for phase 1 work. KBR signed the contract as the “common represenative” of itself and Hoso. Subsequently, the parties entered into a fourth contract (the Subcontract) regarding the scope of phase 1 work. Unfortunately, however, PTI did not award phase 2 of the work to KBR and Hosto.

Suspecting a rat, Hosto sued KBR in April 2021 for common-law fraud and fraudulent inducement based on allegations that KBR, which was planning to shift its business model from construction services to “IT consulting” services, knew or should have known that it could not perform the phase 2 procurement and construction work as it represented to Hosto. Hosto later amended its petition to add a claim of breach of fiduciary duty, alleging that Hosto and KBR formed a joint venture and partnership to pursue both phases of the work and that KBR breached its fiduciary duty when it concealed that it had no intention of performing phase 2.  As a result of the breach, Hosto alleged to have sustained millions of dollars of lost revenue and lost profits. KBR answered and filed a Rule 91a motion to dismiss for failure to state a claim. KBR alleged that its contracts with Hosto limited KBR’s liability and disclaimed any joint venture relationship. The trial court denied the motion.

Then things got interesting. KBR filed traditional and no-evidence summary judgment motions, again referring to the disclaimer and no-cost sharing language in the Teaming Agreement and Subcontract. In support of the motions, KBR submitted the Teaming Agreement, executed in English, and Spanish-to-English translations of the Convenio de Asociación, Prime Contract, and Subcontract. At the hearing, Hosto objected to the English translation of the Prime Contract, pointing out that it was different than the translation that had been attached to KBR’s first and second amended answers and to its original and amended Rule 91a motions and that KBR had not informed Hosto of the change. KBR’s lawyer admitted that the translation of the Prime Contract was a new one (the “second” translation) and that it was different. The problem? The earlier translation rendered “Convenio de Participación Conjunta” as “Joint Venture Agreement.” The second translation altered this to say “Association Agreement.” The upshot of the change was to conform the translation of the Prime Contract to KBR’s theory of the case, which asserted that the parties agreement did not constitute a joint venture and, consequently, KBR did not owe Hosto a fiduciary duty.

So what happened? KBR’s lawyer argued that the second “corrected” translation was necessary because the original translator did not have access to all of the agreements and therefore translated the “Convenio” language out of context. The trial court rejected this argument, instead granting Hosto’s motion to exclude the second translation in favor of the original. Hosto next complained that KBR’s lawyer misleadingly attached the original certificate of accuracy to the second “corrected” translation and, only after she was outed at the summary judgment hearing, obtained a new certificate. Hosto alleged that this conduct amounted to a fraud on the court and moved for sanctions, particularly after it discovered that KBR’s lawyer’s paralegal sent the translation company a list of words and phrases to change in the new translation. Despite the lawyer’s protestations to the innocence of her actions, the trial court, after a hearing, signed an order sanctioning KBR for its counsel’s “egregious and intentional” conduct “in an attempt to strengthen KBR’s case and secure a win for what must be an important client.” Although the trial court did not strike KBR’s pleadings, it required KBR to refer to its relationship with Hosto as a “joint venture” through trial, denied its summary judgment motion, motion to strike Hosto’s fourth amended petition (alleging breach of fiduciary duty), and motion to exclude Hosto’s damages expert, and closed discovery. KBR, having retained a new lawyer, got a modification of the order to allow it to make procedural motions but not substantive ones. KBR sought mandamus relief.

In a lengthy opinion by Justice Hightower, the court of appeals granted mandamus. First, the court rejected Hosto’s argument that the KBR waived its challenge to the sanction order involving the use of the term “joint venture,” i.e. the “Translation sanction.” Hosto asserted that because KBR did not object to two of the trial court’s findings of fact and did not object to the accuracy of the original translation within the 45 days permitted by Texas Rule of Civil Evidence 1009, it waived the issue on appeal. Hosto contended that the Translation sanction was not really a sanction but an evidentiary ruling under Rule 1009. The court didn’t go for this argument because the scope of the sanction went well beyond KBR’s lawyer’s conduct with respect to the second translation.

As to whether the sanctions were unjust, the court ruled that they were. SCOTX’s decision in TransAmerican Natural Gas Corp. v. Powell, 811 S.W.2d 913 (Tex. 1991) established a two-prong test to determine this issue: (1) whether there is a “direct nexus between the offensive conduct, the offender, and the sanction award”; and (2) whether the “punishment fits the crime” or is excessive. In determining the first prong of the test, the court must find that the sanction is “directed against the abuse and toward remedying the prejudice caused the innocent party” and that it is “visited upon the true offender” (i.e., “whether the offensive conduct is attributable to counsel only, or to the party only, or to both”). Hosto attempted to tie the lawyer’s conduct to KBR itself, but the evidence was pretty clear that the lawyer was running this show, not the client. Again citing TransAmerica, the court concluded that “[a] party should not be punished for counsel’s conduct in which it is not implicated apart from having entrusted to counsel its legal representation.” Hosto thus failed to establish the first prong of the test. The court went on to rule that KBR had no adequate remedy on appeal because the gravaman of KBR’s defense—that it did have a joint venture agreement with Hosto—would be eviscerated by the sanction. The court further ruled that the denial of KBR’s summary judgment motions was not substantive rulings, as Hosto argued, but sanctions, as they were characterized in the order itself. KBR, the court concluded, had “‘a right to a substantive ruling’ on its motion, including its motion for summary judgment, ‘[which] would, should [it] be granted, avoid the time, expense, and necessity of a trial” (citations omitted). Additionally, it agreed with KBR that the trial court’s order barring KBR from making any substantive motions would impair KBR’s ability to preserve appellate error, which could not be remedied on appeal. The discovery sanction likewise had to go because it would “disallow discovery that could then never be made part of the appellate record—thereby denying an appellate court the ability to evaluate the effect of the trial court’s error.”

In defense of the trial court in this case, the KBR lawyer’s conduct must have appeared as objectionable as it looks on paper and has an unmistakable “caught with a hand in the cookie jar” odor about it. On the other hand, the sanctions order was simply punitive with respect to KBR, which didn’t have anything to do with its lawyer’s shenanigans. In this sense, one could argue that both courts were “right.” It’s interesting to note that the trial court specifically told KBR’s new lawyer that the sanctions order did not preclude KBR from seeking mandamus relief. The upshot, in our view, is that the trial court preserved the integrity of the judicial process, while the court of appeals discharged its duty to apply the letter of the law.

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