The Texas Supreme Court has held that the subsequent purchaser of a residence is bound by the arbitration clause in the original buyer’s purchase-and-sale agreement with the homebuilder. The decision reverses the Houston [14th] Court of Appeals.
The facts of Lennar Homes of Texas Land and Construction, Ltd. and Lennar Homes of Texas Sales and Marketing, Ltd. v. Kara Whitely (No. 21-0783; delivered May 12, 2023) are straightforward. Lennar built a home and sold it to the original buyer in 2014. Lennar conveyed the house in a special warranty deed and single-family warranty deed, both of which contained mandatory arbitration provisions. The following year the buyer sold the home to Whiteley. Two years later she sued Lennar for mold contamination allegedly caused by defective construction, particularly the design and installation of the home’s HVAC system. Lennar filed an application to stay the lawsuit pending arbitration, which the trial court granted. The arbitrator’s award dismissed Whiteley’s claims and awarded Lennar attorney’s fees. Lennar moved to confirm the award, but Whiteley responded with a motion to vacate the award on the basis that she was not a party to the arbitration agreement. The trial court denied Lennar’s motion and granted Whiteley’s.
The Houston [14th] Court of Appeals affirmed, holding that an arbitration agreement in a sales contract does not run with the land because it does not “touch and concern” the land. The court interpreted the considerable case authority on covenants that run with the land to mean an agreement “premised on the physical use or enjoyment of the conveyed property,” where an arbitration agreement’s purpose is “to provide a rapid, less expensive alternative to traditional litigation” (though we have found many businesses who would dispute that assumption!). “Accordingly,” the court concluded, “the special warranty deed’s arbitration agreement is more akin to a personal covenant than a covenant that touches and concerns the land” (citations omitted). Lennar sought review, which the Court granted.
In an opinion by Justice Busby, SCOTX reversed, rendered judgment confirming the arbitration award against Whiteley, and remanded to the trial court for further proceedings regarding Lennar’s claims for indemnity against the HVAC subcontractor and engineer who inspected the construction. Lennar argued primarily that direct-benefits estoppel applied to estop Whiteley from avoiding the purchase-sale-agreement’s arbitration clause. It argued further the arbitration agreement attached to the original buyer’s Special Warranty Deed was a covenant running with the land, or that Whiteley could be compelled to arbitrate as a third-party beneficiary of Lennar’s warranty. Because the Court decided the case based on direct-benefits estoppel, it did not reach the remaining issues.
The threshold question was whether a person who was not a party to the original PSA could be compelled to arbitrate with the homebuilder. Justice Busby commenced his analysis with the general rule that non-signatories to arbitration agreements may nonetheless be bound by them under six contract and agency law theories: “(1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) equitable estoppel; and (6) third-party beneficiary” (citation omitted). Under the doctrine of direct-benefits estoppel, Justice Busby wrote, “this Court has held that a non-signatory plaintiff may be compelled to arbitrate if its claims are ‘based on a contract’ containing an agreement to arbitrate” (citations omitted). Application of the doctrine, however, “is limited to cases where the non-signatory ‘seeks, through a claim, to derive a direct benefit from the contract,’ although ‘a non-signatory’s claim may relate to a contract containing an arbitration provision, that relationship does not, in itself, bind the non-signatory to the arbitration provision” (citation omitted).
But in a case in which a party’s liability arises from a contract with an arbitration provision (as opposed to from “general obligations imposed by law”), the non-signatory may be so bound. Whiteley argued that her breach of implied warranty claim arose from common law and that, in any event, her claims were based on the contract with the original purchaser, not the PSA.The Court rejected these arguments, holding that an implied warranty depends for its existence on that contract that brings it into being. Consequently, “implied warranties are ‘implicit in the contract between the builder/vendor and original purchaser and [are] automatically assigned to the subsequent purchaser” (citations omitted). And while “the mere fact that the claims would not have arisen but for the [PSA] is not enough to establish equitable estoppel,” Justice Busby noted, any implied warranties are necessarily modified or disclaimed any express warranties contained in the original PSA, special warranty deed, and individual family home warranty. Consequently, Whiteley’s breach of warranty claim can only be “determined by reference” to the PSA. Justice Busby put it this way: “[A]though liability arises in part from the general law, nonliability arises from the terms of the express warranties described in Lennar’s [single-family warranty], which the PSA incorporated by reference (citation omitted). We therefore conclude that Whiteley’s claim for breach of the implied warranty of good workmanship does not ‘stand independently’ of the PSA (citation omitted).
By the same reasoning, the Court held that Whiteley’s claim for breach of the implied warranty of habitability did not “stand independently” of the PSA, which, among other things, disclaimed that implied warranty. Whiteley was thus bound to arbitrate pursuant to the PSA under the doctrine of direct-benefits estoppel.
In a series of recent opinions involving arbitration agreements, the Court has made it clear that it will enforce such agreements up and down the line, if the agreements are valid and the dispute is within their scope.
