In this interlocutory appeal, the Supreme Court of Texas reversed in part the decision of the court of appeals in Lennar Homes of Tex. Land & Constr., Ltd. v. Whiteley, _S.W.3d_2023 (Tex. May 12, 2023). The high court found that Whiteley, a subsequent purchaser who claimed construction defects against Lennar Homes of Texas Land & Construction, Ltd. (“Lennar”) was bound by the arbitration clause contained in the purchase and sale agreement (“PSA”) between Lennar and the original owner of the home pursuant to the doctrine of direct-benefits estoppel. Despite the fact that Whiteley’s implied warranty claims against Lennar arise partly from common law, nonliability arises from the provisions of the express warranty between Lennar and the original purchaser because the express warranty was incorporated by reference into the original PSA. The court found that the warranty claims asserted by Whitely did not stand on their own, but instead relied on the existence of the original PSA containing the arbitration clause.
Background of the Case
Cody Isaacson signed a PSA with Lennar Homes for a house to be built in Enclave at Bay Colony subdivision in Galveston, Texas. The PSA included two arbitration clauses. One contained general language that required Lennar and Isaacson to arbitrate any disputes according to the rules of the American Arbitration Association. The second arbitration clause contained provisions specific to warranty disputes. It stated that, "Any disputes, claims, or controversies relating to any items, problems, defects, or difficulties covered by the Limited Warranty shall be resolved pursuant to the dispute settlement provisions covered by the Limited Warranty Booklet." In the Limited Warranty Booklet, Lennar provided three types of express warranties. First, it provided a workmanship protection warranty that covered certain components of the home for one year from the closing date. Second, a systems protection warranty was provided in the Systems Standards section that stated other components of the home would perform in accordance with accepted standards for up to two years after closing. Finally, the third warranty covered structural components of the home and would be covered up to ten years after closing.
On May 16, 2014, Lennar executed and recorded a Special Warranty Deed conveying title to the home and the property to Isaacson. The deed stated it was subject to an arbitration provision attached to the deed as Exhibit A. The attached arbitration clause was similar to those included within the PSA. In addition, it stated "Exhibit A runs with the land and will be binding upon the successors and assigns of Isaacson."
On July 31, 2015, Isaacson sold the house and property to Kara Whiteley. He conveyed title via General Warranty Deed that was executed and recorded in the county records. Whitely noticed a "serious mold problem" soon after moving in. She brought a claim against Lennar after providing appropriate notice and participating in settlement negotiations according to the requirements of the Residential Construction Liability Act. In her suit Whiteley claimed negligent construction and breach of the implied warranties of habitability and good workmanship. Specifically Whiteley alleged that "Lennar had breached its duty to exercise ordinary care in its construction of the home and failed to construct the home in the same manner as would a generally proficient builder engaged in similar work and performing under similar circumstances." Whiteley went on to say that construction defects caused the mold and rendered the house inhabitable. She sued for actual damages including cost to repair, replacement costs for good damaged inside the home, engineering and consulting fees, temporary housing expenses and attorney fees.
Lennar filed an application to stay the proceedings pending arbitration, but Whiteley opposed Lennar's request for arbitration arguing she did not sign the original PSA containing the arbitration agreements. Lennar argued in its response that Whiteley was bound to arbitrate either as a successor-in-interest under the doctrine of direct-benefits estoppel or because she assumed Isaacson's obligations under the PSA. It also argued that the issue concerning whether Whiteley should be forced to arbitrate was a question for the arbitrator and not the court. The trial court granted Lennar's application for the stay and the parties went before the arbitrator.
The arbitrator found in favor of Lennar and ordered Whiteley to pay costs and fees. Whiteley opposed the decision and again argued that her claims should not have been reviewed in the arbitration process. The trial court denied Lennar's motion and granted Whiteley's, vacating the arbitration award. Lennar filed an interlocutory appeal. The court of appeals affirmed the trial court's decision. The Supreme Court of Texas granted Lennar's petition for review.
Did the Trial Court Err in Granting Whiteley's Motion to Vacate the Final Arbitration Award?
According to the Federal Arbitration Act (FAA), "a party seeking to compel arbitration must establish the existence of a valid arbitration agreement and the existence of a dispute within the scope of the agreement." Baby Dolls Topless Salons, Inv. v. Sotero, 642 S.W.3d 127, 130 (Tex. 2005). The general inquiry into determining who is bound by the terms of the arbitration agreement comes down to intent. Jody James Farms, JV v. Altman Grp., 547 S.W.3d 614, 633 (Tex. 2018). The Supreme Court looked to In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005) to determine whether a non-party to the agreement may be compelled to adhere to its provisions. That case outlined six possible theories by which non-signatories may be bound to an arbitration agreement:
- Incorporation by reference
- Alter Ego
- Equitable estoppel, and
- Third party beneficiary
Here the court found that Whiteley was subject to the terms of the arbitration agreement because the arbitration clause was incorporated by reference into the PSA. As discussed below, the PSA is relevant to Whiteley's case because Whiteley relied on the provisions of the PSA to pursue her claims against Lennar. Without the rights afforded by the PSA, Whiteley would not have a case at all.
Did Lennar Meet its Burden of Showing that Whiteley was Bound by the PSA Agreement to Arbitrate Pursuant to the Equitable Doctrine of Direct-Benefits?
Generally, a plaintiff who brings a claim based upon a certain contract subjects themselves to the terms of that contract. First Merit Bank, N.A. 52 S.W.3d 749, 755 (Tex. 2001). The direct-benefits estoppel theory may only be used in cases where "the non-signatory seeks through the claim, to derive a direct benefit from the contract…" Kellogg at 741. "The claim must depend on the existence of the contract… and be unable to stand independently without the contract." G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 527-28 (Tex. 2015).
In the case at hand, Whiteley contends her right to pursue an implied warranty claim derives from the common law and her purchase of the home was not completed through the PSA, but rather through a separate contract with Isaacson that was wholly outside of the PSA. Although the lower courts agreed with this reasoning and even made several statements in support of it, the Supreme Court disagreed.
The Supreme Court first disagreed with Whiteley's contention that her right to enforce an implied warranty is derived from common law. Instead it found that, although the warranties "are imposed by operation of law, the obligation still arises from the contract and becomes part of the contract. Absent a contract, the warranty would not arise." Nghiem v. Sajib, 567 S.W.3d 718, 715 (Tex. 2019). It also noted that extending warranties of good workmanship and habitability to benefit subsequent purchasers of the homes are "implicit in the contract between the builder/ vendor and original purchaser and are automatically assigned to the subsequent purchaser." 646 S.W.2d 168, 169 (Tex. 1983).
Second, Whiteley's claims do arise from the PSA even though she signed a separate contract for sale with Issacson. The implied warranty of workmanship generally operates as a gap filler or default warranty in a PSA. Centex Homes v. Buecher, 95 S.W.3d 266, 273 (Tex. 2002). "The implied warranty of good workmanship attaches to a new home sale if the parties' agreement does not provide how the builder or the structure is to perform." Centex Homes, 95 S.W.3d at 273. Due to the fact that implied warranties move with the home, subsequent purchasers cannot claim a greater warranty than that provided to the original purchaser. Therefore, Lennar's liability for breach is not "independent of its contractual undertaking." Chapman Custom Homes, Inc. v. Dali Plumbing Co. 445 S.W.3d 716, 718 (Tex. 2014). Although some general liability may arise under common law, nonliability also arises from the terms of the express warranties described in the warranty documents incorporated into the PSA by reference. Based on this the court concluded that Whiteley's claim for a breach of the implied warranty of good workmanship does not stand independently from the PSA between Lennar and the original purchaser.
Finally, as to the implied warranty for habitability, common law requires that "at the completion of the purchase there are no latent defects in the facilities that are vital to the use of the premises for residential purposes and that these essential facilities will remain in a condition which makes the property livable." Kamarth v. Bennett, 568 S.W.2d 658, 661 (Tex. 1978). This is different than the warranty of good workmanship in that it "only extends to defects that render the property so defective that it is unsuitable for its intended use as a home." Centex Homes, 95 S.W.3d at 274. In other words, the warranty of habitability looks at the state of the completed structure and demands that any known defects be disclosed. The implied warranty of habitability "does not include defects, even substantial ones, that are known by or expressly disclosed to the buyer." Id. at 275.
In the case at hand the PSA included the following provisions:
- A general disclaimer of the warranty of habitability
- A section of disclosures regarding the homes,
- An Indoor Environmental Quality Disclosure concerning the likelihood of mold growth in the home, and
- Lennar's "1-2-10 Single-Family Warranty."
Based on these provisions any potential liability on the part of Lennar must be determined by reference to the original PSA. This being the case, Whiteley's claims do not stand independently from the PSA. Pursuant to the Supreme Court's conclusion that Whiteley was bound to arbitrate under the doctrine of direct-benefits estoppel, any liability of Lennar on this front should be determined by an arbitrator. The Supreme Court reversed the judgment as to the court of appeals, confirmed the arbitration award against Whiteley and remanded to the trial court.