“Litigants who seek direct benefits from a contract subject themselves to its terms, including any arbitration clause within that contract.”—Taylor Morrison of Tex., Inc. v. Ha, 660 S.W.3d 529, 531 (Tex. 2023).
“With respect to the subsequent purchaser, we hold that she was bound by the arbitration clause in the purchase-and-sale agreement under the doctrine of direct-benefits estoppel.”—Lennar Homes of Tex. Land & Constr., Ltd. v. Whiteley, No. 21-0783, 66 Tex. Sup. Ct. J. 874, 2023 Tex. LEXIS 407, at *1-2 (May 12, 2023).
While it may seem evident that household members and subsequent purchasers bringing a construction defect claim are bound by the arbitration provision contained in the purchase and sale contract for the home, that was not the case until this year.
In fact, in recent years, Plaintiffs' lawyers would bring construction claims in arbitration under the purchase contract and then would also file a separate lawsuit in state court on behalf of the spouse and minor children, alleging personal injury from the conditions related to the alleged defects. Moreover, subsequent purchasers would bring claims under implied warranties, rather than contractual warranties, in an effort to circumvent the contract. As recently as last year, Texas courts upheld those practices – refusing to order claims to arbitration. But in 2023, the Texas Supreme Court ended these practices.
Spouses and Minor Children Bound by the Arbitration Agreement
In Taylor Morrison v. Ha, the parents and three minor children collectively sued Taylor Morrison, alleging that defects caused mold to grow, resulting in physical illness. They asserted claims for breach of warranty, negligence, fraud, breach of contract, quantum meruit, and violation of the Texas Deceptive Trade Practices Act (DTPA). Taylor Morrison sought to have all claims sent to arbitration. Because only Mr. Ha signed the purchase contract, Mrs. Ha and the children sought to keep their claims in state court. The trial court, and the court of appeals in Houston, ruled against Taylor Morrison and refused to send the claims to arbitration.
In reversing the Court of Appeals' decision, the Supreme Court held:
[W]hen, a nonsignatory spouse and children, live in a family home purchased by the signatory spouse, the nonsignatory family members have accepted direct benefits from the purchase agreement such that they may be compelled through direct-benefits estoppel to arbitrate when the family sues as an integrated unit for factually intertwined construction-defect claims. Taylor Morrison of Tex., Inc. v. Ha, 660 S.W.3d 529, 534-35 (Tex. 2023).
Subsequent Purchasers Bound by the Arbitration Agreement
In Lennar Homes v. Whiteley, the second home purchaser sued Lennar in state court, alleging defects led to mold growth. While the court initially granted the motion to compel arbitration, and the parties even arbitrated the claims, the trial court refused to confirm the arbitration award, holding that the case should have never been sent to arbitration in the first place.
Whiteley argued that the arbitration agreement in the original purchase contract with Lennar was inapplicable to her because she only asserted common law implied warranty claims—not contract-based claims—and her purchase of the home was through a contract with the first homeowner, not with Lennar under the Lennar Purchase and Sale Agreement.
The Supreme Court rejected these arguments. First, the Supreme Court held "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" and that "the warranties of good workmanship and habitability are 'implicit in the contract between the builder/vendor and original purchaser and [are] automatically assigned to the subsequent purchaser.'" Lennar Homes of Tex. Land & Constr., Ltd. v. Whiteley, No. 21-0783, 66 Tex. Sup. Ct. J. 874, 2023 Tex. LEXIS 407, at *15-16 (May 12, 2023).
Next, the Supreme Court held "although liability arises in part from the general law, nonliability arises from the terms of the express warranties described in Lennar's '1-2-10 Single-Family Warranty,' which the PSA incorporated by reference. We, therefore, conclude that Whiteley's claim for breach of the implied warranty of good workmanship does not 'stand independently' of the PSA." Id. at 17-18.
Notably, the Supreme Court held that litigants cannot get around contractual provisions by pleading only non-contract claims:
"[W]hether a claim seeks a direct benefit from a contract containing an arbitration clause turns on the substance of the claim, not artful pleading . . . [W]here the relied-upon arbitration clause is broad enough to cover both tort and contract claims, if the plaintiff pursues one claim on the contract, then [the plaintiff] must pursue all claims—tort and contract—in arbitration."—Id. at *15 (internal citations omitted).
These two groundbreaking decisions place developers and builders in a solid position to enforce the arbitration and warranty provisions of their purchase and sale agreements against virtually all potential litigants claiming construction defects and will provide consistency and certainty in the dispute resolution process.
