Texas Court of Appeals Enforces Arbitration Agreement Provision Delegating Issues of Arbitrability to Arbitrator

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Taylor Morrison of Tex. Inc. v. Caballero, No. 01-20-00800-CV, 2022 Tex. App. LEXIS 1870, 2022 WL 839429 (Mar. 22, 2022)

Gary and Kelley Caballero contracted to purchase a new home to be constructed by Taylor Woodrow and Taylor Morrison of Texas, Inc. (Taylor). The contract contained an agreement to arbitrate any disputes with the American Arbitration Association (AAA) under the Federal Arbitration Act (FAA).

After moving in, the Caballeros discovered that their new home had mold issues. They sued Taylor, claiming that their home was defectively constructed, causing moisture problems, which led to mold growth. They sought to recover actual damages of over $1 million and their attorney’s fees. The Caballeros’ petition recognized that the contract contained an arbitration agreement. However, they claimed that “because of the fraud in the inducement of a real estate transaction, and other alleged prior knowledge, fraudulent activity and misrepresentations, the arbitration [agreement] is void, voidable and/or unenforceable.”

Taylor filed a motion to compel the Caballeros to submit issues of the arbitration agreement’s enforceability to an arbitrator. Taylor relied on an arbitration agreement provision, which delegated the authority to determine threshold issues of “arbitrability” to the arbitrator, including enforceability of the agreement and defenses to enforcement (the “delegation provision). The Caballeros opposed the motion, complaining that certain arbitration agreement provisions, including the delegation provision, were substantively unconscionable. The trial court struck the provisions at issue, holding that it had the right to determine questions of arbitrability rather than the arbitrator. Taylor appealed.

While federal law requires the enforcement of valid agreements to arbitrate, if a party challenges the validity, scope, or enforceability of an arbitration agreement (individually and collectively, “arbitrability), a decision-maker must consider that challenge before it orders the parties to arbitration. Under the FAA, courts presume that parties intend that a court, rather than an arbitrator, decide issues of arbitrability. However, parties may delegate such issues to the arbitrator. If there is a delegation provision, the court must compel arbitration, so the arbitrator may decide “gateway” issues the parties have agreed to arbitrate. Courts “have no discretion but to compel arbitration” unless the delegation provision’s validity is challenged.”

The Caballeros raised such a challenge. They first contended that the delegation provision was substantively unconscionable because it “contract[ed] away the authority” of the trial court “to decide gateway issues.” The Texas Court of Appeals rejected this argument, explaining that “both the U.S. Supreme Court and the Supreme Court of Texas have made clear that parties may contract to delegate questions of arbitrability to the arbitrator.”

The Caballeros next contended that the delegation provision was unconscionable because it forced them to arbitrate issues of arbitrability with the AAA, “an inaccessible and prohibitively expensive forum.” They supported their contention by offering the AAA’s Construction Industry Arbitration Rules and Mediation Procedures, which indicated that for claims over $1 million, the initial filing fee totaled $14,700. They also offered their attorney’s affidavit to show that, in two similar suits filed against Taylor, homeowners had been assessed arbitration fees in excess of $20,000 to arbitrate the merits of their claims. The Court of Appeals also rejected this argument, explaining that to show that arbitration cost rendered the delegation provision unconscionable, the Caballeros needed to demonstrate the unfairness of the cost of arbitrating issues of arbitrability under that provision, not the cost of arbitrating the merits of their claims under the arbitration agreement. The Caballeros offered evidence of the latter, but not the former.

Additionally, Taylor offered to pay the Caballeros’ arbitration costs for arbitrating issues of arbitrability. The court explained that “[w]hen the party seeking arbitration offers in court to pay the arbitration costs of the party opposing arbitration, both Texas state courts and federal courts have held that the offer moots the opposing party’s argument that the arbitration provision is substantively unconscionable because of prohibitive arbitration costs.”

The Court of Appeals held that because the Caballeros did not successfully challenge the delegation provision, the trial court improperly struck the language in the provision authorizing the arbitrator to decide issues of arbitrability, and accordingly was not permitted to decide whether the other provisions at issue rendered the arbitration agreement unenforceable.

The Court of Appeals reversed and remanded the trial court to sign an order, compelling the parties to arbitrate pursuant to the delegation provision.

Full Opinion (PDF)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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