IN THE SUPREME COURT OF
In re Weekley Homes, L.P.
On Petition for Writ of Mandamus
November 30, 2004
Justice Brister delivered the opinion of the Court.
Justice Willett did not participate in the decision.
We are asked to decide whether Weekley Homes, L.P., a party to a contract containing an arbitration clause, can compel arbitration of a personal injury claim brought by Patricia Von Bargen, a nonparty. We have previously compelled arbitration by nonparties to an arbitration agreement when they brought suit Âbased on a contract,Â
In re FirstMerit Bank, N.A., 52 S.W.3d 749, 755 (
Close which Von Bargen purports to avoid here.
But as both state and federal courts have recognized, nonparties may be bound to an arbitration clause when the rules of law or equity would bind them to the contract generally. Because we find those rules applicable here, we conditionally grant mandamus relief.
In the summer of 2000, Vernon Forsting contracted with Weekley for construction of a 4,000 square foot home at a purchase price of $240,000. At the time, Forsting was a seventy-eight year-old widower with an assortment of health problems. His intention in purchasing such a large home was to live with his daughter, Von Bargen (his only child) and her husband and three sons.
Von Bargen and her husband negotiated directly with Weekley on many issues before and after constructionÂpaying a $1,000 deposit, selecting the floor plan, signing a letter of intent as Âpurchasers,Â and making custom design choices.
But only Forsting executed the various financing and closing documents on the home, including the Real Estate Purchase Agreement that contained the following arbitration clause:
Any claim, dispute or cause of action between Purchaser and Seller . . . , whether sounding in contract, tort, or otherwise, shall be resolved by binding arbitration . . . . Such claims, disputes or causes of action include, but are not limited to, those arising out of or relating to . . . the design, construction, preparation, maintenance or repair of the Property.
Shortly after closing, Forsting transferred the home to the Forsting Family Trust, a revocable trust established ten years earlier whose sole beneficiary was Von Bargen. At his deposition, Forsting testified that the only reason he signed the Purchase Agreement individually rather than as trustee was because he Âforgot to put [the home] in the trust.Â Forsting and Von Bargen served as the only trustees of the Trust, the purpose of which was to transfer ForstingÂs property to Von Bargen after his death.
According to the plaintiffsÂ pleadings, numerous problems arose with the home after completion. When the family moved out of the house briefly so Weekley could perform some of those repairs, it was Von Bargen who requested and received reimbursement. Indeed, Von Bargen admitted handling Âalmost . . . all matters related to the house, the problems and the warranty work and even the negotiations.Â
Unsatisfied with the home and WeekleyÂs efforts to repair it, Forsting, Von Bargen, and the Trust filed suit against Weekley in December 2002. Forsting and the Trust asserted claims for negligence, breach of contract, statutory violations, and breach of warranty. Von Bargen sued only for personal injuries, alleging WeekleyÂs negligent repairs caused her to develop asthma.
Weekley moved to compel arbitration of all claims under the Federal Arbitration Act (FAA).
See 9 U.S.C. Â§Â§ 1-16.
Close The trial court concluded the FAA applied, and granted the motion as to all claims by Forsting and the Trust. But the trial court refused to compel arbitration of Von BargenÂs claim because she did not sign the Purchase Agreement.
Mandamus relief is proper to enforce arbitration agreements governed by the FAA.
In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 n.2 (
1999) (per curiam); EZ Pawn Corp. v.Mancias, 934 S.W.2d 87-88 (
1996) (per curiam).
Close After the Fifth Court of Appeals denied WeekleyÂs request for such relief, Weekley filed a similar request in this Court.
II. Governing Law
Neither party challenges the trial courtÂs conclusion that the FAA governs the arbitration clause here.
Although Von Bargen asserts that her personal injury claim cannot be arbitrated under the Texas ArbitrationAct as it was not signed by an attorney, see Tex. Civ. Prac. & Rem. Code Â§ 171.002(a)(3), (c), she does not challengethe trial courtÂs conclusion that the FAA governs here. The FAA not only contains no such limitation, but also preemptsany state requirements that apply only to arbitration clauses. Doctor's Assocs., Inc. v. Casarotto, 517
Close Under the FAA, absent unmistakable evidence that the parties intended the contrary, it is the courts rather than arbitrators that must decide Âgateway mattersÂ such as whether a valid arbitration agreement exists.
Green Tree Fin. Corp. v. Bazzle, 539
444, 452 (2003); PacifiCare Health Sys., Inc. v. Book, 538 U.S.401, 407 n.2 (2003).
Close Whether an arbitration agreement is binding on a nonparty is one of those gateway matters.
Wiley & Sons, Inc. v. Livingston, 376
543, 546-47 (1964).
procedural rules in making that determination.
Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 268 (
Close Those rules call for determination by summary proceedings,
Close with the burden on the moving party to show a valid agreement to arbitrate.
J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (
But as we recently noted, it is not entirely clear what substantive law governs whether a nonparty must arbitrate.
In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 738-39 (Tex. 2005); see also Howsam v. Dean WitterReynolds, Inc., 537 U.S. 79, 87 (2002) (Thomas, J., concurring) (suggesting Supreme Court sometimes looks to federallaw and sometimes law chosen by parties); Wash. Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260, 267 n.6 (5th Cir. 2004)(noting that whether state or federal law of arbitrability applies Âis often an uncertain questionÂ).
Close Generally under the FAA, state law governs whether a litigant agreed to arbitrate,
Doctor's Assocs., 517
at 686-87; First Options of Chi., Inc. v. Kaplan, 514
938, 944 (1995); Perryv. Thomas, 482
483, 492, n.9 (1987). Parties may also agree that state law governs their arbitration. Volt Info. Scis.,Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489
468, 476 (1989).
Close and federal law governs the scope of an arbitration clause.
Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460
1, 24 (1983).
Close Whether a nonparty must arbitrate can involve aspects of either or both. Pending an answer from the United States Supreme Court,
The United States Supreme Court has not answered this question, though it has applied federal substantivelaw to bind a nonparty to labor-union arbitration, a field in which federal law has traditionally yielded little deferenceto state labor-law principles. See
Wiley & Sons, 376
at 548 (citing Textile Workers Union of Am. v. LincolnMills, 353
448, 456 (1957)).
Close we apply state law while endeavoring to keep it as consistent as possible with federal law.
Kellogg, 166 S.W.3d at 739.
III. Estoppel and NonsignatoriesTexas law has long recognized that nonparties may be bound to a contract under various legal principles.
See, e.g., Tex. Bus. Corp. Act art. 2.21(A)(2) (holding shareholders may be
ble for corporationÂs contractsunder alter ego theory if they cause corporation to perpetrate actual fraud for their direct personal benefit); Stine v.Stewart, 80 S.W.3d 586, 590 (
2002) (holding third-party beneficiary could enforce contract); Biggs v.
FireIns. Co., 611 S.W.2d 624, 629 (
1981) (holding agent acting within the scope of apparent authority binds theprincipal).
Close Although we have never considered these principles in the context of arbitration, we recently noted that contract and agency law may bind a nonparty to an arbitration agreement.
Kellogg, 166 S.W.3d at 738. Accordingly, it is no longer true that Âthe [
] decisions do not even mentionthe possibility of additional bases for binding non-signatories to arbitration.Â Fleetwood Enters., Inc. v. Gaskamp, 280F.3d 1069, 1076 (5th Cir. 2002).
Close Indeed, if
law would bind a nonparty to a contract generally, the FAA would appear to preempt an exception for arbitration clauses alone.
Doctor's Assocs., 517 U.S. at 686-87; Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995)(ÂWhat States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), butnot fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policywould place arbitration clauses on an unequal Âfooting,Â directly contrary to the ActÂs language and CongressÂ intent.Â).
In the one case in which we have compelled nonparties to arbitrate, In re FirstMerit Bank, N.A., we stated that Âa litigant who sues based on a contract subjects him or herself to the contract's terms.Â
52 S.W.3d at 755.
Close Because the nonparties there asserted claims identical to the signatoriesÂ contract claims, we held all had to be arbitrated.
We did not describe in FirstMerit what it means to sue Âbased on a contract.Â Von Bargen asserts a narrow interpretation that would apply only to explicit contract claims, and thus not to hers for personal injury; Weekley argues for a broad application to any claim that Âarises from or relates toÂ the contract involved.
We recently adopted an approach between these two extremes, holding that a nonparty may be compelled to arbitrate Âif it seeks, through the claim, to derive a direct benefit from the contract containing the arbitration provisions.Â
Kellogg, 166 S.W.3d at 741.
Close As we noted, this rule is consistent with federal law of Âdirect benefits estoppel.Â
and federal law, whether a claim seeks a direct benefit from a contract containing an arbitration clause turns on the substance of the claim, not artful pleading.
Hughes Masonry Co., Inc. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 838-39 (7th Cir. 1981);Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 495 (
Close Claims must be brought on the contract (and arbitrated) if
bility arises solely from the contract or must be determined by reference to it.
IntÂl Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 418 (4th Cir. 2000); DeWittCounty Elec. Coop., Inc. v. Parks, 1 S.W.3d 96, 105 (
1999); DeLanney, 809 S.W.2d at 494.
Close On the other hand, claims can be brought in tort (and in court) if
bility arises from general obligations imposed by law.
See, e.g., R.J. Griffin & Co. v. Beach Club II Homeowners AssÂn, 384 F.3d 157, 163-164 (4th Cir. 2004);InterGen N.V. v. Grina, 344 F.3d 134, 145-46 (1st Cir. 2003); Westmoreland v. Sadoux, 299 F.3d 462, 467 (5th Cir.2002); Fleetwood Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1076-77 (5th Cir. 2002); DeLanney, 809 S.W.2d at 494;see also Formosa Plastics Corp. USA v. Presidio EngÂrs & Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998).
We question WeekleyÂs conclusion that this rule will inevitably drive claimants to plead only noncontractual claims to avoid arbitration. Nonparties face a choice when they may plead in either contract or tort, but pleading the former invokes an arbitration clause broad enough to cover both (as most do). If they pursue a claim Âon the contract,Â then they must pursue all claimsÂtort and contractÂin arbitration.
See, e.g., Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 271 (
1992) (holding DTPA claim was factuallyintertwined with contract claim and thus subject to arbitration clause).
Close Conversely, if they choose not to sue Âon the contract,Â they may pursue the tort claims in court, but the contract claims will thereby likely be waived under the election-of-remedies doctrine.
Bocanegra v. Aetna Life Ins. Co., 605 S.W.2d 848, 851 (Tex. 1980) (holding election-of-remedies doctrineprevents pursuit of inconsistent rights or remedies when result would be manifest injustice); cf. Medina v. Herrera, 927S.W.2d 597, 598-99 (Tex. 1996) (holding election-of-remedies doctrine barred pursuit of both workersÂ compensationclaim and suit against employer for intentional act).
Close Given these options, it is not clear at this point that nonparties will always choose to forfeit potentially viable contract claims solely to avoid arbitration.
In this case, Von Bargen purports to make no claim on the Weekley contract, claiming only that she developed asthma from dust created by WeekleyÂs repairs of the home. While WeekleyÂs duty to perform those repairs arose from the Purchase Agreement, a contractor performing repairs has an independent duty under
tort law not to injure bystanders by its activities,
See Redinger v. Living, Inc., 689 S.W.2d 415, 417 (
1985) (noting general contractor on a constructionsite in control of the premises may be subject to direct
bility for negligence arising from: (1) a premises defect, or (2)an activity or instrumentality).
Close or by premises conditions it leaves behind.
Strakos v. Gehring, 360 S.W.2d 787, 790 (
Close There is nothing in the sparse record here to suggest Von Bargen Âs claim is different from what any bystander might assert, or what she might assert if the contractor were not Weekley.
But a nonparty may seek or obtain direct benefits from a contract by means other than a lawsuit. In some cases, a nonparty may be compelled to arbitrate if it deliberately seeks and obtains substantial benefits from the contract itself.
Astra Oil Co., Inc. v. Rover Navigation, Ltd., 344 F.3d 276, 281 (2d Cir. 2003) (holding affi
te ofsignatories could enforce arbitration clause as opposing party treated affi
te as part of charter contract duringoccurrences involved); Am. Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. 1999) (holdingnonsignatories who received lower insurance rates and ability to sail under French flag due to contract were bound byarbitration clause in it); see also Matter of VMS Ltd. PÂship Sec. Litig., 26 F.3d 50, 52 (7th Cir. 1994) (holding wifebound by settlement agreement related to investment services contract signed only by her husband, but under which shehad accepted services as well); see also InterGen, 344 F.3d at 146 (holding equitable estoppel inapplicable asnonsignatory never sought to derive direct benefits from contracts during their currency).
Close The analysis here focuses on the nonpartyÂs conduct during the performance of the contract.
E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 200n.7 (3d Cir.2001).
Close Thus, for example, a firm that uses a trade name pursuant to an agreement containing an arbitration clause cannot later avoid arbitration by claiming to have been a nonparty.
Deloitte Noraudit A/S v. Deloitte
, 9 F.3d 1060, 1064 (2d Cir. 1993).
Close Nor can nonsignatories who received lower insurance rates and the ability to sail under the French flag due to a contract avoid the arbitration clause in that contract.
Tencara Shipyard, 170 F.3d at 353.
This Court has never addressed such an estoppel claim in the arbitration context.
See Kellogg, 166 S.W.3d at 741 n.9 (reserving question of whether to apply direct-benefits estoppel tobenefits obtained from contract rather than subsequent litigation).
Close But we have long recognized in other contexts the defensive theory of promissory estoppel.
See, e.g., Â
Â Burger, Inc. v. Phillips Petroleum Co., 492 S.W.2d 934 (Tex.1972).
Close When a promisor induces substantial action or forbearance by another, promissory estoppel prevents any denial of that promise if injustice can be avoided only by enforcement.
Trammell Crow Co. No. 60 v. Harkinson, 944 S.W.2d 631, 636 (
Close Promissory estoppel does not create
bility where none otherwise exists,
Hruska v. First State Bank of Deanville, 747 S.W.2d 783, 785 (
Close but Âprevents a party from insisting upon his strict legal rights when it would be unjust to allow him to enforce them.Â
Wheeler v. White, 398 S.W.2d 93, 96 (
Here, Von Bargen has not merely resided in the home. Claiming the authority of the Purchase Agreement, she directed how Weekley should construct many of its features, repeatedly demanded extensive repairs to Âour home,Â
In various lists submitted in the months after the sale, Von Bargen demanded repairs to sagging floors,buckling walls and windows, cracking brick work, as well as replacing the front door, repainting the back door and thekitchen cabinets, regrouting the bathrooms and entry way, replacing the fireplace screen, closing gaps at carpet seams,removing drainage problems in the yard, and repairing a noisy garage door.
Close personally requested and received financial reimbursement for expenses ÂI incurredÂ while those repairs were made, and conducted settlement negotiations with Weekley (apparently never consummated) about moving the family to a new home. Having obtained these substantial actions from Weekley by demanding comp
nce with provisions of the contract, Von Bargen cannot equitably object to the arbitration clause attached to them.
In addition to these benefits, Forsting and the Trust have sued Weekley on claims which are explicitly based on the contract. Under Texas law, a suit involving a trust generally must be brought by or against the trustee, and can be binding on the beneficiaries whether they join it or not.
See Tex. Prop. Code Â§Â§ 111.004(7), 115.011, 115.015; Huie v. DeShazo, 922 S.W.2d 920, 926 (Tex.1996)(holding trusts are not legal entities); Transamerican Leasing Co. v. Three Bears, Inc., 586 S.W.2d 472, 476-77(Tex. 1979) (holding beneficiaries were bound by judgment against trust and trustees, as some participated in trial in theircapacity as trustees, and remainder showed neither prejudice, conflict of interest, nor inadequate representation bytrustees).
Close Although Von Bargen did not purport to sue as either trustee or beneficiary, she was both, and any recovery will inure to her direct benefit as the sole beneficiary and equitable titleholder of the home.
Perfect Union Lodge No. 10 v. Interfirst Bank of San Antonio, N.A., 748 S.W.2d 218, 220 (
1988)(holding trust beneficiaries hold equitable title to trust property); cf. Javitch v. First Union Sec., Inc., 315 F.3d 619, 627(6th Cir. 2003) (holding arbitration agreements were binding on receiver who succeeded to interests of entities thatsigned them); Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1153-54 (3d Cir. 1989)(holding arbitration agreements were binding on successor trustee in bankruptcy).
Close As one
court has noted, if a trusteeÂs agreement to arbitrate can be avoided by simply having the beneficiaries bring suit, Âthe strong state policy favoring arbitration would be effectively thwarted.Â
Merrill Lynch, Pierce, Fenner & Smith v. Eddings, 838 S.W.2d 874, 879 (Tex. App.ÂWaco 1992, writdenied).
While we based our decision in FirstMerit Bank on the nonpartiesÂ contract-based claims, more was involved in that case than the format of the pleadings. Direct-benefits estoppel requires a colorable claim to the benefits; a meddlesome stranger cannot compel arbitration by merely pleading a claim that quotes someone elseÂs contract. The nonparties in FirstMerit Bank were the daughter and son-in-law of the signatories, the actual occupants of the mobile home, and (according to the briefs) the future owners to whom the signatories planned to transfer title. It is hard to see what direct benefits they expected from that contract that Von Bargen did not expect from this one.
Like the equitable doctrine of promissory estoppel, we do not understand direct-benefits estoppel to create
bility for noncontracting parties that does not otherwise exist. As Von Bargen and Weekley had no contract between them, estoppel alone cannot grant either a right to sue for breach.
See Sun Oil Co. v. Madeley, 626 S.W.2d 726, 734 (
1981) (holding estoppel based on division orderscould not permanently amend underlying lease).
Close Nor do we understand the doctrine to apply when the benefits alleged are insubstantial or indirect. But once Von Bargen deliberately sought substantial and direct benefits from the contract, and Weekley agreed to comply, equity prevents her from avoiding the arbitration clause that was part of that agreement.
We recognize that direct-benefits estoppel has yet to be endorsed by the United States Supreme Court, and that its application and boundaries are not entirely clear.
See, e.g., J. Douglas Uloth & J. Hamilton Rial, III, Equitable Estoppel as a Basis for CompellingNonsignatories to ArbitrateÂA Bridge Too Far?, 21 Rev. Litig. 593 (2002).
Close For example, while federal courts often state the test as whether a nonsignatory has Âembraced the contract,Â
See, e.g., InterGen, 344 F.3d at 145; DuPont, 269 F.3d at 200; Peltz ex rel. Peltz v. Sears, Roebuck & Co.,367 F.Supp.2d 711, 721 (E.D.Pa. 2005); In re Universal Serv. Fund Tel. Billing Practices Litig., 300 F.Supp.2d 1107,1138 (D.Kan. 2003); Amkor Tech., Inc. v. Alcatel Bus. Sys., 278 F.Supp.2d 519, 521-22 (E.D.Pa. 2003); Cherry CreekCard & Party Shop, Inc. v. Hallmark Mktg. Corp., 176 F.Supp.2d 1091, 1098 (D.Colo. 2001).
Close the metaphor gives little guidance in deciding what particular conduct embraces or merely shakes hands with it. Indeed, the equitable nature of the doctrine may render firm standards inappropriate, requiring trial courts to exercise some discretion based on the facts of each case.
See, e.g., Bridas S.A.P.I.C. v. Turkmenistan, 345 F.3d 347, 360 (5th Cir. 2003) (ÂThe use of equitableestoppel is within a district court's discretion.Â); accord, Hill v. G.E. Power Sys., Inc., 282 F.3d 343, 348 (5th Cir. 2002);Grigson v. Creative Artists Agency, 210 F.3d 524, 528 (5th Cir. 2000).
But we agree with the federal courts that when a nonparty consistently
See IntÂl Paper, 206 F.3d at 418 (estopping nonsignatory from denying agreement to arbitrate Âwhen he hasconsistently maintained that other provisions of the same contract should be enforced to benefit him.Â) (emphasis added).
Close and knowingly
See Bridas, 345 F.3d at 361-62 (ÂDirect[-]benefits estoppel applies when a nonsignatory Âknowingly exploitsthe agreement containing the arbitration clause.ÂÂ) (emphasis added) (citing DuPont, 269 F.3d at 199); TencaraShipyard, 170 F.3d at 353 (requiring nonsignatories to arbitrate pursuant to provision in contract they neither requestednor executed, as they had duty to obtain that contract and received copies of it).
Close insists that others treat it as a party, it cannot later Âturn its back on the portions of the contract, such as an arbitration clause, that it finds distasteful.Â
DuPont, 269 F.3d at 200; accord Astra Oil Co., 344 F.3d at 281.
Close A nonparty cannot both have his contract and defeat it too.
While Von Bargen never based her personal injury claim on the contract, her prior exercise of other contractual rights and her equitable entitlement to other contractual benefits prevents her from avoiding the arbitration clause here. Accordingly, the trial court abused its discretion in failing to compel arbitration. We conditionally grant the writ of mandamus and order the trial court to vacate that part of its order denying WeekleyÂs motion, and to enter a new order compelling arbitration of Von Bargen Âs claim. We are confident the trial court will comply, and our writ will issue only if it does not.
October 28, 2005