Opinion
Nos. 14-05-00604-CV, 14-05-00878-CV
Petition for Writ of Mandamus Denied; Reversed and Remanded; and Majority and Concurring Opinions filed January 9, 2007.
On Appeal from the 280th District Court, Harris County, Texas, Trial Court Cause No. 03-69920.
ORIGINAL PROCEEDING. WRIT OF MANDAMUS.
Panel consists of Chief Justice HEDGES and Justices YATES and ANDERSON.
MAJORITY OPINION
This is a consolidated interlocutory appeal and petition for writ of mandamus challenging the trial court's May 13, 2005 order denying a motion to compel arbitration filed by appellant, homebuilder TMI, Inc., d/b/a Trendmaker Homes ("Trendmaker"). See TEX. CIV. PRAC. REM. CODE ANN. § 171.098(a) (Vernon 2005); 9 U.S.C. §§ 1- 16. The lawsuit arose when appellees, nineteen homeowners ("the homeowners") in the Woodwind Lakes subdivision of Houston, learned their homesites were environmentally contaminated, and sued Trendmaker and other entities for failing to disclose the former presence of oil and gas operations on the property. Trendmaker moved to compel arbitration pursuant to an arbitration provision in its Purchase Agreement. Concluding the arbitration provision was procedurally and substantively unconscionable, the trial court denied Trendmaker's motion.
The plaintiffs sued Woodwind Lakes Partnership #3 Ltd., Woodwind Lakes Partnership, Lakeland Development Company, Mapani, Inc., Kentner P. Shell, Chicago Title Insurance Company, Centennial Homes, Inc., d/b/a Trendmaker Homes, TMI, Inc., Windham Holdings, L.P., 422S, Limited Liability Company, Aderus Company, Mapani Homes, Actington Company, and Actington of Texas Corporation (collectively, the "Developer Defendants") and Chevron USA, Inc. d/b/a ChevronTexaco Corporation and Amerada Hess Corporation (collectively, the "Petroleum Defendants"). The additional defendants are not material to Trendmaker's motion to compel arbitration or this appeal. The The homeowners will litigate their claims against the additional defendants in the trial court status of these additional defendants and plaintiffs' suit against them is not found in the appellate record.
In five points of error, Trendmaker asserts the trial court erred in (1) "drawing all factual inferences against arbitrability and ignoring normal presumptions and public policy" favoring arbitration; (2) finding the arbitration clause in Trendmaker's Purchase Agreement was procedurally unconscionable; (3) finding the arbitration clause was substantively unconscionable; (4) considering the procedural unconscionability issue rather than submitting it to an arbitrator; and (5) "creating a new standard for enforceability of arbitration agreements that would essentially require discovery to be taken in connection with a motion to compel arbitration." We construe these contentions as a single claim that the trial court erred in denying Trendmaker's motion to compel arbitration on the grounds of unconscionability. We reverse the trial court's May 13, 2005 order, remand this case for further proceedings, and deny the petition for writ of mandamus.
FACTUAL AND PROCEDURAL BACKGROUND
Trendmaker is in the business of building and selling homes. The appellees, John A. Brooks, Kimberly M. Brooks, Miklyn M. Provenzano, Aston B. Griffiths, Bernice M. Griffiths, Daniel L. Woodard, Cinda J. Woodard, Carsten Alsguth, Sheri L. Alsguth, Timothy S. Hart and Marian Hart, Tanner Garth, Terri Garth, Raoul LeBlanc, Debbie LeBlanc, George Safi, Jill Safi, Jerry Thomas, and Nancy Thomas, purchased new homes in Woodwind Lakes from Trendmaker. Each appellee or set of husband/wife homeowners, signed an agreement ("the Purchase Agreement") with Trendmaker for the construction of a new house, ranging in value from $170,000 to $220,000. The Purchase Agreement contained an arbitration provision as follows:
All claims, disputes and other matters in question between Seller and Purchaser arising out of or relating to this agreement or to any alleged defects relating to the Property including, but not limited to, any claims brought under the Texas Deceptive Trade Practices Act or the Residential Construction Liability Act, shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association promulgated by the American Arbitration Association, as in effect [sic] the date of any demand for arbitration hereunder, except that at Seller's sole option, it shall have all defenses based upon the applicable statute of limitations determined by a court of law or at any arbitrator's preliminary hearing. The foregoing agreement to arbitrate shall be enforceable under the prevailing Texas arbitration law. The award rendered by the arbitrator shall be final and binding upon the parties.
The words "defect" and "Property" are not defined in the Purchase Agreement.
After purchasing their homes, the homeowners discovered the property comprising Woodwind Lakes had been the former site of oil and gas operations. Until the 1970s, ChevronTexaco and Amerada Hess Corporation conducted oil and gas exploration and processing on the property. These operations involved a gas compression station, storage tanks, spill containment facilities, and disposal pits for oil and products derived from oil and natural gas. When the oil and gas operations concluded, the property was sold. Ultimately, Woodwind Lakes Partners #3, Ltd., purchased the property to develop it as a housing subdivision.
During the development process, Lakeland Development Company, the project manager, discovered portions of the property were contaminated from the oil and gas operations. Lakeland began moving the contaminated soil to the platted recreational areas for remediation. Over time, some of the soil was moved back into the residential lots. The homeowners became aware of the contamination issues at various times in 2003, when defendant ChevronTexaco issued letters to the homeowners requesting permission to conduct research concerning the environmental conditions in the neighborhood and on individual lots. Such testing revealed various levels of mercury, benzene, and other contaminants on individual lots and in common areas.
Various groups of homeowners brought suits against the developer, the builder, and the petroleum companies. In the case at bar, homeowners Brooks, Provenzano, Griffiths, Woodard, Alsguth, and Hart ("the original plaintiffs") brought suit against Trendmaker in the 234th District Court, alleging negligence, various forms of fraud, violations of the Deceptive Trade Practices Act, negligent misrepresentation, nuisance, and civil conspiracy, and seeking damages of more than one million dollars per home.
Prior to this suit, another group of homeowners litigated the arbitrability of substantially the same contamination issues, pursuant to the same Purchase Agreement with Trendmaker, in cause No. 2002-55598, Bernie Milligan, Hank Williams, and Brian and Donna Kibler v. Centennial Homes, Inc., d/b/a Trendmaker Homes, in the 281st District Court of Harris County ("the Milligan case"). The parties consisted of five claimants who purchased three homes from Trendmaker. Although the Milligan case was referred to arbitration, the homeowners in the instant case argue the question of the unconscionability of the arbitration provision was not before the court in the Milligan case.
We refer to husband and wife claimants collectively by last name.
The damages estimate is based on a statement by the homeowners' counsel at the May 13, 2005 hearing and from Trendmaker's reply brief in this court; the homeowners did not allege a specific damages sum in their petitions.
Trendmaker answered, alleging inter alia, that the plaintiffs were barred from bringing the action because they had agreed to binding arbitration provisions in the Purchase Agreements for the homes. Trendmaker then filed a motion to compel arbitration, and on June 28, 2004, Judge Bruce D. Oakley granted the motion. Homeowners Garth, LeBlanc, Safi, and Thomas intervened, and Trendmaker filed motions to compel arbitration as to the intervenors.
Subsequently, the original plaintiffs filed a motion to reconsider the order compelling arbitration. On November 8, 2004, after a hearing, Judge Oakley orally denied the motion. However, no written order appears in the record, and the parties contend Judge Oakley retired from the bench without ruling on the motion to reconsider. Judge Oakley's successor was recused, and the case was assigned to Judge Tony Lindsay of the 280th District Court.
On May 13, 2005, after a hearing, Judge Lindsay found that, although the scope of the arbitration clause covers the claims that form the basis of this suit, the clause is both procedurally and substantively unconscionable. Judge Lindsay (1) granted the homeowners' motion to reconsider the prior order compelling arbitration and withdrew the order compelling arbitration as to the original plaintiffs, (2) denied Trendmaker's motion to compel arbitration, (3) stayed discovery and pretrial matters pending this appeal, and (4) allowed the homeowners to file motions to sever. Seeking relief from this order, Trendmaker filed this interlocutory appeal and petition for writ of mandamus. The homeowners do not dispute the existence of the arbitration agreement or the trial court's finding that the arbitration agreement encompasses the homeowners' claims, and therefore, these issues are not before this Court on appeal. The sole issue on appeal is whether the homeowners established the arbitration clause in the Purchase Agreement is unenforceable based on their affirmative defense of unconscionability.
DISCUSSION
A. Standard of Review
The parties agree the Texas General Arbitration Act ("TGAA") governs this dispute. When an arbitration provision is governed by the TGAA, interlocutory appeal is the appropriate mechanism to challenge a denial of arbitration. TEX. CIV. PRAC. REM. CODE ANN. § 171.098(a)(1) (Vernon 2005); see Am. Med. Techs., Inc. v. Miller, 149 S.W.3d 265, 269 (Tex.App.-Houston [14th Dist.] 2004, no pet.).
The parties agreed by signing the Purchase Agreements containing the arbitration agreement that such agreement to arbitrate "shall be enforceable under the prevailing Texas arbitration law."
In contrast, when an arbitration provision is governed by the Federal Arbitration Act ("FAA"), a petition for writ of mandamus is the proper mechanism to challenge a denial of arbitration. 9 U.S.C. § 2 (1999); In re Halliburton Co., 80 S.W.3d 566, 567 (Tex. 2002); Am. Med. Techs., Inc. v. Miller, 149 S.W.3d 265, 269 (Tex.App.-Houston [14th Dist.] 2004, no pet.). Trendmaker has alternatively filed a petition for writ of mandamus in the event the FAA is held to be the governing statute.
When the FAA applies to a specific contract, it preempts the TGAA and governs the agreement unless the parties specifically excluded its application in the contract. Am. Med. Techs., Inc., 149 S.W.3d at 269. Here, the arbitration provision in the Purchase Agreement does not exclude application of the FAA. The FAA applies to all suits in state or federal court when the dispute concerns a "contract evidencing a transaction involving commerce." Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 269B70 n. 6 (Tex. 1992) (citing Perry v. Thomas, 482 U.S. 483, 489, 107 S. Ct. 2520, 2525 (1987)); Am. Med. Techs., Inc., 149 S.W.3d at 269. A contract evidences interstate commerce if it affects interstate commerce. Id.; In re Educ. Mgmt. Corp., 14 S.W.3d 418, 423B24 (Tex.App.-Houston [14th Dist.] 2000, orig. proceeding). When, as here, an agreement is silent as to whether the FAA applies, the question of whether the transaction affects interstate commerce is one of fact. See id. at 422.
Interstate commerce is evidenced by, inter alia, location of headquarters in another state, manufacture of components in a different state, transportation of goods across state lines, and billings prepared in another state. Stewart Title Guar. Co. v. Mack, 945 S.W.2d 330, 333 (Tex.App.-Houston [1st Dist.] 1997, writ dism'd w.o.j.). Here, it is undisputed Trendmaker is a Texas corporation selling real property located within Texas via purchase agreements executed solely in Texas. The only evidence Trendmaker offers that purports to show a transaction in interstate commerce are two earnest money checks drawn on out-of-state banks by LeBlanc and Woodard. This isolated factor is insufficient to constitute interstate commerce and invoke the FAA. See Jack B. Anglin Co., 842 S.W.2d at 270 n. 6. Because the TGAA governs this dispute, we review the trial court's order via the interlocutory appeal.
Under the TGAA, a party seeking to compel arbitration must establish (1) the existence of a valid, enforceable arbitration agreement and (2) that the claims asserted fall within the scope of that agreement. Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 581 (Tex.App.-Houston [14th Dist.] 1999, no pet.). If the party seeking arbitration carries its initial burden, the burden then shifts to the party resisting arbitration to present evidence on its defenses to the arbitration agreement. See In re H. E. Butt Grocery Co., 17 S.W.3d 360, 367 (Tex.App.-Houston [14th Dist.] 2000, orig. proceeding). To resist summary arbitration, the party opposing arbitration needs "only to raise an issue of material fact about a necessary element of its opponent's case in chief' or present some evidence supporting every element of a defensive claim that there is no enforceable agreement to arbitrate." In re Jebbia, 26 S.W.3d 753, 757 (Tex.App.-Houston [14th Dist.] 2000, orig. proceeding). A party may revoke the agreement only on a ground that exists at law or in equity for the revocation of a contract. TEX. CIV. PRAC. REM. CODE ANN. § 171.001 (Vernon 2005). Once the trial court concludes the movant has met his burden and the party opposing arbitration has failed to prove its defenses, the trial court has no discretion but to compel arbitration. See Valero, 2 S.W.3d at 581.
A motion to compel arbitration is essentially a motion for partial summary judgment, subject to the same evidentiary standards. In re Jebbia, 26 S.W.3d at 756B57. Whether the parties have agreed to arbitrate is a question of fact to be summarily determined by the trial court. See Valero, 2 S.W.3d at 581; see also TEX. CIV. PRAC. REM. CODE ANN. § 171.021(b). In reviewing factual questions, appellate courts use a legal sufficiency or "no evidence" standard. See Valero, 2 S.W.3d at 581. When considering a no evidence point, we must consider the evidence in the light most favorable to the challenged finding and indulge every reasonable inference that would support it. See City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005). We must credit favorable evidence if a reasonable factfinder could do so and disregard contrary evidence unless a reasonable factfinder could not. Id. We do not disregard contrary evidence if there is no favorable evidence, or if rules of law or contrary evidence renders supporting evidence incompetent. Id. at 810B11. Legal conclusions are subject to de novo review. Valero, 2 S.W.3d at 582. De novo review is appropriate when only the legal interpretation of the arbitration clause is before the court. Id.B. Unconscionability
Unconscionability is a defense to an arbitration agreement. See In Re FirstMerit Bank, 52 S.W. 3d 749, 756 (Tex. 2001). Because the law favors arbitration, the burden of proving a defense to arbitration is on the party opposing arbitration. Id.
Under the TGAA, a court may not enforce an agreement to arbitrate if the court finds the agreement was unconscionable at the time it was made. TEX. CIV. PRAC. REM. CODE ANN. § 171.022. The test for unconscionability is "whether, given the parties' general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract." In re FirstMerit Bank, 52 S.W.3d at 757.
Unconscionability includes: (1) procedural unconscionability, which refers to the circumstances surrounding the adoption of the arbitration provision; and (2) substantive unconscionability, which refers to the fairness of the arbitration provision itself. In re Halliburton Co., 80 S.W.3d 566, 571 (Tex. 2002). The party opposing arbitration bears the burden to prove unconscionability. See In re FirstMerit Bank, 52 S.W.3d at 756.
Inasmuch as unconscionability encompasses two elements, procedural and substantive unconscionability, and in light of the burden imposed on a party opposing arbitration to prove a defense to arbitration, it follows that appellees must, in order to prevail on their defense, establish both the procedural and substantive components as a matter of law. See Ski River Development, Inc. v. McCalla, 167 S.W.3d 121, 136 (Tex.App.-Waco 2005, pet. denied) (stating, under Texas law, the party asserting unconscionability of the contract bears burden of proving both procedural and substantive unconscionability); Tri-Continental Leasing v. Law Office of Richard Burns, 710 S.W.2d 604, 609 (Tex.App.-Houston [1st Dist.] 1985, writ ref'd n.r.e.) (op. on reh'g) (stating, in deciding the fairness of a contract's substantive terms, the court must also consider whether there were procedural abuses at the time the agreement was made); see also Children's Surgical Found., Inc. v. Nat. Data Corp., 121 F. Supp.2d 1221, 1225 (N.D. Ill. 2000) (applying Texas law and utilizing the two-part test for unconscionability, which includes a procedural and a substantive analysis).
The supreme courts of Alabama, Connecticut, Idaho, Nevada, North Dakota, and Wisconsin have adopted the two-part test requiring the party asserting unconscionability of an arbitration agreement to prove both procedural and substantive unconscionability. See Blue Cross Blue Shield of Alabama v. Rigas, 923 So.2d 1077, 1087 (Ala. 2005); Hottle v. BDO Seidman, L.L.P., 846 A.2d 862, 878 (Conn. 2004); Murphy v. Mid-West Nat'l Life Ins. Co. of Tenn., 78 P.3d 766, 768 (Idaho 2003); D.R. Horton, Inc. v. Green, 96 P.3d 1159, 1162 (Nev. 2004); Strand v. U.S. Bank Nat'l Ass'n ND, 2005 ND 68, 693 N.W.2d 918, 924 (N.D. 2005); Wisconsin Auto Loans, Inc. v. Jones, 2006 WI 53, 290 Wis.2d 514, 534, 714 N.W.2d 155, 165 (Wis. 2006). Intermediate courts of appeal in California, Florida, Illinois, and Ohio have also adopted the two-part test requiring the party asserting unconscionability of an arbitration agreement to prove both procedural and substantive unconscionability. See Coast Plaza Doctors Hosp. v. Blue Cross of Cal., 83 Cal. App. 4th 677, 688, 99 Cal. Rptr. 2d 809, 818 (Cal.App. 2 Dist. 2000, rev. denied); Bland ex rel. Coker v. Health Care and Ret. Corp. of Am., 927 So.2d 252, 256 (Fla.App. 2 Dist. 2006); Kinkel v. Cingular Wireless, L.L.C., 828 N.E.2d 812, 818 (Ill.App. 5 Dist., 2005); English v. Cornwell Quality Tools Co., Inc., 2005 WL 3556281, 2005-Ohio-6983 (Ohio App. 9 Dist., 2005) (Slip Copy). Conversely, only two state supreme courts have adopted the requirement that a party asserting unconscionability of an arbitration agreement need only establish procedural or substantive unconscionability to invalidate the arbitration agreement. See Cleveland v. Mann, 05-CA-00924-SCT, 2006 WL 2506753 at *8 (Miss. Aug. 31, 2006); State ex rel. Vincent v. Schneider, 194 S.W.3d 853, 862 (Mo. 2006).
Under the separability doctrine, arbitration provisions are "separable" from the contracts in which they are contained. Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 402B04, 87 S.Ct. 1801 (1967); Am. Med. Techs., Inc., 149 S.W.3d at 272. When a party's claim of fraudulent inducement is directed at the contract as a whole, rather than at the arbitration clause itself, the issue must be determined by an arbitrator. Am. Med. Techs., Inc., 149 S.W.3d at 272 (citing Prima Paint, 388 U.S. at 403B04). Conversely, when a party's claim of fraudulent inducement is directed at the arbitration provision itself, the court decides the dispute. Id. Accordingly, defenses, such as unconscionability, that concern the contract as a whole must be referred to an arbitrator; defenses to the arbitration provision itself are considered by the court. Id. Here, the homeowners assert that, had Trendmaker disclosed the environmental contamination in the area, they would not have signed the Purchase Agreements at all; however, the homeowners also specifically and repeatedly assert they would not have agreed to the arbitration provision itself, had they known it encompassed any disputes beyond structural defects in the house, which they believed were covered by the warranty program. In the matter at hand, we construe the homeowners' challenge as directed at the arbitration provision itself, a matter determined by the court.
We recognize fraudulent inducement is generally a separate defense from unconscionability. See In re FirstMerit Bank, 52 S.W.3d at 756B58. However, the parties have incorporated fraudulent inducement into their discussion of the unconscionability defense. See Universal Computer Consulting Holdings, Inc. v. Hillcrest Ford Lincoln-Mercury, Inc., Nos. 14-04-00819-CV, 14-04-01103-CV, 2005 WL 2149508, at *2 n. 6 (Tex.App.-Houston [14th Dist.] Sept. 8, 2005, no pet.) (mem. op.).
1. Procedural Unconscionability
The homeowners' procedural unconscionability claims are based on their contention Trendmaker fraudulently induced the homeowners to agree to the arbitration provision by representing that the provision applied only to structural defects in their houses.
Procedural unconscionability relates to the actual making or inducement of the contract. In re Rangel, 45 S.W.3d 783, 786 (Tex.App.-Waco 2001, orig. proceeding). This aspect of unconscionability focuses on the facts surrounding the bargaining process. Id. The party contesting the arbitration provision bears the burden to show unconscionability in how the parties arrived at their bargain. See id. Claims of procedural unconscionability are reserved for judicial review and are considered on a case-by-case basis. Id.
To support their claims of procedural unconscionability, the homeowners submitted their own affidavits. With one exception, each homeowner's affidavit contains the following language:
It was my understanding that Paragraph 20, entitled Arbitration/Limitation on Claims, set forth in the Purchase Agreement that we were required to sign, was intended to relate to defects in the construction of our house. Trendmaker made this representation to me in the Purchase Agreement and other materials provided to me by Trendmaker. In particular, Trendmaker represented to me that arbitration would apply to defects in the construction of the home which would be covered by the Warranty Plus Program.
At no time, was it ever explained to me that paragraph 20 would apply to anything else besides construction defects. To the extent that Trendmaker now takes a different position, I believe they are wrong and they materially misrepresented the meaning or intent of arbitration. I would never have signed the arbitration agreement or the Purchase Agreement, if Trendmaker told me the arbitration clause meant to apply to anything else besides construction defects for which we were protected or covered by the Warranty Plus Program. (emphasis added)
Initially, the homeowners assert that, through the verbiage in the arbitration provision and "other materials," Trendmaker or its "agent" misrepresented the scope of the agreement. Specifically, each appellee attests it was his or her understanding, solely from reading the arbitration provision and the undisclosed "other materials," that the arbitration provision was limited to construction defects in the home and they believe Trendmaker's interpretation is wrong. These affidavits do not refer to any oral misrepresentations. The elements of fraud are: (1) a material representation that was false was made; (2) when the representation was made, the speaker knew it was false or made it recklessly as a positive assertion without any knowledge of its truth; (3) the speaker made the representation with the intent that the other party should act upon it; and (4) the party actually and justifiably relied on the representation; and thereby suffered injury. Ernst Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001).
By its terms, the arbitration provision applies to "[a]ll claims, disputes and other matters in question between Seller and Purchaser arising out of or relating to this agreement or to any alleged defects relating to the Property."Although the word "Property" is not specifically defined in the Purchase Agreement, the Purchase Agreement states the purchaser is buying "the following parcel of land, including all improvements as provided herein." There is no language in the Purchase Agreement implying the term "Property" is limited to the improvements. Furthermore, at the hearing on Trendmaker's motion to compel arbitration, except as to intervenor Garth, there was no evidence before the trial court that the parties asked any questions or requested any explanations of the arbitration provision. See In re Rangel, 45 S.W.3d at 787. Absent fraud, a party to a contract may not successfully claim he believed the provisions of a contract were different from those plainly set out in the contract or he did not understand the language used. In re Media Arts Group, 116 S.W.3d 900, 908 (Tex.App.-Houston [14th Dist.] 2003, orig. proceeding).
The arbitration provision at issue here is broad form in nature, which evidences the parties' intent to be inclusive rather than exclusive. See Pepe Int'l Dev. Co. v. Pub Brewing Co., 915 S.W.2d 925, 928, 930 (Tex.App.-Houston [1st Dist.] 1996, no writ) (construing arbitration clause containing language providing "any controversy or claim arising out of and/or related to this contract, or to the breach thereof, shall be settled by binding arbitration" as broad form in nature).
The evidentiary standards for a motion to compel arbitration are the same as for a motion for summary judgment. In re Jebbia, 26 S.W.3d at 756-57. Accordingly, affidavits of an interested witness submitted in opposition to a motion to compel arbitration must be clear, positive, direct, otherwise credible, free from contradictions and inconsistencies, and readily controvertible. See TEX. R. CIV. P. 166a(c); Trico Technologies Corp. v. Montiel, 949 S.W.2d 308, 310 (Tex. 1997). "Readily controvertible" means the testimony could have been effectively countered by opposing evidence. Id. Self-serving statements in affidavits of interested witnesses concerning their state of mind are uncontrovertible because the mental workings of an individual's mind are matters about which adversaries have no knowledge or ready means of confirming or controverting. Lechtion v. Dyll, 65 S.W.3d 696, 701 (Tex.App.-Dallas 2001, pet. denied). In addition, language in an affidavit that the affiant "understands" a certain issue will not defeat a motion to compel arbitration as such statements do not equate to personal knowledge. See Ryland Group, Inc. v. Hood, 924 S.W.2d 120, 122 (Tex. 1996). Finally, an interested witness' affidavit which recites that the affiant "believes" certain things will not defeat a motion to compel arbitration as such language does not positively and unqualifiedly represent that the "facts" disclosed are true. See id.
In its numerous filings with the trial court on the issue of the enforceability of the arbitration clause, Trendmaker repeatedly objected that the homeowners' affidavits, stating their understanding of the arbitration clause, offered no evidence that Trendmaker made any misrepresentations regarding the arbitration clause. We agree. The homeowners' claims regarding their understanding of the scope of the arbitration clause and their belief Trendmaker's interpretation of that arbitration clause is wrong constitute no evidence as they (1) are not readily controvertible, (2) are not based on the affiants' personal knowledge, and (3) do not unqualifiedly represent that the alleged "facts" are true. See Ryland Group, 924 S.W.2d at 122; In re Media Arts Group, 116 S.W.3d at 908B10; Lechtion, 65 S.W.3d at 701. As a lot of no evidence is still no evidence, we decline to invalidate the arbitration agreement based on the allegations of fraud found in these affidavits. Nissan Motor Co. Ltd. v. Armstrong, 145 S.W.3d 131, 148 (Tex. 2004), In re Media Arts Group, 116 S.W.3d at 908B10.
Only Garth, an attorney who had practiced in Harris County for seventeen years, and "represented hundreds of clients involving construction defect cases including a number of claims in which arbitration was allegedly required by contract in accordance with Construction Industry Arbitration Rules of the American Arbitration Association," states an undisclosed Trendmaker agent made any affirmative misrepresentations independent of the language found in the arbitration provision in connection with securing the arbitration provision. Garth states:
Upon inquiry, Trendmaker's agent specifically represented to me that the arbitration clause would only apply to claims for defects in the construction of the home which would be covered by the Warranty Plus Program. Had I been told that Trendmaker would take the position that a case involving fraud and nondisclosure of environmental issues would be subject to arbitration, I would never have agreed to the arbitration clause.
Garth provided two affidavits, one filed with the Plaintiffs' Response to Motion to Compel Arbitration, and one filed with the Intervenors' Response to Defendants' Motion to Compel Arbitration.
However, we note the Purchase Agreement states it represents the entire agreement and Trendmaker is not bound by any
statement, promise, condition or stipulation not specifically set forth in this Agreement. . . . no sales consultant, employee, or agent of [Trendmaker] has authority to modify the terms of this Agreement or make any representation of agreement not contained in this Agreement, and anything to the contrary shall not be binding upon [Trendmaker].
In addition, the Agreement states,
PURCHASER ACKNOWLEDGES AND REPRESENTS THAT PURCHASER HAS READ AND UNDERSTANDS THIS AGREEMENT, AND ALL ATTACHMENTS, AND THAT PURCHASER HAS NOT RECEIVED ANY REPRESENTATIONS AND IS NOT RELYING ON ANY STATEMENT, PROMISE, CONDITION OR STIPULATION NOT SPECIFICALLY SET FORTH IN THIS AGREEMENT OR THE ATTACHMENTS.
One of the elements of a fraud claim is that the plaintiff actually and justifiably relied on the misrepresentation to suffer injury. DRC Parts Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854, 858 (Tex.App.-Houston [14th Dist.] 2003, pet. denied) (en banc). In this regard, a party to an arm's length transaction, such as Garth and the other homeowners, must exercise reasonable diligence for the protection of his own interests, and a failure to do so is not excused by mere confidence in the honesty and integrity of the other party. Id. Therefore, reliance upon an oral representation that is directly contradicted by the express, unambiguous terms of a written agreement between the parties is not justified as a matter of law. Id. As that is exactly what Garth's affidavit attempts to do, it constitutes no evidence of justifiable reliance, an essential element of the homeowners' affirmative defense. As the homeowners produced no evidence supporting all elements of their affirmative defense to arbitration, the trial court abused its discretion in concluding the arbitration clause was procedurally unconscionable and denying, on that basis, Trendmaker's motion to compel arbitration. See Valero, 2 S.W.3d at 581.
2. Substantive Unconscionability
Because we hold appellees have not met their burden of proving procedural unconscionability, we need not reach the substantive unconscionability issue.
CONCLUSION
We sustain Trendmaker's second point of error. Given our disposition of this point, we do not need to separately address the remaining issues. Having determined Trendmaker proved the existence of an arbitration agreement encompassing the claims at issue and the homeowners failed to prove their unconscionability defense, we hold the trial court erred in denying Trendmaker's motion to compel arbitration of the homeowners' claims.
Accordingly, we reverse the trial court's May 13, 2005 order and remand this case for further proceedings consistent with this opinion. Because we find there exists an adequate remedy by appeal, Trendmaker's petition for writ of mandamus is denied.
CONCURRING OPINION
I write separately because I believe we should address the claim of substantive unconscionability. It is more consistent with binding Texas Supreme Court precedent to consider procedural and substantive unconscionability separately as independent grounds upon which we could hold that the arbitration agreement is not valid. Therefore, I respectfully concur.
Under the Federal Arbitration Act, validity of an arbitration agreement is determined on the basis of state contract law. See 9 U.S.C. § 2; In re Halliburton Co., 80 S.W.3d 566, 568 (Tex. 2002) (orig. proceeding). We must, therefore, apply our own law to determine the validity of the arbitration agreement. Yet the supreme court has not clearly spoken as to whether procedural or substantive unconscionability could, separately, invalidate an agreement. Conversely, the supreme court has not mandated that a court find both before invalidating an agreement. However, given the progression of the law in this area and recent holdings from the supreme court, the clear import of the supreme court's holdings is that we may determine that an arbitration provision is unconscionable on the basis of either procedural or substantive unconscionability; we need not find both.
In Halliburton, the supreme court clarified that Texas courts may consider both procedural and substantive unconscionability. 80 S.W.3d at 571. Prior to Halliburton, some courts considered only the procedural aspect and left the substantive aspect to the designated arbitrator. Id. It follows, therefore, that courts, including this court, were determining if arbitration agreements were invalid on the basis of procedural unconscionability alone. See id.
Prior to Halliburton, the supreme court signaled that substantive unconscionability could serve as an independent basis for determining that an arbitration agreement is invalid. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 756B57 (Tex. 2001) (orig. proceeding). The supreme court cited to the United States Supreme Court, which had previously held that high arbitration costs could serve to invalidate an arbitration agreement. Id. (citing Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 90 (2000)). The supreme court ultimately concluded, as the United State Supreme Court had in Randolph, that the evidence was insufficient to invalidate the arbitration agreement. FirstMerit, 52 S.W.3d at 756B57. However, two courts of appeals have invalidated arbitration agreements on the basis of substantive unconscionability alone. See Olshan Foundation Repair Co. v. Ayala, 180 S.W.3d 212, 216 (Tex.App.-San Antonio 2005, pet. denied) (upholding trial court's ruling refusing to compel arbitration on the basis of "shocking" fees and costs); In re Luna, 175 S.W.3d 315, 328 (Tex.App.-Houston [1st Dist.] 2004, orig. proceeding) (invalidating arbitration agreement on the basis of substantive unconscionability alone, including significant evidence of heavy costs). Both of these holdings are squarely rooted in our supreme court's jurisprudence, which itself relies in part on precedent from the United States Supreme Court.
I do not agree with the majority that a negative finding on the procedural aspect of unconscionability obviates the need to discuss the substantive aspect. Indeed, two of our sister courts have refused to compel arbitration on the basis of substantive unconscionability alone. Those cases indicate that it is not within our power to ignore a claim of substantive unconscionability. Considering that those courts rely, persuasively, on Texas Supreme Court precedent, they should guide our own determination. The other cases the majority cites are not rooted in supreme court precedent and to some extent rely either on federal interpretation of state law or look to other states unnecessarily given that we having binding, guiding precedent from our own supreme court. Therefore, I concur.
There is a three-way split among the states in their approach to unconscionability. Some states require strict proof of both the procedural and substantive aspects, some use a sliding-scale approach whereby a party may show significant evidence of one aspect and then needs to show less evidence of the other aspect, and yet other states will allow either procedural or substantive aspects to suffice on its own to invalidate an arbitration agreement. See Sitgum Holdins, Inc. v. Ropes, 800 A.2d 915, 921B22 (N.J.Super.Ct. Ch. Div. 2002) (explaining the split and collecting cases); Strand v. U.S. Bank Nat'l Assoc. ND, 693 N.W.2d 918, 922B23 (N.D. 2005) (same).
This court has, on one occasion, stated that our approach is similar to California'sCrequiring some proof of both aspects. In re Media Arts Group, Inc., 116 S.W.3d 900, 910 (Tex.App.-Houston [14th Dist.] 2003, orig. proceeding). However, that holding is inapposite as it did not directly answer the issue at hand, and cited only Halliburton, which held only that we may consider both procedural and substantive aspects, but did not require that we consider both. In re Turner Bros. Trucking Co., Inc. is equally unpersuasive as that court relied only on a single federal court applying what it perceived to be Texas law; though a federal court's interpretation of our law is not binding. 8 S.W.3d 370, 376B77 (Tex.App.-Texarkana 1999, orig. proceeding). The Waco Court of Appeals, outside of the arbitration context, has held that both aspects are required when reviewing any contract for unconscionability. Ski River Devel., Inc. v. McCalla, 167 S.W.3d 121, 136 (Tex.App.-Waco 2005, pet. denied). However, McCalla relied only upon Texarkana precedent for that holding. Id.