Valli Construction, Inc. v. Alvites Concrete Services and Alvites Plumbing Inc.

NUMBER 13-13-00295-CV

COURT OF APPEALS

THIRTEENTH DISTRICT OF TEXAS

CORPUS CHRISTI - EDINBURG

VALLI CONSTRUCTION, INC., Appellant,

v.

ALVITES CONCRETE SERVICES
AND ALVITES PLUMBING INC., Appellee.

On appeal from the 148th District Court
of Nueces County, Texas.

MEMORANDUM OPINION

Before Chief Justice Valdez and Justices Benavides and Longoria
Memorandum Opinion by Chief Justice Valdez

By two issues, appellant, Valli Construction Inc. (Valli), appeals the trial court’s

order denying its motion to compel arbitration in favor of appellees, Alvites Concrete

Services L.L.C. and Alvites Plumbing Inc. (the Alvites Parties). Valli contends that the

trial court erred by: (1) overruling objections to the Alvites Parties’ evidence; and (2)

finding that the arbitration clause was unconscionable. We reverse and remand.
 I. BACKGROUND

AutoNation Chevrolet Corpus Christi L.P. (AN Chevrolet) hired Valli as the general

contractor to complete a construction project. Valli subsequently hired the Alvites Parties,

two small locally-owned companies, as subcontractors to work on the plumbing and

concrete for the project. Valli agreed to the Alvites Parties’ bid price and instructed them

to begin work on the project immediately. There was no written contract when work began

on the project. Later the parties agreed to Subcontractors Agreements, which contained

an arbitration provision stating that all claims under the agreement shall be submitted to

arbitration in Santa Clara County, California.

Fox Tree & Landscape Nursery Inc. (Fox Tree) sued Valli and AN Chevrolet for

claims arising out of the construction project. Subsequently, AN Chevrolet sued Valli and

its subcontractors, including the Alvites Parties.1 On April 18, 2012, the Alvites Parties

filed a counterclaim against AN Chevrolet2 and a cross-action against Valli, alleging

breach of contract, quantum meruit, and misapplication of trust funds. On February 15,

2013, Valli filed a motion to compel arbitration on the Alvites Parties’ cross-claims. The

Alvites Parties filed a response in which they conceded that the Subcontractor

Agreements contained an arbitration agreement and that the claims in their cross-action

were covered by the scope of the arbitration agreement. However, the Alvites Parties

argued that they could avoid enforcement of the arbitration agreement because it was

unconscionable.

1 The petitions and documents relating to these lawsuits are not included in the appellate record,

and they were not cited or specifically referred to in either the motion to compel arbitration or the response
to the motion to compel arbitration.

2 The petitions and documents relating to the Alvites Parties’ counterclaim against AN Chevrolet
are not included in the appellate record, and they were not cited or specifically referred to in either the
motion to compel arbitration or the response to the motion to compel arbitration
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 The Alvites Parties presented evidence in the form of an affidavit executed by

Javier Munive, their operations manager. In the affidavit, Munive stated: (1) the Alvites

Parties negotiated a price to provide plumbing and concrete material and services for

improvements on property owned by AN Chevrolet; (2) AN Chevrolet instructed the

Alvites Parties to begin work immediately without entering into a formal contract; (3) after

work began, Valli sent the Alvites Parties formal contracts; (4) the Alvites Parties

attempted to discuss the terms of the contracts with Valli, but were told by a Valli

representative to sign and return the contracts; and (5) the Alvites Parties signed the

contracts because they had already begun work on the project. The affidavit further

alleged that (1) the Alvites Parties had no real bargaining power regarding the terms of

the contract; (2) the Alvites Parties did not recognize the significance and ramifications of

the contract; (3) “to enforce the arbitration and venue provisions. . . would be an extreme

hardship and costly” because they would have to pay an arbitrator and hire local counsel

in California and because most of the witnesses live in Texas; and (4) that arbitration in

California would cause substantial delay in resolving the dispute.

The trial court found the arbitration agreement unconscionable and denied Valli’s

motion to compel arbitration. This appeal followed.

II. STANDARD OF REVIEW

When reviewing an order denying arbitration, we apply a de novo standard to legal

determinations and a no-evidence standard to factual determinations. PER Group, L.P.

v. Dava Oncology, L.P., 294 S.W.3d 378, 384 (Tex. App.—Dallas 2009, no pet.). In

reviewing the trial court’s factual determinations, we must credit favorable evidence if a

reasonable fact finder could and disregard contrary evidence unless a reasonable fact

finder could not. Royston, Rayzor, Vickery & Williams, L.L.P. v. Lopez, 443 S.W.3d 196,

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201 (Tex. App.—Corpus Christi 2013, pet. filed) (orig. proceeding); PER Group, L.P., 294

S.W.3d at 384.

The party asserting unconscionability bears the burden of proof. Royston, Rayzor,

Vickery & Williams, L.L.P, 443 S.W.3d at 201; In re Turner Bros. Trucking Co., 8 S.W.3d

370, 376–77 (Tex. App.—Texarkana 1999, no pet.) (orig. proceeding). Whether a

contract is contrary to public policy or unconscionable at the time it is formed is a question

of law. In re Poly-Am., L.P., 262 S.W.3d 337, 348 (Tex. 2008) (orig. proceeding); Hoover

Slovacek LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006) (orig. proceeding). Because

a trial court has no discretion to determine what the law is or apply the law incorrectly, its

clear failure to properly analyze or apply the law of unconscionability constitutes an abuse

of discretion. In re Poly–America, L.P., 262 S.W.3d at 349; Walker v. Packer, 827 S.W.2d

833, 840 (Tex. 1992).

III. APPLICABLE LAW

Valli filed its motion to compel arbitration under the Federal Arbitration Act (FAA).

See 9 U.S.C.A. § 2 (West 2013). The FAA governs arbitration clauses enforced in Texas

if the parties are from different states and the subject matter involves interstate

commerce. In re L & L Kempwood Assocs., L.P., 9 S.W.3d 125, 127 (Tex. 1999) (orig.

proceeding). Under the FAA, a written arbitration agreement “shall be valid, irrevocable,

and enforceable, save upon such grounds as exist at law or in equity for the revocation

of any contract.” 9 U.S.C.A. § 2.

“[C]ourts treat arbitration agreements under the FAA as other contracts in applying

the legal rules to interpret them.” In re Olshan Found. Repair Co., LLC, 328 S.W.3d 883,

889 (Tex. 2010) (orig. proceeding). Under Texas law, a party can avoid enforcement of

a contract if it can prove that it is unconcsionable. Id. at 893. Unconscionability is an

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affirmative defense to an arbitration agreement and therefore the party asserting the

defense bears the burden of proof. In re AdvancePCS Health L.P., 172 S.W.3d 603, 608

(Tex. 2005) (orig. proceeding).

Texas law recognizes both substantive and procedural unconscionability. In re

Palm Harbor Homes, Inc., 195 S.W.3d 672, 677 (Tex. 2006) (orig. proceeding).

“Substantive unconscionability refers to the fairness of the arbitration provision itself,

whereas procedural unconscionability refers to the circumstances surrounding adoption

of the arbitration provision.” Id. Generally, a contract is unconscionable if, “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 Olshan Found. Repair

Co. LLC, 328 S.W.3d at 893 (citing TEX. BUS. & COM. CODE ANN. § 2.302, cmt. 1 (West,

Westlaw through 2013 3d C.S.)). “The principle is one of the prevention of oppression

and unfair surprise and not of disturbance of allocation of risks because of superior

bargaining power.” TEX. BUS. & COM. CODE ANN. § 2.302, cmt. 1 (internal citation omitted).

IV. DISCUSSION

As an initial matter, the parties dispute whether the Alvites Parties were required

to show both procedural and substantive unconscionability to avoid enforcement of the

arbitration agreement. In Royston, Rayzor, Vickery & Williams, L.L.P., we expressly

determined that a showing of both types of unconscionability was not required. 443

S.W.3d at 204. Here, we need not decide whether we should revisit that holding because

we determine that the Alvites Parties have failed to satisfy their burden to prove either

procedural or substantive unconscionability.

a. Procedural Unconscionability

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 In their response to the motion to compel arbitration, the Alvites Parties asserted

that the agreement was procedurally unconscionable because: (1) Valli is a large

national construction contractor that handles multi-million dollar construction contracts

while the Alvites Parties are small, locally-owned companies; and (2) the Alvites Parties

had no bargaining power and no choice but to accept the arbitration agreement drafted

by Valli because Valli had previously directed them to begin work on project before the

Alvites Parties signed the Subcontractor Agreements.

Procedural unconscionability relates to the making or inducement of the contract,

focusing on the facts surrounding the bargaining process. Royston, Rayzor, Vickery &

Williams, L.L.P., 443 S.W.3d at 204. In this analysis, some courts have considered

whether the party seeking to compel arbitration employed sharp business practices and

whether one of the parties lacked a choice in whether to enter into the agreement. See

El Paso Natural Gas Co. v. Minco Oil & Gas Co., 964 S.W.2d 54, 61 (Tex. App.—Amarillo

1997, pet. granted), rev’d on other grounds sub nom. El Paso Natural Gas Co. v. Minco

Oil & Gas, Inc., 8 S.W.3d 309 (Tex. 1999); see also Wade v. Austin, 524 S.W.2d 79, 87

(Tex. Civ. App.—Texarkana 1975, no writ) (holding that a contract was not procedurally

unconscionable when a party had other available alternatives to signing the arbitration

agreement). However, ultimately, under the FAA, unequal bargaining power does not

itself establish grounds for defeating an agreement to arbitrate “absent a well-supported

claim that the clause resulted from the sort of fraud or overwhelming economic power that

would provide grounds for revocation of any contract.” In re AdvancePCS Health L.P.,

172 S.W.3d at 608. The principles of unconscionability do not negate a bargain because

one party to the agreement may have been in a less advantageous bargaining position.

In re Palm Harbor Homes, Inc., 195 S.W.3d at 679. Instead, unconscionability principles

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are applied to prevent unfair surprise or oppression. Id.; In re McKinney, 167 S.W.3d

833, 835 (Tex. 2005) (orig. proceeding) (holding that absent fraud, misrepresentation, or

deceit, parties are bound by terms of the contract they signed, regardless of whether they

read it or thought it had different terms).

First, the Alvites Parties’ general allegation that Valli is a large national company

and that the Alvites Parties are small, locally-owned businesses does not establish that

the clause resulted from “overwhelming economic power.” See In re Advance PCS

Health L.P., 172 S.W.3d at 608. Second, the fact that the Alvites Parties had already

begun construction does not support a finding that the Alvites Parties had no bargaining

power and therefore had no choice but to enter into the agreement. The Alvites Parties

made the initial decision to begin construction without a formal contract. While Munive,

in his affidavit, contended that Valli directed the Alvites Parties to begin work immediately,

there is no evidence that the Alvites Parties were coerced into beginning construction or

that they were the victim of any “sharp” business practices. See Minco Oil & Gas Co.,

964 S.W.2d at 61. In addition, Munive’s contentions that the Alvites Parties attempted

to discuss the terms of the contracts with Valli, but were told by a Valli representative to

sign and return the contracts, and that the Alvites Parties signed the contracts because

they had already begun work on the project, do not support a conclusion that the Alvites

Parties had no choice but to sign the contract. Even after choosing to begin work without

signing a formal contract, the Alvites Parties could have refused to sign the arbitration

agreement and attempted to recover the funds they had already expended through a

claim for a breach of the oral contract or quantum meruit. For the foregoing reasons, we

conclude that none of the conduct alleged in the Munive affidavit constitutes deception,

fraud, misrepresentation, surprise, or oppression sufficient to prove procedural

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unconscionability. See In re Palm Harbor Homes, Inc., 195 S.W.3d at 679; In re

McKinney, 167 S.W.3d at 835.

b. Substantive Unconscionability

The Alvites Parties alleged that the arbitration agreement was substantively

unconscionable because:

1) it would be excessively expensive for the [Alvites Parties] to have to
arbitrate their cross claims against Valli in Santa Clara County California
. . . [and]

2) It would be unfair to require the [Alvites Parties] to arbitrate their cross-
claims against Valli while the [Alvites Partie’s] counter-claims against the
Plaintiff in the suit, AN Chevrolet Corpus Christi L.P., are not subject to
arbitration. The Alvites Parties would have to pay to litigate its counter-
claims against AN Chevrolet Corpus Christi L.P. in this suit while having
to also pay for initiating a separate arbitration proceeding in California
against Valli arising from the same project.

1) Unconscionability Based on Cost

The party opposing arbitration bears the burden to show that the costs of

arbitration render it unconscionable. In re Olshan Found. Repair Co., LLC, 328 S.W.3d

at 893. When “a party seeks to invalidate an arbitration agreement on the ground that

arbitration would be prohibitively expensive, that party bears the burden of showing the

likelihood of incurring such costs.” Id. (citing Green Tree Fin. Corp.-Alabama v. Randolph,

531 U.S. 79, 92 (2000)). Texas courts likewise require “some evidence that a complaining

party will likely incur arbitration costs in such an amount as to deter enforcement of

statutory rights in the arbitral forum.” Id.

In In re Olshan, Texas Supreme Court reasoned:

In the absence of unusual animus between the parties or external motives,
plaintiffs continue to pursue claims when the expected benefits of the
lawsuit outweigh the total cost of bringing it. If the total cost of arbitration is
comparable to the total cost of litigation, the arbitral forum is equally
accessible. Thus, a comparison of the total costs of the two forums is the
most important factor in determining whether the arbitral forum is an
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 adequate and accessible substitute to litigation. Other factors include the
actual cost of arbitration compared to the total amount of damages the
claimant is seeking and the claimant’s overall ability to pay the arbitration
fees and costs. These factors may also show arbitration to be an
inadequate and inaccessible forum for the particular claimants to vindicate
their rights. However, these considerations are less relevant if litigation
costs more than arbitration.

328 S.W.3d at 894–95.

Accordingly, the Court explained that,

for evidence to be sufficient, it must show that the plaintiffs are likely to be
charged excessive arbitration fees. While we do not mandate that claimants
actually incur the cost of arbitration before they can show its excessiveness,
parties must at least provide evidence of the likely cost of their particular
arbitration, through invoices, expert testimony, reliable cost estimates, or
other comparable evidence. See Poly–America, 262 S.W.3d at 354–55
(concluding that the plaintiff's “own affidavit and that of an expert witness
providing detailed estimates of the likely cost of arbitration in [the plaintiff's]
case” constituted sufficient evidence); Olshan Found. Repair Co. v. Ayala,
180 S.W.3d 212, 215–16 (Tex. App.—San Antonio 2005, pet. denied)
(holding invoice for party's share of arbitration expenses sufficient).
Evidence that merely speculates about the risk of possible cost is
insufficient.

In re Olshan Found Repair Co. LLC, 328 S.W.3d at 895. Ultimately, the Olshan Court

overturned the denial of a motion to compel arbitration because the party seeking to avoid

arbitration “provided no comparison of [the costs of arbitration] to the expected cost of

litigation, the amount of their claim, or their ability to pay these costs.” Id. at 894–97 (citing

Honrubia Props., Ltd. v. Gilliland, No. 13-07-210-CV, 2007 WL 2949567, at *7 (Tex.

App.—Corpus Christi Oct. 11, 2007, no pet.) (mem. op.) (finding that an appellee failed

to show that an arbitration agreement was substantively unconscionable because the

record was “devoid of evidence pertaining to the expected cost differential between

arbitration and litigation in court”).

Here, as their sole evidence that the costs of the arbitration proceedings rendered

the arbitration clause unconscionable, the Alvites Parties provided the Munive Affidavit in

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which Munive generally stated that “to enforce the arbitration and venue provisions . . .

would be an extreme hardship and costly” because they would have to pay an arbitrator

and hire local counsel in California and because most of the witnesses live in Texas. The

Alvites Parties provided no specific evidence of the costs they expected to incur, the

expected cost differential between arbitration and litigation in court, or their ability to pay

the costs of arbitration. See id. They therefore provided insufficient evidence to show

that the arbitration agreement was cost prohibitive. See id.

2) Unconscionability Based on Arbitration’s Relationship to Other Claims

In response to the motion to compel arbitration, the Alvites Parties argued that it

would be unfair to have to litigate their claims against AN Chevrolet and be involved in

arbitration proceedings with Valli. The primary thrust of the Alvites Parties’ argument to

the trial court was that continuing their involvement in both arbitration proceedings and its

lawsuit against AN Chevrolet would be cost prohibitive. However, as noted above, they

have presented none of the evidence required under Texas law to indicate that arbitration

would be cost prohibitive. See id.

On appeal, the Alvites Parties also argue that enforcement of the arbitration

agreement would “unfairly burden them in the underlying suit.”3 Specifically, referring to

their counter-claim against AN Chevrolet, they argue that “if the arbitration provisions are

enforced, two cases with almost identical issues would be working their way through two

3 The attorney for Fox Tree was present during the hearing on the motion to compel and explained
that she did not see how the causes of action subject to the arbitration provision could be severable from
the other causes of action involving the same subject matter because the claims had become a “procedural
mishmash.” Moreover, at the hearing, the attorney for the Alvites Parties generally contended that the
“dispute between [AN Chevrolet] and Valli is extremely pertinent to my client’s ability to collect from which
of those parties—whichever of those parties committed the fraud.” The trial court responded, “I am leaning
toward denying the Motion to Compel arbitration. It just seems strange that we would stop this lawsuit—
this portion of the lawsuit and transfer it to California for arbitration.” At the end of the hearing, the trial court
ruled, “Well, I’m going to find the arbitration agreement to be substantially [sic] and procedurally
unconscionable and deny the motion to compel arbitration.”
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different systems which could result in two different conclusions.” However, the Alvites

Parties have directed us to no authority, and we find none, in support of their claim that

unconscionability can be based on the enforced arbitration proceeding’s relationship to

causes of action the party attempting to avoid arbitration has against other parties or on

other parties’ claims arising out of the same subject matter.4

Moreover, in response to the motion to compel, the Alvites Parties did not refer

specifically to any facts or claims made by it or other parties or provide any evidence that

established that any of the claims were dependent on one another. In the sole evidence

presented in support of their unconsionability claim, Munive, the Alvites Parties’ operation

manager, only generally contended that arbitration would cause a delay in the lawsuit.

Therefore, to the extent that this is a cognizable legal argument, the Alvites Parties did

not argue facts or provide relevant evidence to the trial court indicating that the arbitration

proceedings and the proceedings in the trial court could render irreconcilable conclusions.

Where no such showing has been made, allowing a plaintiff to avoid an arbitration clause

simply because they have pending claims against another party arising out of the same

subject matter could deprive defendants who contract for an arbitration provision of their

statutory right to arbitration any time they are involved in multiparty litigation. Particularly

given that the Alvites Parties did not provide evidence that they would be threatened with

inconsistent results, we conclude that the arbitration’s potential effect on the Alvites

Parties’ suit against AN Chevrolet, or on the other parties involved in the litigation, does

4 Texas courts have compelled nonparties to a contract to arbitrate when the nonparty files suit

based on a contract containing an arbitration agreement because the nonparty “subjects him or herself to
the contract’s terms.” In re FirstMerit Bank, N.A., 52 S.W.3d 749 (Tex. 2001) (orig. proceding). However,
as noted above, the Alvites Parties have cited no authority, and we find none, indicating that a party to a
contract may avoid terms of the contract because it is involved in litigation with nonparties to the contract
arising out of the same subject matter.
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not render the arbitration provision substantively unconscionable. Id. Because the Alvites

Parties have not satisfied their burden to show that the arbitration provision is either

procedurally or substantively unconscionable, we sustain Valli’s second point of error.5

Id.

V. CONCLUSION

We reverse the trial court’s order and remand for proceedings consistent with this

opinion.6

____________________
ROGELIO VALDEZ
Chief Justice

Delivered and filed the
30th day of December, 2014.

5 Because we conclude that, in consideration of all the evidence admitted, the Alvites Parties did
not satisfy their burden to prove that the arbitration clause was unconscionable, we need not address Valli’s
first issue in which it argues that the trial court erred by overruling its objections to evidence. See TEX. R.
APP. P 47.1. Therefore, we assume without deciding that all evidence considered by the trial court was
properly admitted.

6 On June 12, 2014, Valli’s attorney filed an unopposed motion to withdraw as counsel and an
unopposed motion for temporary relief from the stay of proceedings in the trial court. We previously carried
both motions with this case. We grant both motions and order that the stay in the trial court be lifted for the
limited purpose of allowing the trial court to consider the attorney’s motion to withdraw as counsel.
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