Darling Homes of Texas, LLC v. Wade H. Khoury

Opinion issued May 13, 2021

In The

Court of Appeals
For The

First District of Texas
————————————
NO. 01-20-00395-CV
———————————
DARLING HOMES OF TEXAS, LLC, Appellant
V.
WADE & ALMA KHOURY; EARL & ROSE MCDONALD; MATTHEW &
SANDRA NOVAK; JOHN & PENELOPE TIBBS; J. TIBBS FAMILY
TRUST; KENNETH & KAREN BECK; ROY & PEGGY SLAY; DAVID &
KATHLEEN ODORIZZI; BERNARD & JEANNIE OTTEN; CESAR
GOMEZ & MARIA FLOTA; DEAN & KAREN CORBETT; JERE &
TAMARA BRUBAKER; DARLENE DYMOND; JOHN & ELIZABETH
WADELLA; MICHAEL & TAMI GIOVINAZZO; SALLY GRIFFIN,
EDWARD WOLF & JENNIFER LAHTI; PAUL & DENICE MARSTON;
TOMMY & REBECCA DRAKE; WALTER & EILEEN FENTON; KENT &
JENNIFER TAROU; PENNY PRATER; THOMAS & LISA WOJAHN;
JERRY WEBB; DEBRA WHITLA; JOAN FLOWERS; DAVID WILIAMS;
LENWOOD & DONNA BORDELON; CHRIS & ELISABETH
STAVINOHA; THOMAS & PAULETTE BARLOW; PATRICK & KAY
HOLUB; EDWARD & DIANE STOWE; DAVID JUPP; JAMES & LAUREN
SEAMANS; HAYWARD & NANCY KELLEY; TIMOTHY & IKYE
SERRANO; RANDY & MICHELLE MOORMAN; TIMOTHY & MARY
VAN OOST; LUIS & LILIANA CORDOBA; JEFF & MARGARET MOSS;
DEAN & BRIDGET FANGUY; MARTIN & GEORGETTE BENSON;
 JOSEPH MCGAUGH; CHERYL HARLAND; TORSTEN & JANA
SCHMIDT; MORRIS & BARBARA REINISCH; FRANK & VALERIE
GORE; DONALD & ELIZABETH HICKEY; THOMAS & JETTE
BOEHME; JAMES & GAYLE SOEDER; KENWORTHY PAUL & LISA
BOMGAARS; KEITH & SANDRA WINTERS; DREW & DONNA
GOODBREAD; STEVE & DIANE CALKINS; JIMMY & DEBRA CRANE;
STEPHEN & FRANCES CAPPS; GREG & BETH FOLKS; WENDELL &
PHYLLIS CLEAVER; CHARLES & BONNIE MART; ROBERT
CAPPADONA; ROBERT & MARCELLA MCCARTHY, MICHAEL &
JESSICA RICHEY; JOE & DOROTHY MCADAMS; ALEX & JANETTE
IRVINE; JAMES & MAUREEN DIEMER; DAVID & BRENDA KANDT;
STEVEN RESNICK & JENNIFER MCCREADY-RESNICK; GLENN &
MARGARET MCMILLEN; JOSEPH & SANDRA LOCKE; LAWRENCE &
SUSAN DIO; MICHAEL & DONNA JONES; RICHARD & NANCY
ROACH; LARRY & CAROLYN WARD; DEEPESH & NANDINI
KAUSHISH; TIMOTHY & SUSAN DIXON; DEBRA KING; HECTOR
GUIZAR-BLANCO & CARMEN MUNOZ-DIEGO; PAUL PEDLAR &
SUZANNE HART; DAVID MA & VI NGUYEN; RAUL & ANNA GIORGI;
ARCHIE GREGORY; SAUL SELLINGER; AND DENISE SELLINGER,
Appellees

On Appeal from the 152nd District Court
Harris County, Texas
Trial Court Case No. 2019-57183

MEMORANDUM OPINION

Darling Homes of Texas, LLC appeals from the trial court’s interlocutory

order denying its motion to compel arbitration. The appellees, owners of homes built

by Darling Homes, contend that the houses had construction defects that they

discovered after flooding from Hurricane Harvey. They opposed the motion to

compel arbitration based on procedural and substantive unconscionability.

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 We reverse the trial court’s order denying the motion to compel arbitration

and remand to the trial court.

BACKGROUND

The appellees (the “homeowners”) all own houses built by Darling Homes in

The Woodlands Creekside West community in Harris County, Texas. All of the

houses were built pursuant to one of two types of purchase agreements, both of

which include an arbitration clause, referred to as the “Type 1” arbitration agreement

and the “Type 2” arbitration agreement. The language of the arbitration agreements

is similar but not identical.

All homeowners have alleged that that they were informed that their houses

were not in a 100-year floodplain and flood insurance was not required. In addition,

all homeowners have alleged that, when purchasing their houses, they relied on

Darling Homes’s representations that each house would be built at an elevation that

would minimize the risk of flooding. All of the homeowners’ houses flooded in

response to Hurricane Harvey, and the homeowners discovered that their houses had

not been built to the proper minimum slab elevation that would minimize the risk of

flooding.

The homeowners made demand on Darling Homes for claims arising from the

flooding and informed Darling Homes of their intent to file suit. Believing that the

homeowners intended to violate the arbitration agreements incorporated into their

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contracts, Darling Homes filed an application to compel arbitration under the Texas

General Arbitration Act (“TAA”). See TEX. CIV. PRAC. & REM. CODE §§ 171.001–

.098. After the homeowners filed suit, the trial court consolidated Darling Homes’s

application to compel arbitration with their lawsuit.

The homeowners objected to Darling Homes’s application for arbitration.

First, they argued that the contracts that Darling Homes attached to its application

for arbitration were not properly authenticated. Second, they argued that the

arbitration agreements were procedurally unconscionable because Darling Homes

fraudulently induced them to enter into the purchase agreements in which the

arbitration agreements were embedded. Third, they argued that the arbitration

agreements were substantively unconscionable because most of the arbitration

agreements required arbitration pursuant to construction industry rules and

procedures of the American Arbitration Association (“AAA”). The homeowners

maintained that under those rules they would owe an initial filing fee of $7,000,

which is excessive compared to the filing fee for a lawsuit. They also asserted that

the disparity in the parties’ ability to pay arbitration fees was unfair to them and they

could not “afford to pursue their claims through AAA arbitration.”

Darling Homes responded by refiling all of the contracts that included the

arbitration provision along with a business records affidavit. Darling Homes argued

that the homeowners failed to support their unconscionability defenses with

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evidence, including evidence that arbitration was unfairly expensive. In addition, it

argued that allegations of fraudulent inducement to enter the purchase agreements

would not render the embedded arbitration agreements unenforceable.

Before the trial court ruled on Darling Homes’s application for arbitration, the

homeowners filed supplemental objections. They argued that the Type 1 arbitration

agreement is substantively unconscionable because it provides for arbitration to be

conducted pursuant to the AAA Construction Industry Arbitration Rules, which the

homeowners contend are unfairly biased in favor of Darling Homes. The

homeowners further argued that the Type 1 arbitration agreement is unconscionable

because it did not expressly inform them that they were waiving their rights to

litigate disputes in court. The homeowners attached as evidence: (1) their original

petition; (2) the Construction Industry Arbitration Rules; (3) the AAA administrative

fee schedules; and (4) examples of the Type 1 and Type 2 purchase agreements. In

addition, and without argument or explanation, the homeowners mentioned that the

“Type 2” arbitration agreement gave Darling Homes sole discretion to determine

whether to proceed pursuant to the Federal Arbitration Act (“FAA”) or the TAA.

Darling Homes urged the trial court to disregard the homeowners’

supplemental objections and to order the parties to arbitrate for the reasons it had

previously argued. The trial court denied the application for arbitration, and Darling

Homes filed this interlocutory appeal.

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 ANALYSIS

Darling Homes raises a single issue on appeal, arguing that the trial court erred

by denying its application for arbitration. Included in this single issue, Darling

Homes argues that it proved that the homeowners’ claims arise from the purchase

contracts and are within the scope of the arbitration agreements embedded in those

contracts. Darling Homes also argues that the homeowners failed to prove their

defenses of procedural and substantive unconscionability. The homeowners do not

challenge the existence of valid contracts or that their claims are within the scope of

the arbitration clauses. Rather, they maintain that the evidence they supplied was

sufficient to support their affirmative defenses to enforcement of the arbitration

agreements.

I. Jurisdiction; Standard of Review

We have jurisdiction to review an interlocutory order denying a motion to

compel arbitration. See TEX. CIV. PRAC. & REM. CODE § 51.016 (FAA); id.

§ 171.098(a)(1) (TAA); see also Ellis v. Schlimmer, 337 S.W.3d 860, 862 (Tex.

2011) (noting availability of appellate review under the FAA and the TAA).

Ordinarily, we review a trial court’s order denying a motion to compel arbitration

for abuse of discretion, deferring to factual findings that are supported by evidence

and determining legal questions de novo. Weitzel v. Coon, No. 01-19-00015-CV,

2019 WL 3418515, at *1 (Tex. App.—Houston [1st Dist.] July 30, 2019, no pet.)

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(mem. op.); Parker v. Schlumberger Tech. Corp., 475 S.W.3d 914, 922 (Tex. App.—

Houston [1st Dist.] 2015, no pet.). However, because the “ultimate issue” of whether

an arbitration agreement is unconscionable is a question of law, when

unconscionability is the basis for the denial of a motion to compel arbitration—and

when there are no factual disputes—we will review the trial court’s ruling de novo.

Royston, Rayzor, Vickery, & Williams, LLP v. Lopez, 467 S.W.3d 494, 499 (Tex.

2015).

II. Arbitration

“[H]istorically, Texas law favors settling disputes by arbitration.”* EZ Pawn

Corp. v. Mancias, 934 S.W.2d 87, 90 (Tex. 1996). “[A]rbitration is intended as a

lower cost, efficient alternative to litigation.” In re Olshan Found. Repair Co., LLC,

328 S.W.3d 883, 893 (Tex. 2010); see EZ Pawn Corp., 934 S.W.2d at 90

*
A public policy preference in favor of enforcing valid contractual arbitration
agreements has long been enshrined in Texas and federal caselaw. E.g., New Prime
Inc. v. Oliveira, 139 S. Ct. 532, 543 (2019) (noting that Congress adopted the FAA
to establish a federal policy favoring arbitration agreements); Southland Corp. v.
Keating, 465 U.S. 1, 10 (1984) (citing “national policy favoring arbitration”); RSL
Funding, LLC v. Newsome, 569 S.W.3d 116, 121 (Tex. 2018); Jack B. Anglin Co.,
Inc. v. Tipps, 842 S.W.2d 266, 268 (Tex. 1992); Brazoria Cty. v. Knutson, 142 Tex.
172, 179, 176 S.W.2d 740, 743 (1943) (“Arbitration is a proceeding so favored by
Texas law that both our Constitution and statutes provide for the submission of
differences to arbitration.”); see also Green v. Franklin, 1 Tex. 497, 500 (1846)
(“The awards of arbitrators have always been looked upon with peculiar favor, as it
is a conciliatory mode of adjusting disputes by persons specially chosen for that
purpose. If the proceedings before them have the appearance of fairness to both
parties, mere technical objections will receive no countenance from the court.”).
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(“Arbitration agreements, like the one here, offer a permissible choice to traditional

litigation that does not favor either party.”).

Arbitration is a creature of contract, and parties seeking to compel arbitration

must rely upon an agreement to arbitrate. In re Merrill Lynch Tr. Co. FSB, 235

S.W.3d 185, 192 (Tex. 2007) (orig. proceeding); Speedemissions, Inc. v. Bear Gate,

L.P., 404 S.W.3d 34, 42 (Tex. App.—Houston [1st Dist.] 2013, no pet.). Arbitration

agreements are “treated the same as other contracts.” Royston, Rayzor, 467 S.W.3d

at 504. A party seeking to compel arbitration must establish (1) the existence of a

valid arbitration agreement and (2) that the claims asserted are within the scope of

that agreement. Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222, 227 (Tex.

2014); Speedemissions, 404 S.W.3d at 42 (citing In re Kellogg Brown & Root, Inc.,

166 S.W.3d 732, 737 (Tex. 2005) (orig. proceeding)); Parker, 475 S.W.3d at 922.

The existence of a valid arbitration agreement is a legal question which we resolve

by applying contract principles. In re Palm Harbor Homes, Inc., 195 S.W.3d 672,

676 (Tex. 2006) (orig. proceeding); In re D. Wilson Const. Co., 196 S.W.3d 774,

781 (Tex. 2006); Parker, 475 S.W.3d at 922. Once the party seeking to compel

arbitration proves that a valid arbitration agreement exists, a strong presumption in

favor of arbitration arises. Kellogg Brown & Root, 166 S.W.3d at 737–38; see Ellis,

337 S.W.3d at 862 (“[C]ourts should resolve any doubts as to the agreement’s scope,

waiver, and other issues unrelated to its validity in favor of arbitration.”); Olshan

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Found. Repair, 328 S.W.3d at 892 (arbitration is favored under both Texas and

federal law).

After the proponent of arbitration has proven that the claims asserted are

within the scope of a valid arbitration agreement, the burden shifts to the party

opposing arbitration to raise an affirmative defense to enforcement of the arbitration

agreement. Royston, Rayzor, 467 S.W.3d at 500; Venture Cotton Co-op., 435 S.W.3d

at 227. Arbitration clauses are separable from the contracts in which they are

embedded. Prima Paint Corp. v. Flood & Conkling Manuf. Co., 388 U.S. 395, 404

(1967); RSL Funding, LLC v. Newsome, 569 S.W.3d 116, 125 (Tex. 2018); S.C.

Maxwell Family P’ship, Ltd. v. Kent, 472 S.W.3d 341, 343–44 (Tex. App.—Houston

[1st Dist.] 2015, no pet.). Thus, when ruling on a motion to compel arbitration, the

court must determine whether any affirmative defenses relating solely to the

arbitration clause bar its enforcement. Perry Homes v. Cull, 258 S.W.3d 580, 589

(Tex. 2008). Classic contract defenses—like unconscionability and fraudulent

inducement—that are directed to the contract as a whole will be decided by the

arbitrator. RSL Funding, 569 S.W.3d at 124; see Perry Homes, 258 S.W.3d at 589

(“[A]rbitrators must decide if an entire contract was fraudulently induced, while

courts must decide if an arbitration clause was.”).

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III. Unconscionability

Ordinarily, we presume that an unambiguous contract reflects the intent of the

contracting parties. Venture Cotton Co-op., 435 S.W.3d at 228. Such contracts “are

generally enforced as written ‘regardless of whether one or more of the parties

contracted wisely or foolishly, or created a hardship for himself.’” Id. (quoting

Wooten Props., Inc. v. Smith, 368 S.W.2d 707, 709 (Tex. Civ. App.—El Paso 1963,

writ ref’d); see Royston, Rayzor, 467 S.W.3d at 501 (party to written agreement is

presumed to have knowledge of and understand its contents); EZ Pawn Corp., 934

S.W.2d at 90 (same); see also In re U.S. Home Corp., 236 S.W.3d 761, 764 (Tex.

2007) (“Like any other contract clause, a party cannot avoid an arbitration clause by

simply failing to read it.”); In re McKinney, 167 S.W.3d 833, 835 (Tex. 2005)

(“Absent fraud, misrepresentation, or deceit, a party is bound by terms of the contract

he signed, regardless of whether he read it or thought it had different terms.”).

Texas law, however, recognizes an exception to the freedom of contract

because “grossly unfair bargains should not be enforced.” Venture Cotton Co-op.,

435 S.W.3d at 228. “[T]he theory behind unconscionability in contract law is that

courts should not enforce a transaction so one-sided, with so gross a disparity in the

values exchanged, that no rational contracting party would have entered the

contract.” Olshan Found. Repair, 328 S.W.3d at 892 (citing RESTATEMENT

(SECOND) OF CONTRACTS § 208 cmt. b (1981)). Unconscionable contracts are

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unenforceable. Royston, Rayzor, 467 S.W.3d at 499–500; Olshan Found. Repair,

328 S.W.3d at 892; In re Poly-America, L.P., 262 S.W.3d 337, 348 (Tex. 2008).

Arbitration clauses are separable, see Prima Paint, 388 U.S. at 404, and RSL

Funding, 569 S.W.3d at 125, and embedded arbitration agreements may be

unenforceable if they are substantively or procedurally unconscionable, or both.

Royston, Rayzor, 467 S.W.3d at 499–500. “Substantive unconscionability refers to

the fairness of the arbitration provision itself, whereas procedural unconscionability

refers to the circumstances surrounding adoption of the arbitration provision.” Palm

Harbor Homes, 195 S.W.3d at 677; see In re Odyssey Healthcare, Inc., 310 S.W.3d

419, 422 (Tex. 2010) (“Substantive unconscionability refers to whether the

arbitration provision ensures preservation of the substantive rights and remedies of

a litigant.”). Because an arbitration agreement functions as a forum-selection clause,

see Poly-America, 262 S.W.3d at 352, the “‘crucial inquiry’ in determining

unconscionability [is] ‘whether the arbitral forum in a particular case is an adequate

and accessible substitute to litigation, a forum where the litigant can effectively

vindicate his or her rights.’” Venture Cotton Co-op., 435 S.W.3d at 231–32 (quoting

Olshan Found. Repair, 328 S.W.3d at 894); see Green Tree Fin. Corp.-Ala. v.

Randolph, 531 U.S. 79, 90 (2000) (holding that statutory claims may be arbitrated

“so long as the prospective litigant effectively may vindicate [his or her] statutory

cause of action in the arbitral forum.”).

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 “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.” Olshan Found. Repair, 328 S.W.3d at

892 (quoting In re FirstMerit Bank, N.A., 52 S.W.3d 749, 757 (Tex. 2001)).

Excessive arbitration costs may render contractual arbitration unenforceable if the

costs prevent a litigant from effectively vindicating his or her rights in the arbitral

forum. Olshan Found. Repair, 328 S.W.3d at 893; see Green Tree, 531 U.S. at 90.

A party opposing arbitration on the basis of unconscionability must supply

“specific proof in the particular case of the arbitral forum’s inadequacy.” Venture

Cotton Co-op., 435 S.W.3d at 231–32. 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.” Green Tree, 531 U.S. at 92. The arbitration opponent should include evidence

about the claimant’s ability to pay the arbitration fees and costs, the actual cost of

arbitration compared to the amount of damages, the expected cost differential

between arbitration and litigation in court, and whether that cost differential is so

substantial as to deter the bringing of claims. Olshan Found. Repair, 328 S.W.3d at

893–95. Speculation about possible harm is insufficient to establish

unconscionability. Venture Cotton Co-op., 435 S.W.3d at 231–32; see Green Tree,

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531 U.S. at 91 (“The ‘risk’ that [the plaintiff] will be saddled with prohibitive costs

is too speculative to justify the invalidation of an arbitration agreement.”). Rather,

the party opposing arbitration must offer evidence such as invoices, expert

testimony, reliable cost estimates, and affidavits to prove the likelihood of incurring

expected costs. Olshan Found. Repair, 328 S.W.3d at 895.

IV. The homeowners do not dispute that their claims arise from contracts
and are within the scope of the arbitration agreements included in the
contracts.

In the trial court, the homeowners initially challenged the authenticity of the

contracts that Darling Homes attached to its application for arbitration. However,

Darling Homes then refiled the contracts with a business records affidavit. On

appeal, the homeowners do not contend that their claims are not within the scope of

valid arbitration agreements embedded in their purchase contracts.

The Type 1 arbitration agreement provides:

16. DISPUTE RESOLUTION: Any claim or dispute by and
between Seller and Purchaser arising out of or relating to the Agreement
or the sale, construction, or warranty of the Homesite (“Dispute”) shall
be resolved by binding arbitration by an arbitrator agreed upon by the
parties and according to rules to be agreed upon by the parties. If the
parties cannot reach an agreement on the arbitrator or the rules to
govern the arbitration, then the Dispute shall be submitted for
administration to the American Arbitration Association (“AAA”) and
resolved and in accordance with the Construction Industry Arbitration
Rules of the AAA and the Federal Arbitration Act (Title 9, United
States Code). Fees of the arbitrator and expenses charged by AAA shall
be borne equally by the parties, provided that the prevailing party in the
arbitration shall be entitled to reimbursement of such fees from the
losing party. If the arbitration award recognizes validity to both parties’

13
action, responsibility for fees and expenses of the arbitration shall be
apportioned by the arbitrator. Purchaser and Seller agree to be bound
by this Dispute Resolution provision and agree that it shall survive
closing of this Agreement. Nothing in this paragraph shall prevent a
party from pursuing a claim of $10,000 or less in small claims court.

Construction Defect Disputes: Purchaser is advised that as a
prerequisite to filing a construction defect claim in arbitration or small
claims court, you must comply with notice procedures set forth in
Chapter 27 of the Texas Property Code.

The Type 2 arbitration agreement provides in relevant part:

11) DISPUTE RESOLUTION—ARBITRATION

ANY AND ALL CLAIMS, CONTROVERSIES, BREACHES
OR DISPUTES BY OR BETWEEN THE PARTIES HERETO,
ARISING OUT OF OR RELATED TO THIS PURCHASE
AGREEMENT, THE PROPERTY, THE SUBDIVISION OR
COMMUNITY OF WHICH THE PROPERTY IS A PART, THE
SALE OF THE PROPERTY BY SELLER, OR ANY TRANSACTION
RELATING HERETO, WHETHER SUCH DISPUTE IS BASED ON
CONTRACT, TORT, STATUTE, OR EQUITY, INCLUDING
WITHOUT LIMITATION ANY DISPUTE OVER (a) THE
DISPOSITION OF ANY EARNEST MONEY DEPOSIT
HEREUNDER, (b) BREACH OF CONTRACT, (c) NEGLIGENT OR
INTENTIONAL MISREPRESENTATION OR FRAUD,
(d) NONDISCLOSURE, (e) BREACH OF ANY ALLEGED DUTY
OF GOOD FAITH AND FAIR DEALING, (f) ALLEGATIONS OF
LATENT OR PATENT DESIGN OR CONSTRUCTION DEFECTS,
INCLUDING WITHOUT LIMITATION, PURSUANT TO THE
FEDERAL ARBTRATION ACT AND/OR THE TEXAS
ARBITRATION ACT, AT SELLER’S ELECTION (NO
INTERLOCUTORY APPEAL OF DENIAL OF FAA MOTION TO
COMPEL ARBITRATION, MUST USE MANDAMUS), (g) THE
PROPERTY, INCLUDING WITHOUT LIMITATION, THE
PLANNING, SURVEYING, DESIGN, ENGINEERING, GRADING,
SPECIFICATIONS, CONSTRUCTION OR OTHER
DEVELOPMENT OF THE PROPERTY, THE PARCEL/TRACT OR
THE COMMUNITY OF WHICH THE PROPERTY IS A PART,
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 (h) DECEPTIVE TRADE PRACTICES OR (i) ANY OTHER
MATTER ARISING OUT OF OR RELATED TO THE
INTERPRETATION OF ANY TERM OR PROVISION OF THIS
AGREEMENT, OR ANY PROVISION OF THIS PURCHASE
AGREEMENT, INCLUDING EARNEST MONEY DEPOSITS
DISPUTES, THIS ARBITRATION AGREEMENT, ALLEGATIONS
OF UNCONSCIONABILITY, FRAUD IN THE INDUCEMENT, OR
FRAUD IN THE EXECUTION, WHETHER SUCH DISPUTE
ARISES BEFORE OR AFTER THE CLOSE OF ESCROW (EACH A
“DISPUTE”), SHALL BE ARBITRATED PURSUANT TO THE
FEDERAL ARBITRATION ACT AND SUBJECT TO THE
PROCEDURES SET FORTH AS FOLLOWS . . .

The homeowners alleged breach of express warranty, common law and

statutory fraud relating to representations allegedly made by Darling Homes about

the elevation to which the houses would be built, breach of implied warranty of good

and workmanlike services, and breach of contract. These claims fall within the scope

of both the Type 1 and Type 2 arbitration agreements.

V. The homeowners did not show that procedural unconscionability
justified the trial court’s denial of the motion to compel arbitration.

A. Arguments in the trial court and on appeal

In the trial court, the homeowners initially argued that the arbitration

agreements were procedurally unconscionable because Darling Homes had

allegedly fraudulently induced them into the contracts for the purchase of their

houses. In their supplemental objection to the application for arbitration, the

homeowners also alleged that the Type 1 arbitration agreement was procedurally

15
unconscionable because it did not include a notice that the homeowner was waiving

the right to litigate disputes in court.

On appeal, the homeowners briefly address their fraudulent inducement

argument on appeal, saying that they were unfairly deprived of discovery to prove

fraudulent inducement. The homeowners assert that the Type 1 arbitration

agreement was procedurally unconscionable because it did not include a notice that

the homeowner was waiving the right to litigate disputes in court. They also argue

on appeal that the Type 2 arbitration agreement was procedurally unconscionable

because it included ambiguous language regarding the applicability of the TAA or

the FAA. They reason that this ambiguous language “likely” gives the Seller the

“unilateral choice of law” over any dispute within the scope of the arbitration

agreement. They also complain that the ambiguous portion of the Type 2 arbitration

agreement was difficult to read because it was all capitalized.

B. Claims of fraudulent inducement do not demonstrate procedural
unconscionability.

The homeowners’ claims of fraudulent inducement are no evidence of

procedural unconscionability of the arbitration agreement because these claims are

directed to the contract as a whole. The homeowners’ argument is that Darling

Homes misrepresented the elevation to which their houses would be built, and they

relied on that representation when entering into the purchase agreements. This is not

an allegation that they were fraudulently induced into the arbitration agreement. See
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RSL Funding, 569 S.W.3d at 124; Perry Homes, 258 S.W.3d at 589. Because the

allegation of fraudulent inducement relates to the contract as a whole, it is a question

for the arbitrator, not the court, and it is no evidence of procedural unconscionability.

See RSL Funding, 569 S.W.3d at 124; Perry Homes, 258 S.W.3d at 589.

C. Claims about contract language do not demonstrate procedural
unconscionability.

1. Type 1 arbitration agreement

The homeowners contend that the Type 1 arbitration agreement

unconscionably failed to inform them that they were waiving the right to litigate

disputes in court. Their contention about the language used in the Type 1 arbitration

agreement does not demonstrate procedural unconscionability because, having had

an opportunity to read the arbitration agreements and having signed them, they are

legally presumed to know what was in the contract and to have assented to the terms.

See Venture Cotton Co-op., 435 S.W.3d at 228. We agree that the Type 1 agreement

did not expressly state that the purchaser was waiving his or her right to adjudicate

a dispute in court. However, the front page of the contract states in bold, capitalized

letters: “THIS CONTRACT CONTAINS AN ARBITRATION CLAUSE. SEE

PARAGRAPH 16.” The Type 1 contract also provided:

(17) NO ORAL REPRESENTATIONS: This Agreement and all
attachments hereto and all documents executed in connection herewith
constitutes the entire agreement between Purchaser and Seller
regarding Purchaser’s purchase of the Homesite and there are no
agreements or representations, oral or written, not contained in this

17
 Agreement. . . . Purchaser acknowledges that Purchaser . . . has read the
entire Agreement including attachments and is fully bound thereby.

The homeowners make no argument and have provided no evidence that they

were unaware that their disputes would be resolved by arbitration or that Darling

Homes deceived them into believing otherwise. See McKinney, 167 S.W.3d at 835.

We conclude that the homeowners did not show that the Type 1 arbitration

agreement is procedurally unconscionable.

2. Type 2 arbitration agreement

The homeowners contend that the Type 2 arbitration agreement was unclear

as to whether the TAA or FAA applied and left that up to the seller’s unilateral

election. They also allege that the use of all capital letters in the arbitration agreement

was evidence of procedural unconscionability. These contentions about the language

used in the Type 2 arbitration agreement do not justify the trial court’s denial of the

motion to compel arbitration for two reasons. First, the homeowners did not show

that that the circumstances surrounding the adoption of the arbitration provision

were grossly unfair. See Palm Harbor Homes, 195 S.W.3d at 677. Second, paragraph

11(a) of the arbitration agreement itself delegates questions of substantive

arbitrability to the arbitrator.

The homeowners argue that language in the Type 2 arbitration agreement is

unclear as to whether the TAA or the FAA applies and suggests that Darling Homes

has a unilateral right to determine whether to proceed to arbitration under the TAA

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or the FAA. The Type 2 arbitration agreement includes a laundry list of types of

claims that are included within its scope. Subpart (f) of that list states: “allegations

of latent or patent design or construction defects, including without limitation,

pursuant to the Federal Arbitration Act and/or the Texas Arbitration Act, at Seller’s

election (no interlocutory appeal of denial of FAA motion to compel arbitration,

must use mandamus).” We agree that this language is ambiguous because it is

grammatically nonsensical. Subpart (f) identifies allegations of latent or patent

design or construction defects as a type of claim subject to arbitration, and then

states: “including without limitation,” suggesting that what follows would identify a

nonexclusive list of claims that the parties will consider to be “allegations of latent

or patent design or construction defects.” Instead, what follows is “pursuant to the

[FAA] and/or the [TAA], at Seller’s election” and a parenthetical describing a

historically accurate but outdated summary of Texas law regarding appellate review

of denials of motions to compel arbitration.

We disagree, however, with the homeowners’ contention that the Type 2

arbitration agreement is ambiguous about whether the TAA or the FAA applies.

Subsection (c) of the Type 2 arbitration agreement provides: “[A]ny and all Disputes

shall be arbitrated—which arbitration shall be mandatory and binding—pursuant to

the Federal Arbitration Act.” And subsection (n)(ii) of the agreement states: “If

Buyer or Seller refuses to submit to arbitration after agreeing to this provision, Buyer

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or Seller may be compelled to arbitrate under the Federal Arbitration Act.” These

unambiguous statements indicate that the arbitration under the Type 2 arbitration

agreement is pursuant to the FAA.

We also disagree with the homeowners’ contention that the use of

capitalization made the arbitration agreement procedurally unconscionable because

it made the text difficult to read. Parties to a contract are held to understand and have

assented to the terms in the contract even if they have not read them. See U.S. Home

Corp., 236 S.W.3d at 764 (“Like any other contract clause, a party cannot avoid an

arbitration clause by simply failing to read it.”); McKinney, 167 S.W.3d at 835

(same)

A more fundamental reason exists for concluding that the homeowners’

arguments about procedural unconscionability fail to support the trial court’s denial

of the motion to compel arbitration. The Type 2 arbitration agreement delegated

questions of substantive arbitrability to the arbitrator:

This arbitration agreement shall be deemed to be a self-executing
arbitration agreement. Any dispute concerning the interpretation or the
enforceability of this arbitration agreement, including without
limitation, its revocability or voidability for any cause, any challenges
to the enforcement or the validity of the agreement, or this arbitration
agreement, or the scope of arbitrable issues under this arbitration
agreement, and any defense relating to the enforcement of this
arbitration agreement, including without limitation, waiver, estoppel,
or laches, shall be decided by an arbitrator in accordance with this
arbitration agreement and not by a court of law.

(Emphasis added).
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 Ordinarily arbitrability is determined by the court rather than the arbitrator,

but parties may by contract provide that questions of arbitrability should be resolved

by the arbitrator. RSL Funding, 569 S.W.3d at 120. This may be accomplished by

express language or by expressly adopting rules, such as the AAA Commercial

Arbitration Rules, that unmistakably delegate such issues to the arbitrator. Weitzel

v. Coon, No. 01-19-00015-CV, 2019 WL 3418515, at *3 (Tex. App.—Houston [1st

Dist.] July 30, 2019, no pet.) (mem. op.). The Type 2 arbitration agreement expressly

delegated gateway issues of enforceability, including questions of

unconscionability, to the arbitrator. Because there is a valid agreement to arbitrate

that delegates arbitrability to the arbitrator, the trial court should have compelled

arbitration and allowed the arbitrator to decide the questions relating to

unconscionability of the Type 2 arbitration agreement. See RSL Funding, 569

S.W.3d at 121.

VI. The homeowners did not show that substantive unconscionability
justified the trial court’s denial of the motion to compel arbitration.

A. Type 1 arbitration agreement

The homeowners contend that the Type 1 arbitration agreement is

substantively unconscionable because it shortened the statute of limitations and

limited the buyer’s legal remedies. They also contend that it was substantively

unconscionable because it specified that the arbitration would be administered in

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accordance with the AAA’s Construction Industry Arbitration Rules, not the AAA’s

Home Construction Arbitration Rules.

1. Limitation on claims

Paragraph 29 of the Type 1 purchase agreement provides:

29. LIMITATION ON CLAIMS: Under no circumstances shall
either Purchaser or Seller be liable for any special, indirect, or
consequential damages including claims of mental anguish, except as
otherwise specifically set forth in this Agreement. Any action or claim,
regardless of form, which arises from or relates to this Agreement is
barred unless it is brought by Purchaser or Seller not later than two (2)
years and one (1) day from the date the cause of action accrues.

The homeowners contend that this provision demonstrates the one-sidedness

of the Type 1 arbitration agreement. They argue that the limitations on remedies and

the contractual shortening of the statute of limitations render the arbitration

agreement unconscionable. In making this argument, they conflate this provision,

paragraph 29, with the arbitration agreement, which is wholly contained in

paragraph 16 of the Type 1 contract.

The homeowners rely, in part, on In re Poly-America, L.P., 262 S.W.3d 337

(Tex. 2008) (orig. proceeding). But in Poly-America, the arbitration agreement was

a stand-alone contract, and all the provisions discussed by the Texas Supreme Court

were part of the arbitration agreement. 262 S.W.3d at 344. This is not so in this case.

This case is more like In re Labatt Food Service, L.P., 279 S.W.3d 640 (Tex. 2009)

(orig. proceeding), in which the arbitration agreement was embedded in another

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contract. 279 S.W.3d at 648. Like the Supreme Court deciding Labatt Food Service,

we do not reach the question of whether the challenged contractual provision is

enforceable because the homeowners’ challenge is not a challenge to the arbitration

agreement. Id. at 648–49. Because the limitation on claims provision is separate

from the arbitration agreement, the alleged unconscionability of it is a question for

the arbitrator. See id.; see also Prima Paint, 388 U.S. at 409 (separability doctrine).

2. Construction Industry Arbitration Rules

The homeowners contend that the Type 1 arbitration agreement specifies that

the agreement is governed by the AAA Construction Industry Arbitration Rules, and

they argue about the ways in which those rules unfairly favor Darling Homes

especially in comparison to the AAA Home Construction Arbitration Rules. But the

homeowners misstate the Type 1 arbitration agreement, which provides that disputes

“shall be resolved by binding arbitration by an arbitrator agreed upon by the parties

and according to the rules to be agreed upon by the parties.” The arbitration

agreement does not require the use of the AAA Construction Industry Arbitration

Rules unless the parties are unable to agree on an arbitrator and rules to govern the

arbitration. The AAA Construction Industry Arbitration is only an alternative. The

homeowners have presented no evidence that Darling Homes refused to agree to an

arbitrator and rules other than the allegedly biased Construction Industry Arbitration

Rules. Thus, we conclude that they did not meet their burden to prove their claim of

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substantive unconscionability on this basis. See TMI, Inc. v. Brooks, 225 S.W.3d

783, 797 (Tex. App—Houston [14th Dist.] 2007, pet. denied) (rejecting substantive

unconscionability defense as to alleged requirement for AAA to arbitrate dispute

when alternative dispute resolution method was available and plaintiffs presented no

evidence that they would be required to submit to AAA arbitration).

3. Cost of arbitration

The homeowners also contend that “compared to the cost of litigation, the cost

of arbitrating this case is unconscionable.” To support their argument, they

compared the cost of filing fees in the court, $360.50, with Construction Industry

Arbitration Rules initial filing fee of $7,000 for a dispute valued at over $1 million.

They argue that they would be required to bear the expense of up to 81 different

arbitrations, including the costs of arbitrator fees, reporting services, and hearing

room rentals.

In the trial court, the homeowners’ evidence consisted of copies of a Type 1

and Type 2 contract, their original petition, the AAA Home Construction Arbitration

Rules, the Construction Industry Arbitration Rules, and the AAA administrative fee

schedule. The homeowners’ original petition stated: “Plaintiff seeks monetary relief

over $1,000,000.00.” It does not specify whether the alleged amount of damages is

an aggregate of all their claims or is an estimate of each of their claims.

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 We agree that arbitration costs may render contractual arbitration

unenforceable if the costs prevent a litigant from effectively vindicating his or her

rights in the arbitral forum. Olshan Found. Repair, 328 S.W.3d at 893; see Green

Tree, 531 U.S. at 90. But the party opposing arbitration nevertheless must come

forward with evidence demonstrating that the costs of arbitration make it an

inaccessible forum. The homeowners failed to do this. They provided no evidence

that would allow a court to compare the “total costs” of litigation and arbitration,

which the Texas Supreme Court has said is “the most important factor in determining

whether the arbitral forum is an adequate and accessible substitute to litigation.”

Olshan Found. Repair, 328 S.W.3d at 894–95. The record includes no evidence

about the individual homeowners’ ability to pay the arbitration fees and costs, the

amount of damages sought be each homeowner, or the actual cost of arbitration

based on invoices, expert testimony, affidavits, or reliable cost estimates. See id.

Without such evidence, the homeowners’ arguments are no more than speculation

about possible harm, which is insufficient to establish unconscionability. See Green

Tree, 531 U.S. at 91; Venture Cotton Co-op., 435 S.W.3d at 231–32.

We conclude that the trial court could not properly deny arbitration under the

Type 1 arbitration agreement on the basis of the substantive unconscionability as

argued by the homeowners.

B. Type 2 arbitration agreement

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 The homeowners contend that the Type 2 arbitration agreement is

substantively unconscionable because it allowed Darling Homes to choose whether

to proceed under the TAA or the FAA and because it did not specify that the AAA’s

Home Construction Arbitration Rules apply. They also make the same argument

about the unfair and prohibitive cost of arbitration under the Type 2 arbitration

agreement.

As we have explained, the Type 2 arbitration agreement expressly delegates

questions of enforceability and defenses to enforceability to the arbitrator. For that

reason, none of the homeowners’ substantive unconscionability arguments as to the

Type 2 arbitration agreement can justify the trial court’s denial of arbitration of

claims made for houses built pursuant to the Type 2 contracts. See RSL Funding,

569 S.W.3d at 121.

Moreover, the homeowners’ substantive unconscionability arguments would

fail even in the absence of the provision delegating substantive arbitrability to the

arbitrator. The provision regarding application of the TAA or the FAA that the

homeowners challenge is the same grammatically nonsensical language that we

analyzed, supra. For the same reasons we would conclude that the contract does not

permit Darling Homes to unilaterally determine whether to proceed under the TAA

or the FAA. To the extent that the homeowners contend that Type 2 arbitration

agreement grants Darling Homes a unilateral right to select the law applicable to the

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parties’ arbitration, we note that the Type 2 contract includes an express choice-of-

law provision stating that the contract as a whole is “governed by the laws of the

State of Texas.”

The Type 2 arbitration agreement specifies that arbitration will be conducted

pursuant to the arbitration rules and procedures of the AAA in effect at the time the

arbitration request is submitted. The homeowners contend that the failure to specify

that the AAA Home Construction Arbitration Rules would govern disputes is in

itself unconscionable. The homeowners suggest that, based on the AAA’s rules, they

would be required to submit to arbitration under the AAA’s Commercial Arbitration

Rules because the contract did not specify the use of the Home Construction

Arbitration Rules. But they have provided no evidence that demonstrates how or

why the use of rules other than the AAA Home Construction Arbitration Rules

would be unfair. Accordingly, the homeowners did not meet their burden to

demonstrate substantive unconscionability.

Finally, the homeowners’ argument that arbitration under the Type 2

arbitration agreement is unfairly expensive fails for lack of evidence, as we

concluded with regard to the same argument made about the Type 1 arbitration

agreements.

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 Conclusion

Because valid arbitration agreements govern the claims against Darling

Homes, we hold that the trial court abused its discretion by denying the motion to

compel arbitration. We reverse the trial court’s order denying the motion to compel

arbitration. We remand to the trial court for entry of an order compelling the parties

to arbitrate and staying the proceedings pending completion of the arbitration.

Peter Kelly
Justice

Panel consists of Justices Kelly, Landau, and Hightower.

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