Houston COA Overturns Order Denying Arbitration in Construction Dispute

Texas’ 14th District Court of Appeals in Houston has reversed a district court’s order denying arbitration in a construction dispute.  In LDF Construction, Inc. v. Texas Friends of Chabad Lubavitch, Inc., No. 14-14-00113-CV (Tex. App. – Houston [14th], March 5, 2015), a construction company, LDF, entered into a contract to provide remodeling and repair services totaling more than $3 million to an outreach and educational facility, Chabad, in 2006. The contract itself did not include an arbitration provision, but it incorporated by reference an unsigned standard industry contract form that includes an arbitral clause.

After LDF completed the repairs described in the parties’ agreement, Chabad claimed the work was deficient and failed to comply with the applicable building codes. As a result, Chabad filed a lawsuit against LDF claiming the construction company committed breach of contract, breach of warranty, negligence, and negligent representation. In response to Chabad’s complaint, LDF filed a motion to compel arbitration under the Texas General Arbitration Act. A Harris County district court denied the construction company’s motion and LDF filed an interlocutory appeal with Texas’ 14th District Court of Appeals.

On appeal, Chabad argued the appellate court lacked jurisdiction because LDF’s notice of appeal was untimely. After LDF stated it did not receive notice regarding the district court’s order denying arbitration for more than one month, however, the trial court granted the construction company’s “Motion to Advance Appellate Timetable.”

The Houston Court of Appeals stated it would only overturn the lower court’s order advancing the timetable if no evidence supported the court’s legal finding or if the court’s factual finding was “clearly wrong and unjust.” After examining the affidavits provided to the district court, the appellate court held that the trial court did not commit error when it granted LDF’s motion since the evidence provided by the construction company was legally and factually sufficient. As a result, the Houston Court of Appeals stated LDF’s notice of appeal was timely.

Next, the 14th District addressed whether or not a valid agreement to arbitrate existed. Although the parties’ contract did not contain an arbitration clause, LDF argued that another form which did include an arbitral provision was expressly incorporated into the agreement. Chabad countered that it did not agree to be bound by the second document which was left blank and was not signed by the parties.

After examining the record, the appellate court stated a valid agreement to arbitrate existed because the parties’ contract specifically incorporated the document that included an arbitration provision by reference. The court said:

A valid agreement to arbitrate exists when a signed contract incorporates by reference another document containing the arbitration clause. See In re D. Wilson Constr. Co., 196 S.W.3d 774, 781 (Tex.2006). This rule applies even when the document containing the arbitration agreement is unsigned. Teal Constr. Co./Hillside Villas Ltd. v. Darren Casey Interests, Inc., 46 S.W.3d 417, 420 (Tex. App.—Austin 2001, pet. denied); see also D. Wilson Constr., 196 S.W.3d at 781 (not specifically addressing whether incorporated document must be signed but citing Teal Construction as example of rule allowing incorporation of separate document containing arbitration clause).

The court also noted that the document which was incorporated by reference did not include a space for signatures.

The Houston court next stated a signed contract is not required to specifically reference the arbitration clause included in a separate but incorporated document, nor must a copy of the incorporated document be attached to a contract in order to be enforceable. Since the incorporated document at issue in the case was a standard and readily available form, the court said it was “incorporated into the contract even if the document was not physically attached when the parties signed the contract.”

The appellate court then said “the law presumes that a party knows and accepts the terms of the contract he signs, and the law does not excuse a party’s failure to read the contract when he had an opportunity to do so.” The 14th District added that this presumption also applies to documents that are incorporated by reference.

After rejecting Chabad’s remaining arguments that it did not agree to engage in arbitration, the Court of Appeal concluded “as a matter of law that the parties agreed to arbitrate their dispute.”

The 14th District next turned to the question of procedural unconscionability. The court stated:

Two factors cited by the trial court for refusing to compel arbitration suggest a procedural-unconscionability finding because they concerned the circumstances under which the contract was executed: (1) Chabad’s lack of sophistication in “Construction matters/contracts”; and (2) the contract was drafted by LDF. On appeal, Chabad asserts that LDF engaged in the “sharp” business practice of hiding the existence of an arbitration agreement from a less sophisticated party. However, there is no evidence supporting the trial court’s findings or that the arbitration clause was procedurally unconscionable.

Because there was a valid agreement to arbitrate and it was not procedurally unconscionable, Houston’s 14th District Court of Appeals reversed the district court’s order denying the construction company’s motion to compel arbitration and remanded the case.

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