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Supreme Court Of Texas Applies Arbitration Clause In Purchase Agreement Against Non-Signatory Minor Children Under Direct Benefit Estoppel Theory

In Taylor Morrison of Texas, Inc. v. Skufca as Next Friend of KSX, the Supreme Court of Texas determined minor children who join their parents as plaintiffs in breach of contract claims based on construction defects in the home they resided in may be subject to arbitration clauses within the applicable purchase agreement based on the theory of direct-benefits estoppel. 2023 WL 443852, at *2 (Tex. Jan. 27, 2023).  Plaintiffs Jack and Erin Skufca (the “Parents”) and their minor children (collectively, “Plaintiffs”) sued Taylor Morrison of Texas, Inc. and Taylor Woodrow Communities-League City, Ltd. (collectively, “Defendants”) for alleged construction defects in the home they purchased from Defendants.  The purchase agreement for the home contained an arbitration clause which required arbitration of “any and all claims, controversies, breaches or disputes by or between the parties hereto” that “aris[e] out of or relate[ ] 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 related hereto,” whether those claims were based in “contract, tort, statute, or equity.”

Plaintiffs asserted claims for breach of implied warranties, negligent construction, fraud in a real estate transaction, breach of contract, violation of the Residential Construction Liability Act, quantum meruit, and violation of the Texas Deceptive Trade Practices Act. The Complaint listed the Parents as plaintiffs individually, as well as Mrs. Skufca as next friend of the two minor children. Defendants moved to compel arbitration of all the claims based on the arbitration provision in the Parents’ purchase agreement. They also sought to compel arbitration of the minor children under a direct-benefits estoppel theory.

The trial court denied the motion to compel arbitration with respect to the minor children and Defendants appealed.  The Court of Appeals of Texas, Houston (1st District) affirmed the trial court’s order, finding the minor children were not third-party beneficiaries of the purchase and agreement, and direct-benefits estoppel therefore would not apply. Defendants petitioned the Supreme Court of Texas for review.

The question before the Supreme Court of Texas was whether the minor children joined the breach-of-contract claim such that they could be compelled to arbitrate, along with their Parents, despite not being signatories to the purchase agreement. The Court found the Complaint did not differentiate between the Parents’ and the minor children’s causes of actions. The Court held the minor children had sued Defendants based on the Parents’ purchase agreement and were subject to the arbitration provision within the agreement.

The Supreme Court of Texas took its decision one step further, noting the minor children could not avoid arbitration by pleading only tort or other noncontractual claims. The Court stated, “direct-benefits estoppel also applies when a nonsignatory seeks direct benefits from the contract outside of litigation.” The Court noted the minor children lived in the subject home with their Parents and had brought “factually intertwined construction-defect claims,” which served as an additional basis for applying direct-benefits estoppel to compel arbitration of the minor children’s claims.

The practical effect of the Supreme Court of Texas’ decision is that purchasers can bind non-signatories to arbitration provisions when the non-signatory claims are based on the purchaser’s signed contract. For homebuilders in Texas, the decision broadens the potential for arbitration proceedings for all occupants of the same home and may protect against the alternative of defending the same or similar claims in both arbitration and Court simultaneously.