TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-22-00036-CV

Yong Yu and Chao Qun Restaurant Group, LLC, Appellants

v.

Chao-Qun Lu, Appellee

FROM THE 455TH DISTRICT COURT OF TRAVIS COUNTY

NO. D-1-GN-21-006966, THE HONORABLE MAYA GUERRA GAMBLE, JUDGE PRESIDING

M E M O R A N D U M O P I N I O N

In this interlocutory appeal, Yong Yu (Yu) and Chao Qun Restaurant Group, LLC

(the Company) challenge the trial court’s order denying their motion to compel arbitration of 

their respective claims against Chao-Qun Lu (Lu) arising from disputes related to loans to, 

ownership interests in, and management of the Company. See Tex. Civ. Prac. & Rem. Code 

§§ 51.014(a) (listing appealable interlocutory orders), 171.098(a)(1) (allowing interlocutory 

appeals from orders denying motions to compel arbitration). For the following reasons, we 

reverse the order denying the motion to compel arbitration and remand for further proceedings

consistent with this opinion.

BACKGROUND

Prior to the events giving rise to this lawsuit, Lu was the managing member of the 

Company, which owns commercial real estate (the Property) on North Lamar Boulevard in 

Austin and rents out space in the Property to commercial tenants, including a restaurant owned 
2

and operated by Chang Le Restaurant, LLC (the Restaurant). When the Company encountered 

financial difficulties and was at risk of foreclosure by its lenders, it solicited assistance from Yu, 

who agreed to lend funds to the Company pursuant to a promissory note. The note recited that 

upon Yu’s satisfactorily completing “his due diligence” in connection with the Company’s 

business, the parties would enter into a “subscription agreement” or similar instrument whereby 

he would acquire 65% of the Company’s membership interests. Within two months of Lu’s 

execution of the promissory note on behalf of the Company, the parties executed several 

other agreements, including the following two relevant to this appeal: (1) a “Membership 

Purchase Agreement” (Purchase Agreement), by which Yu agreed to purchase from Lu a 65% 

interest in the Company, and (2) a “First Amended and Restated Operating Agreement of . . . 

[the Company]” (Operating Agreement), both executed May 14, 2021.

After disputes arose among the parties to this appeal and third parties about debt

obligations, lease payments, ownership of the Company, and whether Yu paid the consideration 

required by the Purchase Agreement—including whether any of his loan funds converted into 

ownership interests in the Company—Yu and the Company filed the underlying lawsuit. In 

the live petition, Yu made claims against Lu for fraud, fraudulent inducement, and negligent 

misrepresentation and sought a declaratory judgment that he owns a 65% interest in the 

Company and is its sole manager. The Company made claims against Lu for breach of fiduciary

duty and of the Operating Agreement.1 Appellants’ live petition included requests for a

temporary restraining order and injunction to enjoin defendants’ conduct that might interfere 

with the Company’s operations.

1 The Company made claims against the two other individuals and the Restaurant, but we 

need not recite those details because they are not relevant to the issues on appeal.
3

About a week after filing their lawsuit, appellants filed a motion to compel 

mediation and arbitration as to their claims against Lu only. In their motion, they contended that 

the Operating Agreement contains a binding agreement to arbitrate “all disputes of any kind 

between the parties, arising out of or relating in any way to the” Operating Agreement.

Appellants alleged in their motion that Yu and Lu executed “numerous documents assigning 

Yu 65% of the Membership Interests of [the Company]” and that Lu “accept[ed] the significant 

benefits of consideration paid by Yu” and “specifically acknowledge[ed] ‘the receipt and 

sufficiency’ of Yu’s consideration.” Nonetheless, appellants alleged, six months after execution 

of the Operating Agreement and related Purchase Agreement, Lu “sent demand disputing Yu’s 

ownership” in the Company.

On December 22, 2021, the trial court conducted a hearing on appellants’ motion. 

Yu testified and the trial court admitted into evidence copies of the Purchase Agreement, the 

Operating Agreement, and correspondence from Lu’s attorney to Yu’s attorney stating that Yu

had breached the Purchase Agreement by failing to pay the consideration outlined therein.

Following the hearing, the trial court signed an order denying appellants’ motion to compel 

mediation and arbitration without stating its reasons. This interlocutory appeal followed.

DISCUSSION

A party seeking to compel arbitration must prove the existence of a valid 

agreement to arbitrate and that the disputed claims are within the scope of that agreement. See 

G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 519 (Tex. 2015). We resolve 

these questions by applying “common principles of general contract law to determine the parties’

intent.” Id. at 520 n.15; see also Wagner v. Apache Corp., 627 S.W.3d 277, 283 (Tex. 2021)
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(“Arbitration agreements are on equal footing with other contracts and must be enforced 

according to their terms.”). After a court determines that a valid agreement to arbitrate exists, it 

should resolve any doubts as to an agreement’s scope in favor of arbitration. See In re PolyAmerica, L.P., 262 S.W.3d 337, 348 (Tex. 2008). If a party proves that the disputed claims are 

within the scope of a valid agreement to arbitrate, the burden shifts to the opposing party to set 

up an affirmative defense to arbitration. Bonsmara Nat. Beef Co. v. Hart of Tex. Cattle Feeders, 

LLC, 603 S.W.3d 385, 397–98 (Tex. 2020).

We review the denial of a motion to compel arbitration for an abuse of discretion, 

reviewing legal questions de novo. Henry v. Cash Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018).

The validity and scope of an arbitration agreement are legal questions that we review de novo. 

Wagner, 627 S.W.3d at 283.

Appellants contend that the trial court abused its discretion in denying their 

motion to compel arbitration because, although the Purchase Agreement does not contain an 

arbitration provision, the Operating Agreement does, and the two agreements constitute “one 

entire agreement.” Therefore, appellants’ argument continues, the arbitration provision in the 

Operating Agreement applies to all their claims asserted against Lu, which fall within the 

provision’s scope. We agree.

Pursuant to the Purchase Agreement, which Yu signed as “Purchaser” and 

Lu signed as “Seller,” Lu agreed to sell and assign to Yu a 65% membership interest in the 

Company for $400,000. “[U]pon such sale and assignment pursuant to an Assignment of 

Membership Interests in the form of Exhibit A attached hereto,” Yu would “become the Manager 

and a Member holding the Majority Membership Interest [65%] in the Company set forth” in 

Schedule A of the Operating Agreement. In Article VII, the Purchase Agreement provides, 
5

This Agreement, including the exhibits, schedules hereto, and the Operating 

Agreement, embody the entire agreement and understanding of the parties hereto 

in respect of the subject matter hereof and supersede all prior agreements, 

representations, warranties, and understandings between or among the parties, 

whether written or oral, with respect to such subject matter.

(Emphases added.) Article VII also provides that each party

irrevocably agrees that any legal action or proceeding arising out of or relating to 

this Agreement or for the recognition and enforcement of any judgment in respect 

hereof brought by the other party or its successors or assigns shall be brought in 

the courts of the State of Texas, County of Travis, or . . . the United States District 

Court for the Western District of Texas.

As for the Operating Agreement, Lu and Yu each signed it in their respective

capacities as members, and Yu additionally signed it in his capacity as the Company’s manager: 

“The undersigned hereby assents to his election as manager of the” Company. The Operating 

Agreement incorporates by reference a “Schedule A,” which identifies Yu and Lu as the 

Company’s only members with, respectively, 65% and 35% ownership interests. Of particular 

relevance to this appeal, in Article X the Operating Agreement provides,

The Manager(s), Members, and any other party affected hereby, agree to negotiate 

in good faith in an effort to informally resolve any dispute arising out of or related 

to this Agreement that may arise between the Manager(s), Members, and any 

other party affected hereby. If the dispute cannot be resolved by informal 

negotiation, the parties agree to proceed to mediation in Austin, Travis County. If 

the dispute cannot be resolved by mediation within thirty (30) [sic] after such 

dispute is mediated, the parties agree that all disputes of any kind between the

parties, arising out of or relating in any way to the Agreement shall then be 

subject to BINDING ARBITRATION pursuant to the Commercial Arbitration 

Rules of the American Arbitration Association (“AAA”).

(Emphasis added.)
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In construing contracts, we consider the entire writing in an effort to harmonize 

and give effect to all the provisions of the contract so that none will be rendered meaningless. 

J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003). Also, when, as here, separate 

instruments are executed contemporaneously by the same parties, for the same purposes, and as 

part of the same transaction, we construe them together. See Kirby Highland Lakes Surgery Ctr., 

L.L.P. v. Kirby, 183 S.W.3d 891, 900 (Tex. App.—Austin 2006, no pet.). When one of such

agreements that is “essential” to the overall transaction contains an arbitration provision but the 

other agreement does not, we will presume that the parties intended the arbitration provision

to reach all aspects of the transaction unless there is a “contrary expression of intent.” See id.

at 901 (quoting Personal Sec. & Safety Sys., Inc. v. Motorola, Inc., 297 F.3d 388, 395 (5th Cir. 

2002)). Here, not only do the subject matters recited in the Purchase Agreement and Operating 

Agreement reveal that they are part of the same overall transaction, but the Purchase Agreement 

expressly states that it and the Operating Agreement, together, constitute the “entire agreement.”

Furthermore, the Operating Agreement—governing relations among the Company’s members

and the Company’s operations—is essential to the overall transaction the parties structured to 

facilitate Yu becoming the majority owner and sole manager of the Company through his 

purchase of such ownership interest.

While Lu points to the provision in Article VII of the Purchase Agreement 

requiring “any legal action or proceeding arising out of or relating to this Agreement or for the 

recognition and enforcement of any judgment in respect hereof” to be brought in the courts of 

Travis County or the Western District of Texas, such provision can be harmonized with the 

broad arbitration provision in the Operating Agreement by construing it to mean that it applies 

only in the event of a non-arbitrable dispute that must be litigated in court or, for instance, a 
7

party’s attempt to enforce an arbitration award. See Kirby, 183 S.W.3d at 901 (concluding 

similarly where one agreement as part of overall transaction contained similar forum provision 

and another agreement contained similar arbitration provision). Also, notably, the Article VII 

provision in the Purchase Agreement refers to “any legal action or proceeding arising out of or 

relating” to the agreement whereas the arbitration provision in the Operating Agreement refers to 

“all disputes arising out of or relating in any way” to the agreement. “Disputes” is a broader and 

more all-encompassing term than the specific term “legal action,” supporting the conclusion that

the parties intended that all disputes related to the agreements be resolved via arbitration while 

only non-arbitrable legal actions be brought in the specified courts. Cf. Pinto Tech. Ventures, 

L.P. v. Sheldon, 526 S.W.3d 428, 439 (Tex. 2017) (“When a forum-selection clause encompasses 

all ‘disputes’ ‘arising out of’ the agreement, instead of ‘claims,’ its scope is necessarily broader 

than claims based solely on rights originating exclusively from the contract.”). We, accordingly, 

conclude that there is a valid agreement requiring the parties to arbitrate “all disputes arising out 

of or relating in any way to” the Purchase Agreement and Operating Agreement.

Lu counters that as part of their burden to prove the existence of a valid 

arbitration agreement, appellants had the burden of proving that “all conditions precedent” to the 

Operating Agreement’s “taking effect” had occurred but that appellants did not—and could 

not—so prove because the evidence conclusively established that Yu had not paid the 

consideration as required by the closing provision in the Purchase Agreement.

2

 Lu relies on the 

following provision in Article 2.1 of the Purchase Agreement to support his argument that Yu’s 

2 We take no position on whether the evidence conclusively established Yu’s payment of 

consideration or failure of such payment, as we are able to resolve the issues on appeal on the 

basis of legal determinations.
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payment of the $400,000 consideration was a condition precedent to the Operating Agreement’s 

becoming effective:

After giving effect to the sale and purchase under Section 2.1 and the completion 

of the Closing, Purchaser shall be a Member in the Company pursuant to the 

terms of the Operating Agreement, holding the Percentage Interest in the 

Company as set forth opposite its name in Schedule A of the Operating 

Agreement.

We disagree with Lu’s contention that Yu’s alleged “failure of consideration” required by 

the Purchase Agreement rendered the Operating Agreement (and, necessarily, its arbitration 

provision) invalid and unenforceable.

First, “failure of consideration” is distinct from “lack of consideration.” The 

former is a defense to a party’s prevailing on a cause of action brought under a contract, but—

unlike the latter—it does not render a contract unenforceable or invalid. See, e.g., Tex. R. 

Civ. P. 94 (listing failure of consideration as affirmative defense); Walden v. Affiliated Comput.

Servs., Inc., 97 S.W.3d 303, 320–21 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) (“A 

complete failure of consideration constitutes a defense to an action for breach of contract.”); 

cf. S.C. Maxwell Fam. P’ship Ltd. v. Kent, 472 S.W.3d 341, 344–45 (Tex. App.—Houston 

[1st Dist.] 2015, no pet.) (“[C]onsideration is a necessary requirement for the formation of a 

contract. If there is no consideration—that is, no mutuality of obligation—then there is no 

contract.”). In contrast to lack of consideration, which “occurs when the contract, at its 

inception, does not impose obligations on both parties,” a failure of consideration “occurs when, 

because of some supervening cause arising after the contract is formed, the promised 

performance fails.” Doskocil Mfg. Co. v. Sang Nguyen, No. 02-16-00382-CV, 2017 WL 

2806322, at *6–7 (Tex. App.—Fort Worth June 29, 2017, no pet.) (mem. op.). Both the 
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Purchase Agreement and Operating Agreement are supported by consideration, i.e., mutuality of 

obligation, in that the former contains mutual promises by the parties to respectively buy and sell

the membership interests and the latter contains mutual promises between the parties (as 

members of the Company) regarding their conduct and duties to the Company (such as each 

making specified capital contributions). Thus, even if Yu did not pay the consideration required 

by the Purchase Agreement or make the capital contribution required by the Operating 

Agreement—which are material fact issues we need not reach in this appeal—such non-payment 

does not render the agreement invalid.3

Secondly, while the common law recognizes that there can be conditions 

precedent to contract formation, see Sharifi v. Steen Auto., LLC, 370 S.W.3d 126, 143–44 (Tex. 

App.—Dallas 2012, no pet.), we conclude that Yu’s payment of the $400,000 required by the

Purchase Agreement is not a condition precedent to the formation of the Operating Agreement.

Because of their “harshness in operation, conditions are not favorites of the law,” and in 

construing a contract, courts avoid finding forfeiture by condition precedent if another 

reasonable reading of the contract is possible. Criswell v. European Crossroads Shopping Ctr.,

Ltd., 792 S.W.2d 945, 948 (Tex. 1990); Great W. Drilling, Ltd. v. Pathfinder Oil & Gas., Inc., 

No. 11-14-00206-CV, 2020 WL 373096, at *8 (Tex. App.—Eastland Jan. 23, 2020, pet. dism’d)

(mem. op.). “If the language of the contract is susceptible to a non-condition precedent 

interpretation, we accept that construction and construe the language as a mere covenant.” Great 

W. Drilling, 2020 WL 373096, at *8. Furthermore, contract terms that use conditional language 

such as “if,” “provided that,” “on condition that,” or similar conditional phrases reflect the 

3 Additionally, even if Lu were lodging a true complaint about lack of consideration, such 

defect would go to the validity of the agreement as a whole and would have to be decided by an 

arbitrator, not the court. See In re Labatt Food Serv., L.P., 279 S.W.3d 640, 647–48 (Tex. 2009).
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parties’ intent to create a condition precedent, whereas the absence of such language is at least 

some indication that a provision should be construed as a covenant rather than a condition. See 

Criswell, 792 S.W.2d at 948; Schwarz-Jordan, Inc. v. Delisle Constr. Co., 569 S.W.2d 878, 

881 (Tex. 1978) (concluding that terms “shall” and “upon approval” were “not those usually 

associated with a condition precedent”); see also Chalker Energy Partners, III, LLC v. Le 

Norman Operating LLC, 595 S.W.3d 668, 673–74 (Tex. 2020) (noting that whether agreement

creates conditions precedent to formation may be decided as matter of law when terms are 

unambiguous, and holding that provision stating parties have no “legal obligation of any kind”

“unless and until” certain events have occurred creates condition precedent).

The Article 2.1 contract provision on which Lu relies—providing that “[a]fter 

giving effect to the sale and purchase under Section 2.1 and the completion of the Closing, 

Purchaser shall be a Member . . . pursuant to . . . the Operating Agreement”—does not contain 

any terms such as “provided that” or “if” that customarily indicate the parties intended to create

a condition. Furthermore, Article 2.1 does not condition the formation of the Operating 

Agreement on Yu’s paying consideration at closing but merely recites that after such 

performance he will be a member pursuant to the Operating Agreement. The effectiveness of

the Operating Agreement is not made expressly contingent upon Yu making payment (or upon 

any other event); rather, the effectiveness of the Operating Agreement is impliedly concurrent 

with the immediate effectiveness of the Purchase Agreement, by virtue of the provision

providing that both agreements comprise the parties’ “entire agreement.” It also bears noting 

that Article IV of the Operating Agreement provides a remedy for any member’s “fail[ure] to 

contribute the full amount of his or her ‘Initial Capital Commitment’”: the “deficiency will be 

considered a debt” for which the Company “shall have the right to take legal action against the 
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defaulting Member to recover on such debt.”

4

 The fact that the Operating Agreement provides 

a remedy for Yu’s alleged failure to pay his capital commitment or capital contribution of, 

presumably, the $400,000 referenced in the Purchase Agreement lends further support to our 

conclusion that payment thereof is not a condition precedent to formation of the Operating 

Agreement.

As to whether the claims at issue fall within the scope of the arbitration provision, 

we conclude that they do. The claims at issue constitute the following: (1) Yu’s request for a 

declaratory judgment that he owns 65% of the Company, (2) Yu’s fraud claims stemming from 

Lu’s alleged misrepresentation of the Company’s debts and resulting inducement of Yu to lend 

funds to the Company and convert the promissory note into the Purchase Agreement, and (3) the 

Company’s claims against Lu for breach of fiduciary duty and of the Operating Agreement 

arising from his alleged attempt to sell the Property through a brokerage agreement. The 

Operating Agreement’s arbitration clause is broad, embracing “all disputes of any kind between 

the parties, arising out of or relating in any way to the Agreement” (emphasis added),

terminology that this Court has held to be “extremely broad” and “capable of expansive reach.”

See Kirby, 183 S.W.3d at 898 (quoting Pennzoil Expl. & Prod. Co. v. Ramco Energy Ltd., 

139 F.3d 1061, 1067–68 (5th Cir. 1998)). Such “related to” language, in contrast to narrower 

phrases like “arising out of,” extends to “all disputes between the parties having a significant 

relationship to the contract regardless of the label attached to the dispute” or that “touch” on 

4 The Operating Agreement defines “Initial Capital Commitment” as “the amount the 

Member agrees to contribute for his or her Membership Interest” and the related term “Initial 

Capital Contribution” as “the amount the member has contributed for his or her Membership 

Interest as of the Effective Date.” (Emphases added.) It notes that the amount of each is listed 

next to the members’ names on the attached Schedule A. Next to Yu’s name on Schedule A, the 

amount of $400,000 is identified as his “Capital Contribution,” but there is no “Capital 

Commitment” listed.
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matters covered by the contract containing the arbitration provision. Id. (quoting Pennzoil,

139 F.3d at 1067–68). Given our determination that both the Purchase Agreement and the 

Operating Agreement, viewed as one agreement, constitute the contract at issue, it necessarily 

follows that the parties’ disputes about the percentage of Yu’s ownership interest in the 

Company, if any; Lu’s alleged breach of contractual or fiduciary duties as a member of the

Company; and Lu’s alleged misrepresentations with the intent to induce Yu into loans and 

conversion thereof into an ownership interest in the Company are matters that “touch” on and 

have a significant relationship to the agreement. This is especially so given our mandate to 

resolve any doubts as to an agreement’s scope in favor of arbitration. See In re Poly-America, 

262 S.W.3d at 348. We, accordingly, hold that the claims at issue are subject to the arbitration 

provision, and the trial court should have granted appellants’ motion to compel mediation and 

arbitration.

CONCLUSION

Having concluded that the trial court should have granted appellants’ motion to 

compel mediation and arbitration, we reverse the order and remand this cause for further 

proceedings consistent with this opinion. See Tex. Civ. Prac. & Rem. Code § 171.021; Tex. R. 

App. P. 43.2(d).

__________________________________________

Thomas J. Baker, Justice

Before Justices Goodwin, Baker, and Triana

Reversed and Remanded 

Filed: June 8, 2022