Opinion ID: 2831475
Heading Depth: 2
Heading Rank: 1

Heading: Arbitration Under the General Contract

Text: We begin with the Other Defendants’ reliance on the general contract as support for their arbitration demands. We conclude that Sapphire did not agree in the general contract to arbitrate its claims against the Other Defendants and is not equitably estopped from refusing to do so.
As we have explained, a party seeking to compel arbitration must establish that a valid arbitration agreement exists and that the claims at issue fall within the scope of that agreement. TEX. CIV. PRAC. & REM. CODE § 171.021(a); FirstMerit Bank, 52 S.W.3d at 753. Sapphire 25 concedes that the general contract contains a valid arbitration agreement, but contends that the Other Defendants cannot enforce that agreement because they are not signatories or parties to the general contract. See In re Rubiola, 334 S.W.3d 220, 224 (Tex. 2011) (holding that, generally, “parties must sign arbitration agreements before being bound by them”). We have recognized, however, that in some circumstances a non-signatory can be bound to, or permitted to enforce, an arbitration agreement. See, e.g., In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005) (listing “(1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) equitable estoppel, and (6) third-party beneficiary”). With regard to the Other Defendants and the general contract, the question in this case, as in Rubiola, “is not whether a non-signatory may be compelled to arbitrate but rather whether a non-signatory may compel arbitration.” 334 S.W.3d at 224. As a general rule, “an arbitration clause cannot be invoked by a non-party to the arbitration contract.” Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 532 (5th Cir. 2000). “[The] policy favoring arbitration is strong, but it alone cannot authorize a non-party to invoke arbitration.” Id. Thus, the Other Defendants must establish that they have a valid legal right to enforce the general contract’s arbitration agreement even though they are not parties to that contract. The Other Defendants contend that Sapphire agreed in the general contract that the Other Defendants could enforce its arbitration provisions. See Rubiola, 334 S.W.3d at 222 (holding that “parties to an arbitration agreement may grant nonsignatories the right to compel arbitration”).19 19 The agreement at issue in Rubiola gave the “parties” the right to demand arbitration and defined “parties” to include not only “each and all persons and entities signing this agreement,” but also all “individual partners, affiliates, officers, directors, employees, agents, and/or representatives of any party to such documents, and . . . any other owner and holder of this agreement.” Rubiola, 334 S.W.3d at 222–23. We agreed that it thus “expressly provides that certain non-signatories are to be parties to the agreement.” Id. at 224. 26 This contention raises questions about “the existence of a valid arbitration clause between specific parties and is therefore a gateway matter for the court to decide.” Id. at 224. Ultimately, the question requires us to determine “the intent of the parties, as expressed in the terms of the agreement,” so we apply “ordinary principles of state contract law [to] determine whether there is a valid agreement to arbitrate.” Id. (quoting Bridas S.A.P.I.C. v. Gov’t of Turkm., 345 F.3d 347, 355, 358 (5th Cir.2003)); see also Kellogg Brown & Root, 166 S.W.3d at 738 (holding that, “[u]nder the FAA, ordinary principles of state contract law determine whether there is a valid agreement to arbitrate”). The Other Defendants argue that several provisions of the contract demonstrate Sapphire’s intent to allow them to require arbitration, but we find none of them persuasive.
First, the Other Defendants contend that Sapphire’s claims against them fall within the scope of the general contract’s arbitration agreement because the scope includes “[a]ny Claim arising out of or related to the Contract,” and Sapphire expressly agreed that the arbitration could include parties other than G.T. Leach. Specifically, the Other Defendants rely on a provision of the general contract in which Sapphire and G.T. Leach agreed that “[a]ny arbitration may include, by consolidation or joinder or any other manner, parties other than the Owner, Contractor, a Subcontractor, a separate contractor . . . and other persons substantially involved in a common question of fact or law whose presence is required if complete relief is to be accorded in arbitration.” The Other Defendants argue that, through this “joinder provision,” Sapphire agreed that the scope of the arbitration would include Sapphire’s claims against the Other Defendants because those claims “arise out of or relate to” the general contract, those claims and Sapphire’s claims 27 against G.T. Leach involve common questions of law or fact, and the Other Defendants’ presence is “required” for complete relief to be accorded in the arbitration. We conclude that the Other Defendants’ reliance on the scope of the agreement between Sapphire and G.T. Leach to establish the existence and enforceability of an agreement between Sapphire and the Other Defendants is misplaced. As we have explained, a party seeking to compel arbitration must establish both (1) the existence of a valid enforceable agreement to arbitrate and (2) that the claims at issue fall within the scope of that agreement. TEX. CIV. PRAC. & REM. CODE § 171.021(a); FirstMerit Bank, 52 S.W.3d at 753. The Other Defendants’ argument that Sapphire agreed that they, as non-signatories, could enforce the arbitration agreement addresses the first issue, not the second. Although Sapphire’s claims may fall within the scope of the agreement, the scope of the arbitration clause “does not answer whether [Sapphire] must arbitrate” with the Other Defendants. Kellogg Brown & Root, 166 S.W.3d at 739–40.
The Other Defendants contend that the joinder provision itself constitutes Sapphire’s agreement that they could enforce the general contract’s arbitration agreement. Specifically, they contend that, through the joinder provision, Sapphire agreed to allow non-parties to “require” arbitration if their presence is “required” for complete relief to be afforded in the arbitration. The Subcontractors, in particular, note that Sapphire and G.T. Leach specifically revised the AIA form to add a reference to “a Subcontractor” as a party whose presence would be expected in the arbitration. Because Sapphire seeks to recover the same damages from each of the defendants and to hold all of the defendants jointly and severally liable for those damages, they assert, the arbitration can only provide “complete relief” if all of them are parties to it. We do not agree. 28 To begin with, the joinder provision states that an arbitration “may include” other parties, and we find no basis on which to conclude that the parties intended the word “may” to be mandatory rather than permissive in this context. Cf. Iliff v. Iliff, 339 S.W.3d 74, 81 (Tex. 2011) (stating that the word “may” is “permissive” and “imports the exercise of discretion”); Dall. Cnty. Cmty. Coll. Dist. v. Bolton, 185 S.W.3d 868, 874 (Tex. 2005) (“The words ‘may’ and ‘shall’ mean different things, and . . . [t]he context in this case does not require an interpretation of the permissive word ‘may’ to mean something other than its plain meaning.”); Wichita Cnty., Tex. v. Hart, 917 S.W.2d 779, 782 (Tex. 1996) (“The Legislature’s use of the permissive term ‘may’ in the Whistleblower Act’s venue provision, in light of its contemporaneous reorganization of the venue statute, strongly suggests that the Act’s venue provision is permissive.”). The original AIA form provided that “[n]o arbitration shall include, . . . parties other than the Owner, Contractor, a separate Contractor, . . . and other persons substantially involved in a common question of fact or law whose presence is required if complete relief is to be accorded in arbitration.” In its original form, the provision thus prohibited joinder of any but the listed parties (at least, absent written consent of all the parties), but it did not require joinder of the listed parties. Sapphire and G.T. Leach revised this provision to state that “Any [instead of “No”] arbitration may [instead of “shall”] include parties other than” the listed parties, and added “Subcontractors” to the list. The effect of their revisions was to remove the prohibition against including parties “other than” those listed. Because they changed “shall” to “may,” they did not require the joinder of unlisted parties, but neither did they require the joinder of the listed parties. In fact, they retained a sentence from the original form providing that a party’s “[c]onsent to arbitration involving an additional person or entity . . . shall not constitute consent to arbitration of a claim not described therein or with a person or entity not named or described therein.” 29 The provision thus permits the parties to the general contract to consent to the joinder of additional parties in the arbitration, but it does not require them to do so. Ultimately, the Other Defendants concede as much by repeatedly acknowledging throughout their briefs that the joinder provision “allows inclusion or joinder,” “allow[s] them to be joined” so that they “could participate” in the arbitration, and “permits all parties to arbitrate” together. Nevertheless, they contend that, because this clause is ambiguous as to whether it is mandatory or permissive, we must construe it as mandatory in support of the law’s presumption in favor of arbitration. This presumption, however, requires that doubt “as to waiver, scope, and other issues not relating to enforceability—must be resolved in favor of arbitration.” Poly-Am., 262 S.W.3d at 348 (emphasis added). And, in any event, we do not find the language here to be ambiguous. The fact that the provision refers to other parties as those whose presence “is required” to accord complete relief does not make their joinder “required”; rather, it allows for their joinder, but only if their joinder is “required” to provide complete relief. We conclude that the joinder provision does not give the Other Defendants, who are not parties to the general contract, a legal right to require Sapphire to arbitrate with them. The Other Defendants contend that, at a minimum, the joinder provision gives G.T. Leach a contractual right to join others whose presence is “necessary to completely resolve the dispute,” even if it does not give those other parties the right to join themselves. In light of the provision’s permissive language and references to the necessity of each party’s “consent,” as we have just discussed, we disagree. Moreover, even if the contract gave G.T. Leach such a right, G.T. Leach has not requested that relief in this Court. G.T. Leach asks this Court to “order the claims brought by Sapphire against [G.T. Leach] to arbitration,” without reference to the claims brought by Sapphire against the Other Defendants. 30
The Engineers and Insurance Brokers point out that the general contract states that it is an agreement between “the Owner” and “the Contractor,” and that Sapphire and G.T. Leach each signed the agreement in those respective capacities. They note, however, that the contract provides that the term “Contractor” includes any contractor who executes a separate agreement with the owner. Since Sapphire is suing them for breach of separate agreements directly between each of them and Sapphire, they contend that they are each a “Contractor” under the general contract and thus entitled to enforce its arbitration agreement. The contract, however, expressly provides that the “Contract Documents shall not be construed to create a contractual relationship of any kind . . . between [Sapphire] and a Subcontractor . . . or [] between any persons or entities other than [Sapphire] and [G.T. Leach].”20 In summary, we find no language in the general contract that gives the Other Defendants rights to enforce the general contract’s arbitration clause against Sapphire. We thus conclude that Sapphire did not agree in the general contract to arbitrate its claims against the Other Defendants. 20 In addition, a supplemental provision of the general contract states that “[n]o person or entity shall be deemed to be a third party beneficiary of any provisions of the Contract, nor shall any provisions thereof be interpreted to create a right of action or otherwise permit anyone not a signatory party to the Contract to maintain an action for personal injury or property damage.” While the Other Defendants contend that this provision was in an unsigned supplement to the general contract and, in any event, does not expressly prohibit demands for arbitration, they concede that the contract expressly incorporates these provisions as part of the “Contract Documents.” In any event, this provision reflects Sapphire’s intent that other parties not have rights under the general contract more clearly than any provision on which the Other Defendants rely reflects an intent that they have such rights. Even ignoring this provision, the lack of any provision by which Sapphire agrees to allow the Other Defendants to compel arbitration of Sapphire’s claims against them defeats their attempts to do so. 31
As an alternative to the argument that Sapphire expressly agreed that they can enforce the general contract’s arbitration provisions, the Other Defendants argue that Sapphire is equitably estopped from denying its assent to such an agreement. We do not agree. We have recognized that, under principles of equitable estoppel, “a litigant who sues based on a contract subjects him or herself to the contract’s terms . . . , including the Arbitration Addendum.” FirstMerit Bank, 52 S.W.3d at 755–56; see Meyer, 211 S.W.3d at 305 (listing cases so holding). This is because the claimant cannot “have it both ways”; it cannot, “on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a non-signatory.” Meyer, 211 S.W.3d at 306. This equitable principle applies when a claimant seeks “direct benefits” under the contract that contains the arbitration agreement. Kellogg Brown & Root, 166 S.W.3d at 739. “Whether a claim seeks a direct benefit from a contract containing an arbitration clause turns on the substance of the claim, not artful pleading.” Weekley Homes, 180 S.W.3d at 131–32. It is not enough, however, that the party’s claim “relates to” the contract that contains the arbitration agreement. Kellogg Brown & Root, 166 S.W.3d at 741. Instead, the party must seek “to derive a direct benefit”—that is, a benefit that “stems directly”—from that contract. Id.; In re Morgan Stanley & Co., 293 S.W.3d 182, 184 (Tex. 2009). The claim must “depend on the existence” of the contract, Meyer, 211 S.W.3d at 307, and be unable to “stand independently” without the contract, Kellogg Brown & Root, 166 S.W.3d at 739–40. The alleged liability must “arise[] solely from the contract or must be determined by reference to it.” Weekley Homes, 180 S.W.3d at 132. But “when the substance of the claim arises from general obligations imposed by 32 state law, including statutes, torts and other common law duties, or federal law,” rather than from the contract, “direct benefits” estoppel does not apply, even if the claim refers to or relates to the contract.21 Morgan Stanley, 293 S.W.3d at 184 n.2; see also Kellogg Brown & Root, 166 S.W.3d at 740–41 (holding that subcontractor’s quantum meruit claim against contractor did not justify direct benefits estoppel to compel arbitration under contract between contractor and owner). The Other Contractors contend that Sapphire’s claims against them seek a “direct benefit” under the general contract, even though they are not parties to that contract, because the claims “arise from and must be determined by reference to” the general contract. More specifically, they assert that the work that they performed was necessary only because of the general contract, and without the general contract they would have had no duties of their own to perform. Sapphire’s claims thus “relate to and arise out of” the general contract, they contend, because they are claims for work performed “pursuant to” the general contract. The Subcontractors also note that the general contract required G.T. Leach to “include terms in the subcontracts . . . binding its subcontractors . . . to the applicable terms of this agreement.” Sapphire is not suing the Other Defendants, however, for breach of obligations under the general contract. Rather, Sapphire alleges in its petition that the Other Defendants each breached duties that they each “contractually agreed” to perform, and failed to perform them as a reasonable professional would have performed them. We agree that Sapphire is not seeking direct benefits 21 Even if “direct benefits” estoppel does not apply based on the claims in the lawsuit, we have recognized that “a nonparty may seek or obtain direct benefits from a contract by means other than a lawsuit” and that application of the doctrine may be based on “conduct during the performance of the contract” rather than conduct during the lawsuit. See Weekley Homes, 180 S.W.3d at 132–33, 135 (holding that “when a nonparty consistently and knowingly insists that others treat it as a party, it cannot later ‘turn[] its back on the portions of the contract, such as an arbitration clause, that it finds distasteful’”) (citations omitted). The parties do not advance this theory here. 33 under the general contract. We read Sapphire’s allegations to refer to separate agreements in which the Engineers agreed with Sapphire to provide engineering services, the Insurance Brokers agreed with Sapphire to provide insurance services, and the Subcontractors agreed with G.T. Leach to provide construction-related services.22 The record and briefs in this case reflect that Sapphire contends that the Engineers and Insurance Brokers contracted directly with Sapphire and are what the general contract refers to as a “separate contractor” rather than a “subcontractor.” Thus, although Sapphire’s breach of contract claims against the Engineers may “relate to” the general contract, they “arise out of” and directly seek the benefits of a separate alleged agreement between Sapphire and the Engineers. Similarly, Sapphire alleges that the Insurance Brokers “contracted with Sapphire to procure adequate insurance to protect Sapphire while the Sapphire condominiums were being built” and “breached that agreement thereby damaging Sapphire.” These claims depend on an alleged insuranceprocurement agreement between Sapphire and the Insurance Brokers, not the general contract between Sapphire and G.T. Leach. And finally, Sapphire asserts that the Subcontractors breached obligations they accepted in their subcontracts with G.T. Leach, not in the general contract to which Sapphire was a party. While these claims may bear some relationship to the general contract, the fact that the claims would not have arisen but for the existence of the general contract is not enough to establish equitable estoppel. See Kellogg Brown & Root, 166 S.W.3d at 739–40. Sapphire’s contract claims 22 The Other Defendants point out that Sapphire’s experts filed reports in the trial court in which they relied in part on the general contract’s specification and notes to establish the standards for the Other Defendants’ contractual performance. These reports, however, do not suggest that the general contract imposed the duty to meet these specifications. Instead, it appears that Sapphire contends that the Other Defendants’ separate contractual agreements included promises to comply with these specifications. 34 against the Other Defendants do not, on their face, seek a “direct benefit” under the general contract; rather, the record at this stage indicates that they seek direct benefits under other alleged contracts. Under these circumstances, we cannot conclude that the “direct benefits” theory of equitable estoppel authorizes the Other Defendants to rely on the arbitration provision in Sapphire’s general contract with G.T. Leach. See Morgan Stanley, 293 S.W.3d at 184; Weekley Homes, 180 S.W.3d at 133; Kellogg Brown & Root, 166 S.W.3d at 739–40. In addition, the Other Defendants argue that, even if Sapphire is not suing them for breach of the general contract, it is seeking to hold them jointly and severally liable for the damages that Sapphire alleges G.T. Leach’s breach of that contract caused. Specifically, the Insurance Brokers contend that, “if Sapphire seeks to hold the Insurance Defendants liable for damages arising from G.T. Leach’s alleged breach of the [general contract], then Sapphire must necessarily rely on the existence of the [general contract].”23 But contrary to the Insurance Brokers’ argument, Sapphire’s pleadings do not assert that the Insurance Brokers are jointly and severally liable for the damages allegedly resulting from G.T. Leach’s breach of contract,24 and the parties have not identified any 23 Alternatively, the Insurance Brokers argue that if Sapphire seeks to hold [them] jointly and severally liable for damages with respect to Sapphire’s tort claims against [G.T. Leach], then Sapphire must necessarily rely on allegations of interdependent and concerted misconduct between those parties. Either way, Sapphire satisfies one or both bases for imposing equitable estoppel under this Court’s decision in Meyer and thus must be compelled to arbitrate its claims against the Insurance Defendants. But we declined to adopt the “concerted misconduct” theory of equitable estoppel in In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 191–92 (Tex. 2007). The Insurance Brokers do not address Merrill Lynch or raise any argument that this case is distinguishable in any manner material to our analysis of the “concerted misconduct” theory in that case. We therefore decline to reconsider that decision here. 24 In fact, Sapphire’s fourth amended petition does not reference “joint and several liability” at all. The Other Defendants quote Sapphire’s counsel as having orally argued to the trial court that the defendants are jointly and severally liable for all damages, but we must look to the pleadings to determine the nature of Sapphire’s claims. 35 doctrine that would permit Sapphire to hold them jointly and severally liable under the facts of this case.25 “Texas law permits joint and several liability for most actions based in tort, as long as ‘the percentage of responsibility attributed to the defendant with respect to a cause of action is greater than 50 percent.’” Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 424 (Tex. 2011) (quoting TEX. CIV. PRAC. & REM. CODE § 33.013(b)(1)). But the Insurance Brokers’ “direct benefits” estoppel argument is premised on Sapphire seeking to hold them jointly and severally liable for G.T. Leach’s breach of contract, not its torts. Finally, the Other Defendants argue that Sapphire is equitably estopped from refusing to arbitrate its tort claims against them because those claims assert only negligent performance of contractual duties, and thus seek only damages resulting from the breach of contractual duties rather than duties imposed by law. Under these circumstances, they contend, the allegedly negligent breaches can “only be characterized as a breach of contract,” and the claims thus “sound in contract, not tort.” This argument raises a complex legal doctrine: the “economic loss” rule, sometimes referred to in this context as the law of “contorts.” See, e.g., Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494–95 (Tex. 1991); id. at 495 (Gonzales, J., concurring). We need not address this doctrine here, however, because even if Sapphire’s tort claims sound in contract, they do no arise solely out of or otherwise seek direct benefits under the general contract. See Kellogg Brown & Root, 166 S.W.3d at 740–41. While they have some relationship to the general 25 Cf. S. Union Co. v. City of Edinburg, 129 S.W.3d 74, 87 (Tex. 2003) (noting that Texas law has recognized specific legal theories under which corporate structure can be disregarded to hold corporate actors jointly and severally liable for corporation’s contractual obligations); TEX. BUS. ORGS. CODE § 152.304(a) (imposing joint and several liability on partners for “all” partnership obligations); TEX. GOV’T CODE § 60.152(b)(1) (authorizing contractual assumption of joint and several liability in certain government contracts); TEX. LAB. CODE § 407A.056 (requiring contractual assumption of joint and several liability for group and employer under certain group self-insurance agreements); TEX. NAT. RES. CODE § 161.323 (imposing joint and several liability on “veteran purchaser” and subsequent assignees of veteran with respect to certain land contracts under some circumstances). 36 contract, the mere fact that the claims would not have arisen but for that contract is not enough to establish equitable estoppel. See id. at 739–40. We therefore hold that equitable estoppel does not apply to enable the Other Defendants to compel Sapphire to arbitrate its tort claims against them under the general contract.