Court Opinion

ID: 3071417
Source: CourtListenerOpinion
Date Created: 2015-10-16 00:35:51.752217+00
Date Added: 2024-06-11T11:41:44.097196
License: Public Domain

COURT OF APPEALS
                         SECOND DISTRICT OF TEXAS
                              FORT WORTH

                              NO. 02-14-00357-CV

GRANITE RE INC.                                                   APPELLANT

                                        V.

JAY MILLS CONTRACTING INC.                                         APPELLEE

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          FROM THE 355TH DISTRICT COURT OF HOOD COUNTY
                     TRIAL COURT NO. C2014036

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              MEMORANDUM OPINION 1 ON REHEARING

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      On April 10, 2015, appellant Granite Re Inc. (Granite) filed a motion for

rehearing directed to our March 26, 2015 memorandum opinion and judgment.

We deny the motion for rehearing but withdraw our prior opinion and judgment

and substitute the following. See Tex. R. App. P. 49.3.

      1
       See Tex. R. App. P. 47.4.
      Granite appeals from the trial court’s order denying its motion to compel

arbitration. We reverse the trial court’s order and remand for entry of an order

compelling arbitration.

                                I. BACKGROUND

                           A. UNDERLYING AGREEMENTS

      The City of Granbury (the city) hired appellee Jay Mills Contracting, Inc.

(JMC) to design and build a recreational boardwalk, boat dock, and fishing dock

(the project). JMC then subcontracted with North American Marine Industries

(NAMI) to perform the required work. JMC and NAMI entered into a “Blanket

Agreement . . . between the Contractor and the Design/Build Subcontractor” (the

blanket agreement). NAMI signed the blanket agreement on June 19, 2012, and

JMC signed it on June 28, 2012. The blanket agreement included an arbitration

clause, which provided that “all claims, disputes and controversies arising out of

or relating to this Blanket Agreement and any Work Orders issued hereunder,

including claims for extra work or changed conditions to or related to the

Subcontract Work, shall be decided by arbitration.” The arbitration clause further

stated that the “claimant” in any such arbitration proceeding could be either “the

Contractor”—JMC—or the “Design/Build Subcontractor”—NAMI. Similarly, the

blanket agreement provided that “[n]othing contained in this Blanket Agreement

shall create a contractual relationship with, or create a cause of action in favor of,

a third party which is neither the Contractor [JMC] nor Design/Build

Subcontractor [NAMI]. [JMC] and [NAMI] agree that there are no third party

                                          2
beneficiaries to the Blanket Agreement.” The blanket agreement further provided

that NAMI would furnish a performance bond “in a form satisfactory to [JMC],” if

JMC required such a bond.       It is uncontradicted that JMC required NAMI to

furnish a performance bond.

      On the same dates that JMC and NAMI signed the blanket agreement,

they also signed a “Work Order to Blanket Agreement” (the work order),

incorporating the terms of the blanket agreement. The work order required NAMI

to “provide bonding for the project for an additional $8,730.00.”                On

June 21, 2012—before JMC signed the blanket agreement and work order but

after NAMI did so—NAMI executed a performance bond, with Granite acting as

the surety, in the amount of $291,719. 2 The performance bond stated that the

work order between JMC and NAMI was “incorporated by reference and made a

part of this [performance bond] for all purposes.”

                             B. UNDERLYING DISPUTE 3

      JMC alleged that by October 2012, NAMI had abandoned the project,

defaulted on the blanket agreement and work order, and “clos[ed] shop.” On

      2
      The performance bond was not a statutory performance bond because it
was not executed by JMC as the city’s contractor. See Tex. Gov’t Code Ann.
§ 2253.021 (West Supp. 2014).
      3
       Our factual statements regarding the parties’ underlying dispute merely
provide context for our discussion of the enforceability of the arbitration clause at
issue and, of course, are not a comment on the merits of JMC’s claims, the
merits of Granite’s defenses to those claims, or the legal import of the contracts
between JMC and NAMI. Indeed, these issues are not before us in this appeal.

                                         3
March 10, 2014, JMC sued NAMI and Granite, as NAMI’s surety, for breach of

contract—the blanket agreement, the work order, and the performance bond—

and sought damages arising from JMC’s efforts to complete the project and from

JMC’s settlement of the city’s claims against it. JMC’s breach-of-contract claim

against Granite solely encompassed Granite’s alleged breach of the performance

bond, not any breach of the blanket agreement or the work order. At some point

in 2014, NAMI filed for bankruptcy protection. After the bankruptcy court granted

NAMI a discharge, JMC filed a notice of nonsuit as to its claims against NAMI,

and the trial court entered a dismissal order as to those claims.            See

Tex. R. Civ. P. 162; Epps v. Fowler, 351 S.W.3d 862, 868 (Tex. 2011).

      Granite then filed a motion to compel arbitration under the arbitration

clause contained in the blanket agreement, arguing that the clause in the blanket

agreement was incorporated into the performance bond through the work order.

Thus, Granite argued that the performance bond incorporated the valid

arbitration clause and that JMC’s claims fell within the scope of the clause.

Granite’s argument was analogous to the children’s song “There Was an Old

Lady Who Swallowed a Fly”:          Because the work order swallowed the

performance bond and the blanket agreement swallowed the work order, the

blanket agreement necessarily swallowed the performance bond contained in the

work order. 4

      4
       This is shown by Granite’s argument that “[JMC] does have an
enforceable arbitration agreement with [Granite] by virtue of the Bond, which
                                       4
      Granite also asserted that even if the arbitration clause in the blanket

agreement could not be found to have been incorporated into the performance

bond such that it applied to JMC’s claims against Granite, JMC’s claims were

subject to the arbitration clause based on direct-benefits estoppel and JMC’s

status as a third-party beneficiary of the performance bond. In other words,

Granite argued that if the performance bond that Granite signed was not

incorporated into the blanket agreement such that the performance bond did not

contain an arbitration clause, Granite could enforce the clause against JMC

under equitable-estoppel theories. 5 JMC responded that the performance bond

did not contain an arbitration clause and that even if the performance bond were

deemed to include an arbitration clause, its indemnity claim against Granite did

not fall within the clause’s scope.

      After holding a nonevidentiary hearing, the trial court denied Granite’s

motion to compel without entering findings of fact or conclusions of law. Granite

filed an accelerated appeal and argues that the trial court erred by denying its

motion because a valid arbitration clause existed that governed JMC’s claims.

incorporates the Work Order, which incorporates the Blanket Agreement, which
contains an arbitration agreement.”
      5
       At the hearing on Granite’s motion, Granite stated that its “argument is
you can’t have the breach of contract claim under the performance bond, which
incorporates the work order, which incorporates the blanket agreement, without
taking out all subject to the arbitration. . . . The entire concept of incorporation by
reference, the doctrine of equitable estoppel . . . all come into play when [JMC]
can’t sue Granite based on the supposed default under a binding contract and
escape the arbitration clause.”

                                          5
See Tex. Civ. Prac. & Rem. Code Ann. § 51.016 (West 2015) (allowing

interlocutory appeal from denial of motion to compel arbitration under the FAA).

      In its motion to compel, Granite asserted the Federal Arbitration Act

applied “because the parties have engaged in interstate commerce.”            See

9 U.S.C.A. § 2 (West 2009) (providing FAA governs contracts relating to

interstate commerce). JMC did not object to the application of the FAA and the

only argument raised in the trial court was that the FAA applied; thus, we apply

the FAA.    See IKON Office Solutions, Inc. v. Eifert, 2 S.W.3d 688, 696

(Tex. App.—Houston [14th Dist.] 1999, orig. proceeding & no pet.) (holding

burden is on party seeking to compel arbitration to show FAA applies).

       II. STANDARD OF REVIEW, BURDENS, AND PRESUMPTIONS

      We review the trial court’s denial of a motion to compel arbitration for an

abuse of discretion but we review de novo a trial court’s determination regarding

whether a valid agreement to arbitrate exists. See In re Labatt Food Serv., L.P.,

279 S.W.3d 640, 643 (Tex. 2009) (orig. proceeding); J.M. Davidson, Inc. v.

Webster, 128 S.W.3d 223, 227 (Tex. 2003); Branch Law Firm, L.L.P. v. Osorn,

447 S.W.3d 390, 395 (Tex. App.—Houston [14th Dist.] 2014, no pet.).           But

because the trial court did not enter findings of fact or conclusions of law to

explain its denial of the motion to compel, we must uphold the trial court’s

decision if there is sufficient evidence to support the denial on any legal theory

raised in the trial court.   Shamrock Foods Co. v. Munn & Assocs., Ltd.,

392 S.W.3d 839, 844 (Tex. App.—Texarkana 2013, no pet.); In re Weeks

                                        6
Marine, Inc., 242 S.W.3d 849, 854 (Tex. App.—Houston [14th Dist.] 2007, orig.

proceeding).

      Because Granite sought to compel arbitration, it bore the burden to

establish that (1) there is a valid arbitration agreement and (2) the claims raised

fall within that agreement’s scope. In re Kellogg, Brown & Root, Inc., 166 SW.3d

732, 737 (Tex. 2005) (orig. proceeding). The first inquiry is not subject to the

FAA’s general presumption in favor of arbitration and is determined by the

application of state-law principles of contract.     See In re Poly–Am., L.P.,

262 S.W.3d 337, 347–48 (Tex. 2008) (orig. proceeding); Kellogg, 166 S.W.3d at

737–38. Under such principles, we primarily must determine the parties’ intent

as expressed in the terms of the contract.      Chrysler Ins. Co. v. Greenspoint

Dodge of Houston, Inc., 297 S.W.3d 248, 252 (Tex. 2009). If Granite met its

burden to show a valid arbitration agreement, then any doubts concerning the

scope of the arbitrable issues—the second inquiry—should be resolved de novo

in light of the policy and presumption favoring arbitration. Moses H. Cone Mem’l

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25, 103 S. Ct. 927, 941 (1983);

accord Ellis v. Schlimmer, 337 S.W.3d 860, 861–62 (Tex. 2011); Prudential Sec.

Inc. v. Marshall, 909 S.W.2d 896, 898–99 (Tex. 1995) (orig. proceeding); BBVA

Compass Inv. Solutions, Inc. v. Brooks, No. 02-13-00047-CV, 2015 WL 595209,

at *4 (Tex. App.—Fort Worth Feb. 12, 2015, no pet. h.).

                                        7
               III. ENFORCEABILITY OF ARBITRATION CLAUSE

                A. EXISTENCE OF VALID ARBITRATION AGREEMENT

      Therefore, our first question is whether Granite showed, under Texas

contract principles, that there was a valid agreement to arbitrate as between JMC

and Granite.    Granite posited three theories by which it could enforce the

arbitration clause in the blanket agreement against JMC: (1) incorporation by

reference, (2) direct-benefits estoppel, and (3) third-party beneficiary.   See

generally Rachal v. Reitz, 403 S.W.3d 840, 846 n.5 (Tex. 2013) (listing theories

under which nonsignatories may be bound to or may enforce arbitration

agreements). For the following reasons, we conclude that Granite carried its

burden to show that there was a valid arbitration agreement as between JMC

and Granite.

      As stated above, the arbitration clause Granite seeks to enforce was

contained in the blanket agreement, not the performance bond.         Under the

doctrine of incorporation by reference, however, where an agreement refers to a

prior contract or instrument, the subsequent agreement may properly constitute

part of the original contract.   Cappadonna Elec. Mgmt. v. Cameron Cnty.,

180 S.W.3d 364, 371 (Tex. App.—Corpus Christi 2005, orig. proceeding & no

pet.); Teal Constr. Co./Hillside Villas Ltd. v. Darren Casey Interests, Inc.,

46 S.W.3d 417, 420 (Tex. App.—Austin 2001, pet. denied). The language in the

subsequent agreement must plainly refer to the original contract or otherwise

show that the parties intended for the subsequent agreement to become part of

                                       8
or incorporated into the original contract. See One Beacon Ins. Co. v. Crowley

Marine Servs., Inc., 648 F.3d 258, 267 (5th Cir. 2011); Owen v. Hendricks,

433 S.W.2d 164, 167 (Tex. 1968); In re C & H News Co., 133 S.W.3d 642, 645

(Tex. App.—Corpus Christi 2003, orig. proceeding); see also In re Enron Corp.

Sec., Derivative & “ERISA” Litig., 391 F. Supp. 2d 541, 581 n.45 (S.D. Tex. 2005)

(reciting Texas law regarding doctrine of incorporation by reference).

      Even so, the language in the work order clearly indicated that the parties to

the bond—NAMI and Granite—intended to incorporate the terms of the work

order and, necessarily, the blanket agreement into the performance bond.

Additionally, the blanket agreement specified that each work order included the

blanket agreement; thus, the work order automatically included the terms of the

blanket agreement, including the arbitration clause. Indeed, federal courts have

held that a surety must arbitrate disputes related to a performance bond where

the performance bond specifically incorporated by reference a contract

containing an arbitration clause. See U.S. Fid. & Guar. Co. v. W. Point Constr.

Co., 837 F.2d 1507, 1508 (11th Cir. 1988); Exch. Mut. Ins. Co. v. Haskell Co.,

742 F.2d 274, 276 (6th Cir. 1984); Developers Sur. & Indem. Co. v. Resurrection

Baptist Church, 759 F. Supp. 2d 665, 669–71 (D. Md. 2010); see also Greta A.

McMorris & Lawrence Lerner, To What Extent is a Surety Bound by Arbitration

and Forum Selection Provisions in its Principal’s Contract?, 33 Constr.

Lawyer 22, 26–27 (2013). Such is the case here.

                                        9
      Therefore, we conclude the performance bond contained a valid arbitration

clause applicable to Granite and JMC through the doctrine of incorporation by

reference. 6 Because we so conclude, we need not address Granite’s arguments

that the arbitration clause was enforceable through the equitable doctrines of

direct-benefits estoppel or third-party beneficiary.

                  B. CLAIMS FALL WITHIN SCOPE OF AGREEMENT

      Although Granite met its burden to show that the arbitration clause was

valid as between Granite and JMC through incorporation by reference, it must

also establish that JMC’s breach-of-contract claims against it fell within the scope

of the arbitration clause and, if so, whether an exception removes JMC’s claims

from arbitration. See Ellis, 337 S.W.3d at 861–62. Because Granite established

that a valid arbitration clause between it and JMC existed, we now indulge a

strong presumption in favor of arbitration.       See id. at 862; J.M. Davidson,
128 S.W.3d at 227.      Necessarily, we must broadly interpret the scope of an

arbitration clause in light of the federal policy favoring arbitration. In re NEXT

Fin. Grp., Inc., 271 S.W.3d 263, 267 (Tex. 2008) (orig. proceeding). But when

exceptions to the arbitration clause are raised, we construe the exceptions

narrowly in light of the federal policy favoring arbitration and disfavoring broad

interpretations of exceptions. Id. This is a question of law that we review de

      6
        Although the arbitration clause limits who may be a “claimant” in any
arbitration proceeding to NAMI or JMC, JMC is the claimant because it brought
claims against Granite.

                                         10
novo and that allows consideration of the terms of the arbitration clause and the

factual allegations pertinent to the claim. In re FirstMerit Bank, N.A., 52 S.W.3d
749, 754 (Tex. 2001) (orig. proceeding); Associated Glass, Ltd. v. Eye Ten Oaks

Invs., Ltd., 147 S.W.3d 507, 512 (Tex. App.—San Antonio 2004, orig. proceeding

& no pet.).

      The arbitration clause provided that “all claims, disputes and controversies

arising out of or relating to this Blanket Agreement and any Work Orders issued

hereunder . . . shall be decided by arbitration.”     The clause excepted from

arbitration “a claim for contribution or indemnity asserted by [JMC] in a suit

against a party with whom [JMC] does not have an enforceable arbitration

agreement” (the exemption provision). In its petition against NAMI and Granite,

JMC alleged that Granite breached the performance bond “by refusing and failing

to remedy the defaults of [NAMI under the blanket agreement and work

order] . . . and failing to pay [JMC] for the portion of [NAMI’s] work [that JMC]

completed employing such subcontractors and laborers, and furnishing such

materials as [JMC] deemed necessary.”        In short, JMC argued that because

NAMI breached the blanket agreement and the work order, Granite’s obligations

under the performance bond were triggered. JMC pleaded for specific damages

in the amount of $109,698.13, representing the amount JMC alleged it paid the

city to settle the city’s claims against JMC based on NAMI’s alleged default and

JMC’s attorneys’ fees defending against the city’s claims.

                                        11
        JMC’s breach-of-contract claim against Granite clearly relates to NAMI’s

alleged failure to fully perform under the blanket agreement and work order,

which triggered Granite’s obligations under the performance bond.                In other

words, JMC could not pursue its breach-of-contract claim without reference to

NAMI’s performance (or lack of performance) under the blanket agreement and

work order. JMC’s breach-of-contract claim against Granite, therefore, fell within

the scope of the clause.       See U.S. Sur. Co. v. Hanover R.S. Ltd. P’ship,

543 F. Supp. 2d 492, 495–96 (W.D.N.C. 2008); In re Rushing, 443 B.R. 85, 95

(Bankr. E.D. Tex. 2010); Cleveland Constr., Inc. v. Levco Constr., Inc.,

359 S.W.3d 843, 854–55 (Tex. App.—Houston [1st Dist.] 2012, pet. dism’d);

cf. Gloucester City Bd. of Educ. v. Am. Arbitration Ass’n, 755 A.2d 1256, 1262

(N.J.   Super.   Ct.   App.   Div.   2000)     (holding   contractor’s   claim   against

subcontractor’s statutory surety not subject to arbitration clause contained in

construction contract and incorporated into performance bond because

contractor’s claim did not involve performance of underlying construction contract

but involved surety’s personal defenses arising from the provisions of the bond

itself). See generally Pennzoil Exploration & Prod. Co. v. Ramco Energy Ltd.,

139 F.3d 1061, 1067 (5th Cir. 1998) (“Broad arbitration clauses [governing

disputes relating to the contract] are not limited to claims that literally ‘arise under

the contract,’ but rather embrace all disputes between the parties having a

significant relationship to the contract regardless of the label attached to the

dispute.”).

                                          12
      JMC argues that its claim seeking indemnity is exempted from arbitration

under the exemption provision. But there is an enforceable arbitration agreement

as between JMC and Granite under the doctrine of incorporation by reference

and because JMC’s claims fall with the broad scope of the arbitration clause.

Therefore, the exception stated in the clause, interpreted narrowly in favor of

arbitration, does not apply to JMC’s claims against Granite. See Choice Hotels

Int’l, Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 712 (4th Cir. 2001)

(holding breach-of-contract claim was not collection action such that claim was

encompassed by exemption for collection actions contained in arbitration clause);

cf. New York v. Oneida Indian Nation of N.Y., 90 F.3d 58, 62–64 (2d Cir. 1996)

(holding claim clearly fell within exclusion to arbitration contained in clause;

therefore, claim fell outside scope of arbitration clause and was not subject to

arbitration). We conclude that JMC’s claim against Granite fell within the scope

of the broad arbitration clause in the blanket agreement and was not included in

the exemption provision.

                              IV. CONCLUSION

      We conclude that a valid arbitration clause existed between JMC and

Granite through the doctrine of incorporation by reference and that JMC’s claims

against Granite fell within the scope of the clause. Accordingly, the arbitration

clause was enforceable by Granite in JMC’s action against it. The trial court

abused its discretion to conclude otherwise, and we sustain that portion of

Granite’s first issue raising incorporation by reference. We need not address the

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remaining portion of Granite’s first issue raising third-party beneficiary or

Granite’s second issue raising direct-benefits estoppel. See Tex. R. App. P.

47.1. Accordingly, we reverse the trial court’s order denying Granite’s motion to

compel arbitration and remand to the trial court for entry of an order compelling

the parties’ dispute to arbitration under the terms of the arbitration clause.

See Tex. R. App. P. 43.2(d), 43.3(a).

                                                 /s/ Lee Gabriel

                                                 LEE GABRIEL
                                                 JUSTICE

PANEL: DAUPHINOT, GABRIEL, and SUDDERTH, JJ.

DELIVERED: April 23, 2015

                                        14