Arbitration- Subsequent Buyers Are Invited Too!

by Matthew L. Motes

The Texas Supreme Court has answered a critical question that has lingered in legal minds for years. Can a builder compel the subsequent buyer to arbitration with an arbitration agreement with the first owner even if they do not allege breach of the contract?

Answer: YES.  In May 2023, the Texas Supreme Court concluded that the subsequent buyer was bound by the arbitration clause in the original purchase agreement under the doctrine of direct-benefits estoppel.[1] 

While direct-benefits estoppel has been a ground to compel a party to arbitration, this case was the first time it was applied to a subsequent buyer. 

The court’s reasoning was that if the arbitration clause is broad enough on all types of claims (torts and contracts), when a non-signatory subsequent buyer pursues even one claim on the contract, all claims must be brought in arbitration.   A good plaintiff lawyer knows that to recover their attorney’s fees they must bring an implied warranty claim against a homebuilder.  And the fact that their client has probably never met the builder in this case, makes that pretty hard to substantiate.

In the precedent-setting case, Cody Isaascon contracted with Lennar to build a house in Galveston.  The contract contained a limited warranty and comprehensive arbitration clause in the contract and the warranty. A year later, Mr. Isaascon sold the property to Ms. Whitley, the plaintiff.  After that sale, Ms. Whitley discovered a serious mold problem and sued Lennar, not Isaascon.  Lennar demanded arbitration and the trial court granted it.  They arbitrated the case and the arbitrator found Ms. Whitley failed to prove her case. Then Ms. Whitley decided to argue that there was no valid arbitration agreement between Whitley and Lennar.  The trial court and the Houston Court of Appeals agreed.[2] 

The case escalated to The Texas Supreme Court.

It focused on the substance of the claim (arising out of and from the contract), not artful pleading.  Cutting new legal territory, the court extended its analysis to include the inevitable implied warranty of good and workmanlike construction and habitability—the “wild west of construction claims.” Whitley’s attorneys argued implied warranties were separate from the contract[3] and thus beyond the scope of the arbitration provision.  But the Texas Supreme Court peeled back the onion and concluded the implied warranty claims are not independent from the contractual undertaking and essentially cannot be determined without considering the contract.  Disclaiming of implied warranties[4] aside, this opinion is important.  It establishes that a plaintiff cannot plead their way around an arbitration clause, even as a subsequent buyer. 

In reaching this conclusion, the court probably created some unintended consequences by concluding that implied warranties essentially run with the land.  Therefore, even though the original builder had no contract with the subsequent buyer and may have never seen or talked to them, implied warranties still exist could extend through several purchasers.  This case further underscores the importance of a well-written contract that properly disclaims those implied warranties.

[1] Lennar Homes of Texas Land and Construction, Ltd. v. Whiteley, 672 S.W.3d 367 (Tex. 2023)

[2] 625 S.W.3d 569 (Tex.App—Houston [14th Dist.] 2021) 

[3] Whitley’s attorney did not plead breach of the original contract

[4] Implied warranties will be discussed in a subsequent article- stay tuned.

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