Valli Construction, Inc. v. Alvites Concrete Services and Alvites Plumbing Inc. ( 2014 )


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  •                             NUMBER 13-13-00295-CV
    COURT OF APPEALS
    THIRTEENTH DISTRICT OF TEXAS
    CORPUS CHRISTI - EDINBURG
    VALLI CONSTRUCTION, INC.,                                                   Appellant,
    v.
    ALVITES CONCRETE SERVICES
    AND ALVITES PLUMBING INC.,                                                  Appellee.
    On appeal from the 148th District Court
    of Nueces County, Texas.
    MEMORANDUM OPINION
    Before Chief Justice Valdez and Justices Benavides and Longoria
    Memorandum Opinion by Chief Justice Valdez
    By two issues, appellant, Valli Construction Inc. (Valli), appeals the trial court’s
    order denying its motion to compel arbitration in favor of appellees, Alvites Concrete
    Services L.L.C. and Alvites Plumbing Inc. (the Alvites Parties). Valli contends that the
    trial court erred by: (1) overruling objections to the Alvites Parties’ evidence; and (2)
    finding that the arbitration clause was unconscionable. We reverse and remand.
    I.      BACKGROUND
    AutoNation Chevrolet Corpus Christi L.P. (AN Chevrolet) hired Valli as the general
    contractor to complete a construction project. Valli subsequently hired the Alvites Parties,
    two small locally-owned companies, as subcontractors to work on the plumbing and
    concrete for the project. Valli agreed to the Alvites Parties’ bid price and instructed them
    to begin work on the project immediately. There was no written contract when work began
    on the project. Later the parties agreed to Subcontractors Agreements, which contained
    an arbitration provision stating that all claims under the agreement shall be submitted to
    arbitration in Santa Clara County, California.
    Fox Tree & Landscape Nursery Inc. (Fox Tree) sued Valli and AN Chevrolet for
    claims arising out of the construction project. Subsequently, AN Chevrolet sued Valli and
    its subcontractors, including the Alvites Parties.1 On April 18, 2012, the Alvites Parties
    filed a counterclaim against AN Chevrolet2 and a cross-action against Valli, alleging
    breach of contract, quantum meruit, and misapplication of trust funds. On February 15,
    2013, Valli filed a motion to compel arbitration on the Alvites Parties’ cross-claims. The
    Alvites Parties filed a response in which they conceded that the Subcontractor
    Agreements contained an arbitration agreement and that the claims in their cross-action
    were covered by the scope of the arbitration agreement. However, the Alvites Parties
    argued that they could avoid enforcement of the arbitration agreement because it was
    unconscionable.
    1 The petitions and documents relating to these lawsuits are not included in the appellate record,
    and they were not cited or specifically referred to in either the motion to compel arbitration or the response
    to the motion to compel arbitration.
    2 The petitions and documents relating to the Alvites Parties’ counterclaim against AN Chevrolet
    are not included in the appellate record, and they were not cited or specifically referred to in either the
    motion to compel arbitration or the response to the motion to compel arbitration
    2
    The Alvites Parties presented evidence in the form of an affidavit executed by
    Javier Munive, their operations manager. In the affidavit, Munive stated: (1) the Alvites
    Parties negotiated a price to provide plumbing and concrete material and services for
    improvements on property owned by AN Chevrolet; (2) AN Chevrolet instructed the
    Alvites Parties to begin work immediately without entering into a formal contract; (3) after
    work began, Valli sent the Alvites Parties formal contracts; (4) the Alvites Parties
    attempted to discuss the terms of the contracts with Valli, but were told by a Valli
    representative to sign and return the contracts; and (5) the Alvites Parties signed the
    contracts because they had already begun work on the project. The affidavit further
    alleged that (1) the Alvites Parties had no real bargaining power regarding the terms of
    the contract; (2) the Alvites Parties did not recognize the significance and ramifications of
    the contract; (3) “to enforce the arbitration and venue provisions. . . would be an extreme
    hardship and costly” because they would have to pay an arbitrator and hire local counsel
    in California and because most of the witnesses live in Texas; and (4) that arbitration in
    California would cause substantial delay in resolving the dispute.
    The trial court found the arbitration agreement unconscionable and denied Valli’s
    motion to compel arbitration. This appeal followed.
    II.    STANDARD OF REVIEW
    When reviewing an order denying arbitration, we apply a de novo standard to legal
    determinations and a no-evidence standard to factual determinations. PER Group, L.P.
    v. Dava Oncology, L.P., 
    294 S.W.3d 378
    , 384 (Tex. App.—Dallas 2009, no pet.). In
    reviewing the trial court’s factual determinations, we must credit favorable evidence if a
    reasonable fact finder could and disregard contrary evidence unless a reasonable fact
    finder could not. Royston, Rayzor, Vickery & Williams, L.L.P. v. Lopez, 
    443 S.W.3d 196
    ,
    3
    201 (Tex. App.—Corpus Christi 2013, pet. filed) (orig. proceeding); PER Group, 
    L.P., 294 S.W.3d at 384
    .
    The party asserting unconscionability bears the burden of proof. Royston, Rayzor,
    Vickery & Williams, 
    L.L.P, 443 S.W.3d at 201
    ; In re Turner Bros. Trucking Co., 
    8 S.W.3d 370
    , 376–77 (Tex. App.—Texarkana 1999, no pet.) (orig. proceeding).               Whether a
    contract is contrary to public policy or unconscionable at the time it is formed is a question
    of law. In re Poly-Am., L.P., 
    262 S.W.3d 337
    , 348 (Tex. 2008) (orig. proceeding); Hoover
    Slovacek LLP v. Walton, 
    206 S.W.3d 557
    , 562 (Tex. 2006) (orig. proceeding). Because
    a trial court has no discretion to determine what the law is or apply the law incorrectly, its
    clear failure to properly analyze or apply the law of unconscionability constitutes an abuse
    of discretion. In re Poly–America, 
    L.P., 262 S.W.3d at 349
    ; Walker v. Packer, 
    827 S.W.2d 833
    , 840 (Tex. 1992).
    III.   APPLICABLE LAW
    Valli filed its motion to compel arbitration under the Federal Arbitration Act (FAA).
    See 9 U.S.C.A. § 2 (West 2013). The FAA governs arbitration clauses enforced in Texas
    if the parties are from different states and the subject matter involves interstate
    commerce. In re L & L Kempwood Assocs., L.P., 
    9 S.W.3d 125
    , 127 (Tex. 1999) (orig.
    proceeding). Under the FAA, a written arbitration agreement “shall be valid, irrevocable,
    and enforceable, save upon such grounds as exist at law or in equity for the revocation
    of any contract.” 9 U.S.C.A. § 2.
    “[C]ourts treat arbitration agreements under the FAA as other contracts in applying
    the legal rules to interpret them.” In re Olshan Found. Repair Co., LLC, 
    328 S.W.3d 883
    ,
    889 (Tex. 2010) (orig. proceeding). Under Texas law, a party can avoid enforcement of
    a contract if it can prove that it is unconcsionable. 
    Id. at 893.
    Unconscionability is an
    4
    affirmative defense to an arbitration agreement and therefore the party asserting the
    defense bears the burden of proof. In re AdvancePCS Health L.P., 
    172 S.W.3d 603
    , 608
    (Tex. 2005) (orig. proceeding).
    Texas law recognizes both substantive and procedural unconscionability. In re
    Palm Harbor Homes, Inc., 
    195 S.W.3d 672
    , 677 (Tex. 2006) (orig. proceeding).
    “Substantive unconscionability refers to the fairness of the arbitration provision itself,
    whereas procedural unconscionability refers to the circumstances surrounding adoption
    of the arbitration provision.” 
    Id. Generally, a
    contract is unconscionable if, “given the
    parties’ general commercial background and the commercial needs of the particular trade
    or case, the clause involved is so one-sided that it is unconscionable under the
    circumstances existing when the parties made the contract.” In re Olshan Found. Repair
    Co. 
    LLC, 328 S.W.3d at 893
    (citing TEX. BUS. & COM. CODE ANN. § 2.302, cmt. 1 (West,
    Westlaw through 2013 3d C.S.)). “The principle is one of the prevention of oppression
    and unfair surprise and not of disturbance of allocation of risks because of superior
    bargaining power.” TEX. BUS. & COM. CODE ANN. § 2.302, cmt. 1 (internal citation omitted).
    IV.    DISCUSSION
    As an initial matter, the parties dispute whether the Alvites Parties were required
    to show both procedural and substantive unconscionability to avoid enforcement of the
    arbitration agreement. In Royston, Rayzor, Vickery & Williams, L.L.P., we expressly
    determined that a showing of both types of unconscionability was not 
    required. 443 S.W.3d at 204
    . Here, we need not decide whether we should revisit that holding because
    we determine that the Alvites Parties have failed to satisfy their burden to prove either
    procedural or substantive unconscionability.
    a.    Procedural Unconscionability
    5
    In their response to the motion to compel arbitration, the Alvites Parties asserted
    that the agreement was procedurally unconscionable because:          (1) Valli is a large
    national construction contractor that handles multi-million dollar construction contracts
    while the Alvites Parties are small, locally-owned companies; and (2) the Alvites Parties
    had no bargaining power and no choice but to accept the arbitration agreement drafted
    by Valli because Valli had previously directed them to begin work on project before the
    Alvites Parties signed the Subcontractor Agreements.
    Procedural unconscionability relates to the making or inducement of the contract,
    focusing on the facts surrounding the bargaining process. Royston, Rayzor, Vickery &
    Williams, 
    L.L.P., 443 S.W.3d at 204
    . In this analysis, some courts have considered
    whether the party seeking to compel arbitration employed sharp business practices and
    whether one of the parties lacked a choice in whether to enter into the agreement. See
    El Paso Natural Gas Co. v. Minco Oil & Gas Co., 
    964 S.W.2d 54
    , 61 (Tex. App.—Amarillo
    1997, pet. granted), rev’d on other grounds sub nom. El Paso Natural Gas Co. v. Minco
    Oil & Gas, Inc., 
    8 S.W.3d 309
    (Tex. 1999); see also Wade v. Austin, 
    524 S.W.2d 79
    , 87
    (Tex. Civ. App.—Texarkana 1975, no writ) (holding that a contract was not procedurally
    unconscionable when a party had other available alternatives to signing the arbitration
    agreement). However, ultimately, under the FAA, unequal bargaining power does not
    itself establish grounds for defeating an agreement to arbitrate “absent a well-supported
    claim that the clause resulted from the sort of fraud or overwhelming economic power that
    would provide grounds for revocation of any contract.” In re AdvancePCS Health 
    L.P., 172 S.W.3d at 608
    . The principles of unconscionability do not negate a bargain because
    one party to the agreement may have been in a less advantageous bargaining position.
    In re Palm Harbor Homes, 
    Inc., 195 S.W.3d at 679
    . Instead, unconscionability principles
    6
    are applied to prevent unfair surprise or oppression. Id.; In re McKinney, 
    167 S.W.3d 833
    , 835 (Tex. 2005) (orig. proceeding) (holding that absent fraud, misrepresentation, or
    deceit, parties are bound by terms of the contract they signed, regardless of whether they
    read it or thought it had different terms).
    First, the Alvites Parties’ general allegation that Valli is a large national company
    and that the Alvites Parties are small, locally-owned businesses does not establish that
    the clause resulted from “overwhelming economic power.” See In re Advance PCS
    Health 
    L.P., 172 S.W.3d at 608
    . Second, the fact that the Alvites Parties had already
    begun construction does not support a finding that the Alvites Parties had no bargaining
    power and therefore had no choice but to enter into the agreement. The Alvites Parties
    made the initial decision to begin construction without a formal contract. While Munive,
    in his affidavit, contended that Valli directed the Alvites Parties to begin work immediately,
    there is no evidence that the Alvites Parties were coerced into beginning construction or
    that they were the victim of any “sharp” business practices. See Minco Oil & Gas 
    Co., 964 S.W.2d at 61
    . In addition, Munive’s contentions that the Alvites Parties attempted
    to discuss the terms of the contracts with Valli, but were told by a Valli representative to
    sign and return the contracts, and that the Alvites Parties signed the contracts because
    they had already begun work on the project, do not support a conclusion that the Alvites
    Parties had no choice but to sign the contract. Even after choosing to begin work without
    signing a formal contract, the Alvites Parties could have refused to sign the arbitration
    agreement and attempted to recover the funds they had already expended through a
    claim for a breach of the oral contract or quantum meruit. For the foregoing reasons, we
    conclude that none of the conduct alleged in the Munive affidavit constitutes deception,
    fraud, misrepresentation, surprise, or oppression sufficient to prove procedural
    7
    unconscionability.    See In re Palm Harbor Homes, 
    Inc., 195 S.W.3d at 679
    ; In re
    
    McKinney, 167 S.W.3d at 835
    .
    b.     Substantive Unconscionability
    The Alvites Parties alleged that the arbitration agreement was substantively
    unconscionable because:
    1) it would be excessively expensive for the [Alvites Parties] to have to
    arbitrate their cross claims against Valli in Santa Clara County California
    . . . [and]
    2) It would be unfair to require the [Alvites Parties] to arbitrate their cross-
    claims against Valli while the [Alvites Partie’s] counter-claims against the
    Plaintiff in the suit, AN Chevrolet Corpus Christi L.P., are not subject to
    arbitration. The Alvites Parties would have to pay to litigate its counter-
    claims against AN Chevrolet Corpus Christi L.P. in this suit while having
    to also pay for initiating a separate arbitration proceeding in California
    against Valli arising from the same project.
    1) Unconscionability Based on Cost
    The party opposing arbitration bears the burden to show that the costs of
    arbitration render it unconscionable. In re Olshan Found. Repair Co., 
    LLC, 328 S.W.3d at 893
    . When “a party seeks to invalidate an arbitration agreement on the ground that
    arbitration would be prohibitively expensive, that party bears the burden of showing the
    likelihood of incurring such costs.” 
    Id. (citing Green
    Tree Fin. Corp.-Alabama v. Randolph,
    
    531 U.S. 79
    , 92 (2000)). Texas courts likewise require “some evidence that a complaining
    party will likely incur arbitration costs in such an amount as to deter enforcement of
    statutory rights in the arbitral forum.” 
    Id. In In
    re Olshan, Texas Supreme Court reasoned:
    In the absence of unusual animus between the parties or external motives,
    plaintiffs continue to pursue claims when the expected benefits of the
    lawsuit outweigh the total cost of bringing it. If the total cost of arbitration is
    comparable to the total cost of litigation, the arbitral forum is equally
    accessible. Thus, a comparison of the total costs of the two forums is the
    most important factor in determining whether the arbitral forum is an
    8
    adequate and accessible substitute to litigation. Other factors include the
    actual cost of arbitration compared to the total amount of damages the
    claimant is seeking and the claimant’s overall ability to pay the arbitration
    fees and costs. These factors may also show arbitration to be an
    inadequate and inaccessible forum for the particular claimants to vindicate
    their rights. However, these considerations are less relevant if litigation
    costs more than 
    arbitration. 328 S.W.3d at 894
    –95.
    Accordingly, the Court explained that,
    for evidence to be sufficient, it must show that the plaintiffs are likely to be
    charged excessive arbitration fees. While we do not mandate that claimants
    actually incur the cost of arbitration before they can show its excessiveness,
    parties must at least provide evidence of the likely cost of their particular
    arbitration, through invoices, expert testimony, reliable cost estimates, or
    other comparable evidence. See 
    Poly–America, 262 S.W.3d at 354
    –55
    (concluding that the plaintiff's “own affidavit and that of an expert witness
    providing detailed estimates of the likely cost of arbitration in [the plaintiff's]
    case” constituted sufficient evidence); Olshan Found. Repair Co. v. Ayala,
    
    180 S.W.3d 212
    , 215–16 (Tex. App.—San Antonio 2005, pet. denied)
    (holding invoice for party's share of arbitration expenses sufficient).
    Evidence that merely speculates about the risk of possible cost is
    insufficient.
    In re Olshan Found Repair Co. 
    LLC, 328 S.W.3d at 895
    . Ultimately, the Olshan Court
    overturned the denial of a motion to compel arbitration because the party seeking to avoid
    arbitration “provided no comparison of [the costs of arbitration] to the expected cost of
    litigation, the amount of their claim, or their ability to pay these costs.” 
    Id. at 894–97
    (citing
    Honrubia Props., Ltd. v. Gilliland, No. 13-07-210-CV, 
    2007 WL 2949567
    , at *7 (Tex.
    App.—Corpus Christi Oct. 11, 2007, no pet.) (mem. op.) (finding that an appellee failed
    to show that an arbitration agreement was substantively unconscionable because the
    record was “devoid of evidence pertaining to the expected cost differential between
    arbitration and litigation in court”).
    Here, as their sole evidence that the costs of the arbitration proceedings rendered
    the arbitration clause unconscionable, the Alvites Parties provided the Munive Affidavit in
    9
    which Munive generally stated that “to enforce the arbitration and venue provisions . . .
    would be an extreme hardship and costly” because they would have to pay an arbitrator
    and hire local counsel in California and because most of the witnesses live in Texas. The
    Alvites Parties provided no specific evidence of the costs they expected to incur, the
    expected cost differential between arbitration and litigation in court, or their ability to pay
    the costs of arbitration. See 
    id. They therefore
    provided insufficient evidence to show
    that the arbitration agreement was cost prohibitive. See 
    id. 2) Unconscionability
    Based on Arbitration’s Relationship to Other Claims
    In response to the motion to compel arbitration, the Alvites Parties argued that it
    would be unfair to have to litigate their claims against AN Chevrolet and be involved in
    arbitration proceedings with Valli. The primary thrust of the Alvites Parties’ argument to
    the trial court was that continuing their involvement in both arbitration proceedings and its
    lawsuit against AN Chevrolet would be cost prohibitive. However, as noted above, they
    have presented none of the evidence required under Texas law to indicate that arbitration
    would be cost prohibitive. See 
    id. On appeal,
    the Alvites Parties also argue that enforcement of the arbitration
    agreement would “unfairly burden them in the underlying suit.”3 Specifically, referring to
    their counter-claim against AN Chevrolet, they argue that “if the arbitration provisions are
    enforced, two cases with almost identical issues would be working their way through two
    3 The attorney for Fox Tree was present during the hearing on the motion to compel and explained
    that she did not see how the causes of action subject to the arbitration provision could be severable from
    the other causes of action involving the same subject matter because the claims had become a “procedural
    mishmash.” Moreover, at the hearing, the attorney for the Alvites Parties generally contended that the
    “dispute between [AN Chevrolet] and Valli is extremely pertinent to my client’s ability to collect from which
    of those parties—whichever of those parties committed the fraud.” The trial court responded, “I am leaning
    toward denying the Motion to Compel arbitration. It just seems strange that we would stop this lawsuit—
    this portion of the lawsuit and transfer it to California for arbitration.” At the end of the hearing, the trial court
    ruled, “Well, I’m going to find the arbitration agreement to be substantially [sic] and procedurally
    unconscionable and deny the motion to compel arbitration.”
    10
    different systems which could result in two different conclusions.” However, the Alvites
    Parties have directed us to no authority, and we find none, in support of their claim that
    unconscionability can be based on the enforced arbitration proceeding’s relationship to
    causes of action the party attempting to avoid arbitration has against other parties or on
    other parties’ claims arising out of the same subject matter.4
    Moreover, in response to the motion to compel, the Alvites Parties did not refer
    specifically to any facts or claims made by it or other parties or provide any evidence that
    established that any of the claims were dependent on one another. In the sole evidence
    presented in support of their unconsionability claim, Munive, the Alvites Parties’ operation
    manager, only generally contended that arbitration would cause a delay in the lawsuit.
    Therefore, to the extent that this is a cognizable legal argument, the Alvites Parties did
    not argue facts or provide relevant evidence to the trial court indicating that the arbitration
    proceedings and the proceedings in the trial court could render irreconcilable conclusions.
    Where no such showing has been made, allowing a plaintiff to avoid an arbitration clause
    simply because they have pending claims against another party arising out of the same
    subject matter could deprive defendants who contract for an arbitration provision of their
    statutory right to arbitration any time they are involved in multiparty litigation. Particularly
    given that the Alvites Parties did not provide evidence that they would be threatened with
    inconsistent results, we conclude that the arbitration’s potential effect on the Alvites
    Parties’ suit against AN Chevrolet, or on the other parties involved in the litigation, does
    4 Texas courts have compelled nonparties to a contract to arbitrate when the nonparty files suit
    based on a contract containing an arbitration agreement because the nonparty “subjects him or herself to
    the contract’s terms.” In re FirstMerit Bank, N.A., 
    52 S.W.3d 749
    (Tex. 2001) (orig. proceding). However,
    as noted above, the Alvites Parties have cited no authority, and we find none, indicating that a party to a
    contract may avoid terms of the contract because it is involved in litigation with nonparties to the contract
    arising out of the same subject matter.
    11
    not render the arbitration provision substantively unconscionable. 
    Id. Because the
    Alvites
    Parties have not satisfied their burden to show that the arbitration provision is either
    procedurally or substantively unconscionable, we sustain Valli’s second point of error.5
    
    Id. V. CONCLUSION
    We reverse the trial court’s order and remand for proceedings consistent with this
    opinion.6
    ____________________
    ROGELIO VALDEZ
    Chief Justice
    Delivered and filed the
    30th day of December, 2014.
    5  Because we conclude that, in consideration of all the evidence admitted, the Alvites Parties did
    not satisfy their burden to prove that the arbitration clause was unconscionable, we need not address Valli’s
    first issue in which it argues that the trial court erred by overruling its objections to evidence. See TEX. R.
    APP. P 47.1. Therefore, we assume without deciding that all evidence considered by the trial court was
    properly admitted.
    6 On June 12, 2014, Valli’s attorney filed an unopposed motion to withdraw as counsel and an
    unopposed motion for temporary relief from the stay of proceedings in the trial court. We previously carried
    both motions with this case. We grant both motions and order that the stay in the trial court be lifted for the
    limited purpose of allowing the trial court to consider the attorney’s motion to withdraw as counsel.
    12