Too Costly to Be Fair: Texas Appellate Court Finds the Arbitration Clause in a Residential Construction Contract Unenforceable

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In Cont’l Homes of Tex., L.P. v. Perez, No. 04-21-00396-CV, 2022 Tex. App. LEXIS 7691, the Court of Appeals of Texas (Appellate Court) considered whether the lower court erred in refusing to enforce an arbitration clause in a construction contract between the parties. The Appellate Court considered the costs of the arbitration forum required by the contract in the context of the plaintiffs’ monthly household income. The court also compared the arbitration cost to the estimated cost of litigating the dispute. The court held that the arbitration clause was substantively unconscionable on the grounds that the arbitration costs were not affordable for the plaintiffs and not an “adequate and accessible substitute to litigation.”  The Appellate Court affirmed the lower court’s decision denying the defendant’s motion to compel arbitration.

The plaintiffs, Giancarlo and Krystle Perez (collectively, the Perezes), hired the defendant, Continental Homes of Texas, LP d/b/a Express Home (Express Homes), to build a new home in San Antonio. Express Homes provided its standard contract, which included a binding arbitration clause. The clause stated that every potential dispute between the parties occurring before and after the closing of the purchase of the home was subject to binding arbitration, to be administered and conducted by the American Arbitration Association (AAA). The clause also stated that the costs of the arbitration were to be split by the parties.

The Perezes filed a lawsuit in Texas district court against Express Homes alleging defects in the foundation of the home. The complaint asserted claims for fraud, breach of contract, negligence and violations of the Texas Deceptive Trade Practices Act.

Express Homes filed a motion to compel arbitration, arguing that the contract mandated binding arbitration through the AAA. The Perezes opposed the motion on the grounds that the arbitration clause was substantively unconscionable because they could not afford the costs of the arbitration. The Perezes also argued that the cost of arbitrating through the AAA were higher than the costs of litigation.

In support of their argument, Ms. Perez submitted an affidavit setting forth the Perezes monthly income. In addition, the Perezes’ attorney submitted an affidavit stating that based on his experience with AAA arbitrations, the cost of arbitrating the subject dispute would be over $10,000 per party, not including his fee. The Perezes also provided the resumes of twenty (20) AAA arbitrators, whose use cost an average of $2,000 per day. The attorney also stated in his affidavit that he agreed to a monthly payment plan for his hourly fee, which would be considerably lower than the cost of arbitration.

Express Homes disputed the cost estimates provided by plaintiffs but did not provide any rebuttal evidence. Express Homes claimed that the arbitrators identified by the Perezes were not qualified to handle the case, and thus their costs were irrelevant and should not be considered.

The Appellate Court acknowledged that it would accept the trial court’s factual determinations since they were supported by evidence but would review the trial court’s legal determinations de novo. The issue of whether an arbitration clause is enforceable is a question of law. The court noted that Texas precedent established that the factors to consider are the party’s ability to pay the arbitration fee, the actual amount of the fee in relation to the amount of the underlying claim, and the cost differential between arbitration and litigation in court. The court further explained that a comparison of the total costs of the two forums is the most important factor in determining whether the arbitral forum is an adequate and accessible substitute to litigation.

The Appellate Court found the plaintiffs’ evidence compelling. The court disagreed with the defendant that the plaintiffs needed to show exactly which arbitrator would be appointed in this case. The court also relied on the attorney’s affidavit explaining his experience and knowledge with AAA, and the associated costs. The court also considered the plaintiffs’ monthly income and liabilities, which left the plaintiffs with little money to spare. The court also relied on the evidence that the plaintiff’s attorney agreed to a “shoestring budget” and an affordable monthly payment plan for his fees. Based on the evidence showing that the arbitration costs exceeded the litigation costs for the Perezes, and that the Perezes could not realistically afford arbitration, the court found the arbitration clause to be substantively unconscionable and unenforceable.

The Perez case reminds us that Texas provides protections against unconscionable arbitration provisions. If an arbitration agreement is substantively impractical because it makes the arbitration more expensive than litigation, and too expensive for one of the parties, then there is an argument that the arbitration clause is not enforceable. It is unclear how the holdings of this case would affect subrogation claimants as subrogating carriers generally have the means to incur arbitration expenses. Nonetheless, subrogation professionals practicing in Texas should consider this decision when reviewing arbitration clauses as there may be legitimate challenges to substantively unfair arbitration clauses.

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