Texas Court Holds that Arbitrator Had Jurisdiction Over Subcontractor Pass Through Claims

Centex/Vestal J.V. v. Friendship West Baptist Church
2010 Tex. App. LEXIS 4346 (Tex. App. June 10, 2010)

The trial court denied a motion to confirm an arbitration award and granted a motion to vacate finding that the arbitrator exceeded his authority when he determined the validity of and awarded the general contractor damages on its pass through subcontractor claims. On appeal, the Court of Appeals reversed the trial court, holding that because of the breadth of the arbitration clause, the arbitrator was authorized to determine the pass through subcontractor claims, and entered an order confirming the arbitrator’s award.

The underlying dispute arose out of a June 2004 agreement between Centex/Vestal (“Centex”) the general contractor, and Friendship West Baptist Church (the “Church”), the owner, to construct a sanctuary, classroom and administrative building (the “Project”). The agreement between the parties provided that “[a]ny claim arising out of or related to the Contract” is subject to arbitration. The contract further stated that “[n]o arbitration shall include, by consolidation or joinder or in any other manner, parties other than [Church], [Centex], a separate contractor as described in Article 6 or other persons substantially involved in a common question of fact or law or whose presence is required if complete relief is to be accorded in arbitration.”

Centex entered into a subcontract with Ennis Steel Industries, Inc. (“Ennis”) pursuant to which Ennis was to fabricate and erect the structural and miscellaneous steel on the Project. The subcontract provided that Centex could allow Ennis to pursue a pass-through claim against the Church. Ennis subsequently hired Choctow Erectors, Inc. (“Choctow”) to perform a portion of the steel erection. Several engineering changes were made during the Project affecting the scope of Ennis’ work, as well as the construction schedule. Centex submitted a claim by Ennis and Choctow for costs incurred as a result of the changes, but the claim was denied by the Church. In August 2006, Centex initiated an action to foreclose its mechanics lien against the Project and requested that the litigation be stayed pending the completion of the arbitration as required by the Contract.

Centex then filed a demand for arbitration seeking payment of the unpaid Contract balance and compensation for extra work. Centex specified that it was seeking damages for the pass-through claim brought on behalf of Ennis, which also included the claims of Choctow. During the arbitration, the Church filed two motions for summary judgment claiming that Centex did not have standing to assert claims on behalf of Ennis. Shortly before the arbitration, Centex and the Church settled their claims, except for the Ennis claim. After the arbitration hearings, an award was issued in favor of Centex on behalf of Choctow and Ennis as pass-through claimants. Centex then filed a motion to reinstate the foreclosure litigation and moved to confirm the award. In response, the Church filed objections to the confirmation and moved to vacate the award. The Church argued that the Award should be vacated because the arbitrator exceeded his powers and manifestly disregarded the law by awarding damages on the Ennis and Choctow claims which neither Centex nor Ennis has standing to assert, violating public policy that prohibits the imposition of contractual obligations on a non-party to a contract, imperfectly executing the Award by failing to make a “mutual, final, and definitive” award, and improperly awarded attorneys fees and expenses.

The trial court conducted a hearing, after which the court denied the motion to confirm and granted the motion to vacate on statutory grounds. On appeal, the Court of Appeals held that review of a trial court’s decision to vacate or confirm an arbitration award was de novo. The court recognized that its review of a arbitration award is “extremely limited” because Texas law favors arbitration and that even a mistake of fact or law by the arbitration in the application of substantive law is not a proper grounds for vacating an award.

The court first addressed the standard for vacating an award under the Texas Arbitration Act, which provides that a court must confirm an award unless an opposing party establishes a statutory ground for vacating, modifying, or correcting the award. Section 171.088 of the Texas Civil Practice Code provides for vacatur when an arbitrator exceeds his power, refuses to postpone a hearing after a showing of sufficient cause, refuses to hear material evidence, or conducts a hearing contrary to enumerated statutory provisions resulting in substantial prejudice to a party. The Court of Appeals held that the authority of arbitrators is derived from the arbitration agreement and is limited to a decision of the matters submitted therein. The court stressed that any doubts concerning the scope of what is arbitrable should be resolved in favor of arbitration. When a non-prevailing party seeks to vacate an arbitration award, it bears the burden in the trial court of bringing forth a complete record that establishes its basis for vacating the award. The court noted that where there is no arbitration transcript (which was the case in this dispute), then the court must assume that the arbitration evidence adequately supported the award. The Court held that the arbitration clause in the contract was broad and encompassed a wide range of disputes so that the arbitrator was authorized to determine that the Ennis and Choctow claims arose out of or related to the Contract or involved a common question of law or fact. The Court of Appeals also noted that the Church had submitted for the arbitrator’s consideration the very issues that it now insists the arbitrator lacked the authority to decide. The Court held that a party cannot submit an issue to the arbitration panel and then, when an unfavorable result occurs, claim the arbitrators exceeded their authority in deciding the issue.

The Church also asserted an argument that Texas law did not allow pass-through claims made against an owner by a subcontractor’s subcontractor. The Court found that this assertion was not really a complaint of whether the arbitrator exceeded his authority, but rather a complaint that the arbitrator committed an error of law. Rejecting the assertion, the Court of Appeals held that it was “not at liberty to substitute its judgment for that of the arbitrator’s merely because it would have reached a different decision.” Finally, the Court affirmed that it was proper for the arbitrator to award fees and expenses on the Ennis claims because the arbitrator had the power to determine these claims.

Finding that the trial court should have confirmed the arbitrator’s award because the Church failed to establish a basis for vacating it, the Court of Appeals reversed the trial court’s judgment and rendered judgment confirming the arbitrator’s award.

Click here to view full text of decision courtesy of LexisNexis.

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