Bonded Builders Home Warranty Association v. Smith

Justices Lang (Opinion), Evans, and Whitehill

James Smith and Michelle Eyrich had problems with their new home, and they didn’t want their home warranty dispute to go to arbitration. The homeowners argued, among other things, that the warranty company’s ability to choose the arbitrator ensured the process would be biased and too expensive and that the arbitration agreement deprived them of important rights under the DTPA and attorneys’ fee statute. The trial court agreed and denied the warranty company’s motion to compel arbitration. The homeowners were not as successful on appeal, but didn’t leave empty-handed.

The Dallas Court of Appeals rejected the homeowners’ argument that the arbitration agreement was too vague, even though the agreement did not specify where the dispute was to be arbitrated, the identity of the arbitration organization to be used, or the rules and costs of arbitration. Although the homeowners argued those terms were “ones that any reasonable person would consider vitally important,” the Court held they were not “essential terms” to an arbitration agreement. The homeowners also argued the arbitration agreement was invalid because the warranty company allegedly had “sole authority to select the arbitrator(s),” and thus ensured the appointment of biased and partial arbitrators. The Court of Appeals disagreed with the homeowners’ factual premise, noting that the warranty company was to provide a list of “approved arbitration companies” from which the homeowners could choose and so the warranty company did not in fact have “unrestricted and exclusive control of the arbitrator to be chosen.” The homeowners’ fear that the proscribed process would result in a biased arbitrator was “a matter of pure speculation.” The Court likewise rejected the homeowners’ argument that arbitration would be prohibitively expensive because there was no evidence in the record of the actual cost of arbitration under the rules to be selected. “While claimants are not required to actually incur the cost of arbitration before they can show 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.”

The Court of Appeals did give the homeowners some relief, however. The arbitration agreement stated that each party was to pay its own attorneys’ fees and that the arbitrator had no authority to award attorneys’ fees. The Court held the homeowners had a potential statutory right to attorneys’ fees under the DTPA and/or Chapter 38 of the Texas Civil Practice & Remedies Code and any alleged waiver of that right was insufficient. The defects in the agreement did not render the entire agreement unenforceable, as the homeowners hoped, but those portions of the agreement stripping the arbitrators of authority to award fees were invalid.