By Anam R. Fazli, Associate Attorney

In October 2020, the Houston First Court of Appeals affirmed the lower court’s ruling that parents whose claims were brought on behalf of their minor children against a homebuilder accused of construction defects that caused mold growth are not subject to arbitration because the children were not third-party beneficiaries to the home purchase agreement and the theory of direct benefits estoppel did not apply.  Taylor Morrison Homes of Texas Inc., et al. v. Erin Skufca, et al., Non. 09-19-943, Texas App., 1st Dist., 2020 Tex. App. LEXIS 7855.

The parents discovered unacceptable levels of mold in the home due to construction defects after moving in with their two minor children. The family filed suit against the homebuilder for breach of contract, breach of implied warranties, negligent construction, statutory fraud in a real estate transaction, violations of the DTPA, and quantum meruit. The family alleged that the homebuilder’s acts and omissions of negligent conduct constituted the proximate cause of personal injury and other damages, including injury to the children. The homebuilder filed a motion to compel the family to arbitrate their claims pursuant to the arbitration provision in the purchase agreement. The court ordered the parents to arbitrate their individual claims against the homebuilder, but denied the motion to compel as to the children’s claims because the children were nonsignatories to the purchase agreement. On appeal, the homebuilder asserted that the children are third-party beneficiaries and subject to the arbitration provision under the theory of equitable estoppel.

Third-Party Beneficiary

A person seeking to establish third-party beneficiary status must demonstrate that the contracting parties’ intended to secure a benefit to that third party and entered into the contract directly for the third party’s benefit. In order to determine this, courts must look to the contract’s language. Any implied intent to create a third-party beneficiary is insufficient. The purchase agreement in this case does not mention the children and the agreement appears only to be for the benefit of the children’s parents. Although the children lived in the home before suit was filed, that would, at most, render them incidental beneficiaries of the contract. This is not sufficient to establish them as third-party beneficiaries.

Direct Benefits Estoppel

Under the doctrine of direct benefits estoppel, nonsignatory plaintiffs who seek the benefits of a contract or who seek to enforce the terms of a contract are estopped from avoiding the contract’s burdens. However, when the claim arises from obligations imposed by state or federal statues, torts, and other common law duties, rather than from the contract, direct benefits estoppel does not apply, even if the claim relates to the contract. If a nonsignatory’s claims can stand independently of the contract, then arbitration should not be compelled. The children assert claims sounding in tort and base the homebuilder’s negligence liability on a common-law tort duty. These claims can stand independent of the contract. Therefore, the doctrine of direct benefits estoppel does not apply.

By denying the motion to compel arbitration against the children’s claims, Texas courts will likely rule that a nonsignatory plaintiff is bound to the terms of the contract if there is clear and unequivocal language in the contract that establishes the intent to confer a direct benefit on the nonsignatory. A nonsignatory may also be bound to the terms of the contract if his claims cannot stand independent of the contract.