Opinion
No. 05-04-00002-CV
Opinion Filed August 3, 2004.
On Appeal from the County Court at Law #3, Collin County, Texas, Trial Court Cause No. 3-1070-03.
Affirm.
Before Justices WRIGHT, O'NEILL, and FRANCIS.
MEMORANDUM OPINION
Appellant Pine Ridge Homes, Inc. appeals the trial court's order denying its motion to compel arbitration. Appellant raises six issues generally complaining of the trial court's denial of the motion to compel arbitration. For the following reasons, we affirm the trial court's judgment.
Pine Ridge Homes, Inc. and appellees Keith and Stacy Stone entered into an Agreement of Sale for a home to be constructed by Pine Ridge. The contract was made contingent on the Stones receiving a loan qualification letter. Pursuant to the contract, Pine Ridge received from the Stones $5000 as earnest money. The contract also provided that if Pine Ridge defaulted, the Stones would receive a refund of their earnest money as their sole and only remedy against Pine Ridge. On the other hand, if the Stones defaulted, Pine Ridge could seek any remedies allowed by law. The agreement also contained an arbitration agreement which stated:
All claims or disputes that cannot be resolved between the parties before or after the sale closing shall be submitted to non-binding mediation under the Construction Industry Mediation Rules thru the American Arbitration Association where the parties will try to resolve the dispute in an amicable manner. If the dispute cannot be resolved thru mediation, the dispute shall be submitted to binding arbitration thru the American Arbitration Association. The party submitting the demand for mediation or arbitration shall pay the required AAA fees for both parties. If arbitration is necessary, the arbitrator shall have the authority to award the cost of AAA fees for mediation or arbitration to be divided equally between the parties after arbitration. Each of the parties shall be responsible for the expense of their own legal fees.
The Stones subsequently sought to obtain a construction loan from USAA. Before approving the loan, USAA requested Pine Ridge to complete a Standard Draw Schedule setting forth the amount of each draw for different phases of construction. Pine Ridge's draw schedule provided it would be paid in full at closing and did not include a 10% retainage pending receipt of final inspection, certificate of occupancy and release of liens. Because Texas law requires an owner to retain 10% of the contract price during the progress of work for which a mechanic's lien could be claimed, USAA sought to have Pine Ridge agree to the 10% retainage. See Tex. Prop. Code Ann. § 53.101 (Vernon 1995). Pine Ridge refused USAA's request. (Interestingly, Pine Ridge had previously provided a disclosure statement to the Stones informing them that they should withhold or cause its lender to withhold 10% percent of the contract price as a statutory retainage. See Tex. Prop. Code Ann. § 53.254 (Vernon Supp. 2004)). Because Pine Ridge would not agree to the statutory retainage, USAA would not approve the loan. The Stones subsequently notified Pine Ridge the contract was "cancelled and terminated" and demanded the return of their earnest money. Pine Ridge refused to return the earnest money.
Because the agreement of sale included an arbitration provision, the Stones filed a demand for arbitration with the American Arbitration Association (AAA). The AAA responded to the Stones and Pine Ridge that the arbitration clause in the sales contract contained a "material or substantial deviation" from AAA Consumer Rules and Protocol in that it required the consumer to pay the arbitration fees for both parties. So that it could proceed with the arbitration, the AAA requested Pine Ridge to agree to have the matter administered under the Consumer Rules and Protocol and waive the requirement that the Stones pay the entire fee. The AAA cautioned it could decline to administer the dispute absent receipt of Pine Ridge's waiver and its portion of the arbitration fee. Pine Ridge would not agree to the AAA's request.
The Stones subsequently filed suit in county court. Pine Ridge filed a motion to compel arbitration asserting the contract required the Stones to arbitrate and to pay arbitration fees for both parties. The Stones responded that the AAA had refused jurisdiction over the dispute because of Pine Ridge's refusal to pay its portion of the arbitration fee. It further asserted that the arbitration agreement terminated when they were unable to obtain financing due to Pine Ridge's refusal to agree to the 10% statutory retainage. Finally, they alleged the arbitration agreement was unconscionable because it required them to pay Pine Ridge's portion of the fees in violation of AAA guidelines.
The trial court denied Pine Ridge's motion to compel. In its findings of fact and conclusions of law, the trial court found (1) the sales agreement, including the arbitration agreement, never became effective because the Stones could not obtain financing because of Pine Ridge's attempt to circumvent the retainage provisions required by Texas law, (2) even if the arbitration agreement was effective, it was impossible to comply with because the AAA would not provide service unless the parties ignored the contractual requirement that the Stones pay the arbitration fee for both parties, and (3) that the arbitration agreement was unconscionable in that it required the Stones to pay all fees. This appeal followed.
In its third issue, Pine Ridge contends the trial court erred in concluding the arbitration clause was unconscionable. Pine Ridge cites only two cases to support its contention. Specifically, it relies on dicta from the Texas Supreme Court in In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 n. 3 (Tex. 1999), and on Smith v. H.E. Butt Grocery Co., 18 S.W.3d 910, 912 (Tex. App.-Beaumont 2000, pet. denied) which relied on that dicta. Both of these cases state that the trial court's unconscionability determination is limited to the actual making or inducement of the arbitration agreement rather than the substantive fairness of its provisions. Pine Ridge ignores the fact that this dicta has been expressly disavowed by the supreme court in re Halliburton Company, 80 S.W.3d 566, 571-72 (Tex. 2002). Specifically, in Halliburton, the supreme court held that a trial court may properly consider "substantive unconscionability" of an arbitration agreement, i.e., the fairness of the arbitration provision itself in determining whether to enforce the provision. See id.
Thus, we turn to whether the Stones met their burden to establish the arbitration agreement was substantively unconscionable. Substantive unconscionability focuses on the one-sidedness of the arbitration agreement. In re Palm Harbor Homes, Inc., 129 S.W.3d 636, 645 (Tex. App.-Houston [1st Dist.] 2003, orig. proceeding). The general test is whether 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. See In re FirstMerit Bank, N.A., 52 S.W.3d 749, 757 (Tex. 2001).
After reviewing the arbitration agreement under the circumstances existing when the parties made the contract, we cannot conclude the trial court erred in concluding the agreement was so one-sided as to render it unconscionable. Initially, we note that the contract containing the arbitration agreement was on a preprinted form prepared by Pine Ridge. The record shows that requiring a consumer (the Stones) to pay a business's (Pine Ridge's) fees was contrary to the AAA's due process protocol. Indeed, the AAA indicated it may refuse to arbitrate the claim unless Pine Ridge agreed to pay its portion of the fee, which it refused to do.
More importantly, a review of the contract's terms regarding resolution of disputes shows that it grossly favors Pine Ridge. Specifically, when the parties entered into the contract, the Stones gave Pine Ridge $5,000 as earnest money. If the Stones defaulted, Pine Ridge could keep the Stones' earnest money. It thus had a remedy without resort to arbitration or being required to pay any fees. Pine Ridge also retained all other remedies provided by law including breach of contract remedies and specific performance. Only if it sought these additional remedies would it be required to resort to arbitration and pay any associated fees.
On the other hand, if Pine Ridge defaulted, the contract provided the Stones's sole remedy was the return of their own earnest money. To obtain their earnest money, the Stones would be required to request arbitration and to pay the fees for both parties. Thus, while the arbitration agreement facially appears to apply to both parties equally, a review of the agreement in light of the remedies available shows it grossly favors Pine Ridge. We conclude the arbitration agreement in this case was so one-sided at the time of its making as to render it unconscionable. We resolve the third issue against Pine Ridge. Because of our resolution of this issue, we need not address Pine Ridge's remaining issues. We affirm the trial court's judgment.