Contractors and Adjacent Property: Spreading the Neighborly Love

by Tatianna Brannen

June 26, 2023

Contractors and developers often get into disputes with neighboring landowners. Due to the complicated relationship between these parties, unique procedural issues often arise that require special consideration. 

One reoccurring scenario in which disputes between neighbors may arise is where one landowner begins construction on a project that sits next to already developed land. Once construction begins, the neighboring landowner may have complaints concerning the construction. Such disputes may arise relating to nuisance, trespass, negligence, breach of contract, fraud, breach of warranty, and/or property damage. If the neighboring landowner decides to file suit, they may decide to join the contractor performing the construction along with their neighbor. One common basis for a claim against a contractor in this scenario is that a neighboring landowner is owed duties under the construction contract as a third-party beneficiary. 

However, procedural issues may arise with the presence of an arbitration provision in the construction contract at issue. Such a provision raises the question: Can neighboring landowners be compelled to arbitrate their claims even though they are non-signatories to the construction contract at issue? Several recent opinions from the Supreme Court of Texas suggest this result is a possibility.

One way a neighboring landowner may be compelled to arbitrate its claims is through the theory of direct-benefits estoppel. This doctrine is used in many types of disputes, including those involving the construction and real estate industries. The doctrine of direct-benefits estoppel applies to breach of contract claims in which a party seeks to assert a claim as a third-party beneficiary to a contract it did not sign. It prohibits a party from asserting that the lack of its signature on a written contract precludes enforcement of the contract’s arbitration clause when the party itself maintains that other provisions of the same contract should be exploited to benefit it. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005). The Supreme Court of Texas recently clarified the scope of direct-benefits estoppel and the doctrine’s application in construction defect cases involving non-signatories to a construction contract. 

In two separate cases, the Supreme Court of Texas recently considered whether non-signatory parties asserting a breach-of-contract claim must arbitrate along with the signatory parties. The first case involved homeowners who sued their homebuilder for construction defects and fraud based on a construction contract containing a mandatory arbitration provision. The homeowners also asserted claims on behalf of their children. The children did not sign the construction contract at issue. The Supreme Court of Texas held that litigants who sue based on a contract subject themselves to its terms, including any arbitration clause within that contract. Taylor Morrison of Tex., Inc. v. Skufca, 660 S.W.3d 525 (Tex. 2023). The court further explained that if any of a plaintiff’s claims are based on a contract, then the plaintiff must arbitrate all claims that fall under the scope of the contract’s arbitration clause. Id.

The court expanded upon the foundation regarding direct-benefits estoppel, holding that suing for factually intertwined construction-defect claims may be compelled to arbitrate through direct-benefits estoppel. Id. at 529. Additionally, it clarified that in making its analysis, the court looks at the causes of action asserted in the petition and whether they implicate the contract at issue. The court further held that because the claims had to be determined by reference to the contract at issue, they satisfied direct-benefits estoppel and were therefore subject to the contract’s terms, including the arbitration clause. Id. 

Lastly, the court made it clear that the non-signatories may not avoid arbitration by amending their petition to allege only tort or other noncontractual claims. The court explained that direct-benefits estoppel also applies when a nonsignatory seeks direct benefits from the contract outside of litigation. Id. Because the non-signatories lived in the home at issue and sued for factually intertwined construction-defect claims, they were required to arbitrate all of their claims.

In a similar case, the Supreme Court of Texas applied direct-benefits estoppel to hold that nonsignatory family members living in the home that was the subject of the construction defect suit were also required to arbitrate their claims. Taylor Morrison of Tex., Inc. v. Ha, 660 S.W.3d 529 (Tex. 2023). 

These two recent cases have expanded the scope of direct-benefits estoppel and have implications that reach wider than construction defect cases. Any party involved in a suit involving third-party beneficiaries should carefully analyze the claims and procedural issues before them to avoid being subject to a forum against their choosing.  

Tatianna Brannen is an attorney at Griffith Davison, P.C. and can be reached at tbrannen@griffithdavison.com. 

This article first appeared in the June 2023 Issue of Dallas Bar Association Headnotes.