Case Update for October to December 2016

By Andrew Nelson, Wright & Close, LLP, and Leslie Gardner, 14th Court of Appeals

FIRST COURT OF APPEALS

In re Essex Ins. Co., No. 01-16-00552-CV, 2016 WL 6599613 (Tex. App.—Houston [1st Dist.] Nov. 8, 2016, orig. proceeding)

A trial court does not have discretion to grant a separate trial when severance is mandated by the Texas Rules of Civil Procedure.

Essex denied coverage to its insured for a personal injury action brought against its insured by an employee. After Essex denied coverage, the insured filed a third-party petition against Essex in the pending personal injury suit. The insured sought a declaration that Essex had a duty to defend and indemnify, damages for breach of contract, and damages for violations of the Texas Insurance Code.

Essex moved to sever the claims against it from the personal injury suit. The plaintiff and defendant opposed the motion and instead proposed that the case be bifurcated into two phases—one in which the tort claims would be tried and evidence of insurance would not be admissible, and a second phase in which the insurance claims against Essex would be decided. The trial court granted separate trials but denied bifurcation. Essex filed a petition for writ of mandamus.

On appeal, the First Court began by noting that, in determining whether severance was required, it must address whether the claims were properly severable, and, if so, whether the circumstances of the case required the trial court to grant severance. In the specific case before it, the court noted that Texas Rule of Civil Procedure 38(c) indicates that an insurance company cannot be joined as a third-party defendant in a tort case unless it is liable by statute or contract to the person injured. Additionally, Rule 51 regarding joinder of claims states that the joinder rule shall not be applied in tort cases to permit the joinder of an insurance company.

As a result of these rules, the court held that the insured was prohibited from joining Essex in the underlying personal injury case. In response, the plaintiff and defendant (insured) argued that the plaintiff’s premises liability allegations, and the facts developed in those allegations relating to his employment status, were “inextricably linked” to Essex’s coverage defenses. They also noted that the same medical records and expert testimony used to support the plaintiff’s damages would form part of the basis for the insured’s claim for indemnity.

The court of appeals denied these judicial economy arguments. Where the rules prohibit joinder of parties, the court held it is error for a trial court to deny a severance, regardless of what efficiencies might be achieved by deciding the issues together.

Finally, the court held that Essex lacked an adequate remedy by appeal and that mandamus relief was warranted. Unless mandamus was granted, the court said, Essex would have been forced to participate in discovery and monitor a separate liability trial “in the face of the prospect that [the insured] may not prevail on its suit for coverage and a defense.” And, the outcome of the separate trials would be reversed for improper joinder anyway. Therefore, the First Court granted mandamus.

Lyon v. Building Galveston, Inc., No. 01-15-00664-CV, 2016 WL 6518641 (Tex. App.—Houston [1st Dist.] Nov. 3, 2016, no pet. h.)

Texas Rule of Civil Procedure 270 does not forbid a trial court from taking evidence related to attorneys’ fees after the jury’s verdict, so long as the parties have an agreement in place to try the issue of fees to the court.

Building Galveston, Inc. (“BGI”) was a contractor hired to remodel a bakery. It engaged Lyon to serve as its subcontractor on the project. BGI sued Lyon for a variety of different causes of action, including breach of contract. The jury rendered a verdict against Lyon. The parties agreed before trial to submit the issue of attorneys’ fees under Chapter 38 of the Texas Civil Practice and Remedies Code to the court rather than to the jury. However, BGI failed to plead presentment of its demand for attorneys’ fees to Lyon. BGI moved for leave to file a supplemental petition pleading presentment after the jury returned its verdict. The trial court refused to allow the filing. Lyon appealed, and BGI filed a cross-point on the attorneys’ fees issue.

On appeal, the First Court first determined that the trial court should have permitted BGI to file its supplemental petition. Lyon, however, argued that that error was harmless, because Rule 270 forbade receipt of evidence on the disputed issue of presentment post-verdict. Rule 270 provides: “When it clearly appears necessary to the due administration of justice, the court may permit additional evidence to be offered at any time; provided that in a jury case no evidence on a controversial matter shall be received after the verdict of the jury.”

The court noted that the application of Rule 270 in the context of a bifurcated trial in which the parties agreed to try the fees issue to the court was a case of first impression in Texas. However, the court held that by agreeing not to submit the issue to the jury, Rule 270 did not bar the trial court from receiving evidence of the disputed issue after the jury rendered its verdict. The court seemed to make a clear distinction between issues submitted to the judge and issues submitted to the jury. This case makes clear that when parties have agreed not to submit certain issues to the jury, there is no requirement that a hearing on the issues submitted to the judge be had prior to the jury’s verdict.

FOURTEENTH COURT OF APPEALS

In re Blankenhagen, No. 14-16-00699-CV, 2016 WL 6809189 (Tex. App.—Houston [14th Dist.] Nov. 17, 2016, no pet. h.).

A default judgment that does not determine the amount of damages is not a final judgment.

Relators Larry Blankenhagen and Dian Petty contracted with Noble Building & Development, LLC (“Noble”) for construction of their home. In 2012, Relators sued Noble for breach of contract. The contract included a dispute-resolution provision, which required relators to first submit their claim to an “Initial Decision Maker.” Relators and Noble designated the Architect as the Initial Decision Maker. Relators submitted their claim, and the Architect issued his Initial Decision in favor of relators, but did not make a final determination of the damages. The Initial Decision estimated the damages ranged from $366,636.31 to $513,316.31 and approved Relators’ claim.

Relators filed their petition for declaratory judgment and Noble failed to timely answer. On April 2, 2016, the trial court signed a default judgment in favor of Relators. The default judgment entered by the trial court provided that Noble was indebted to Relators “in the amount as set out in the Initial Decision by the Architect.” On June 9, 2016, the trial court denied Relators’ motion for hearing to prove the amount of damages. The trial court denied the Relators’ motion because it concluded the default judgment was a final judgment and its plenary jurisdiction had expired. The Relators filed a petition for writ of mandamus asking the Fourteenth Court of Appeals to compel the trial court to vacate its order denying Relators’ motion for hearing.

Justice Donovan, writing for the majority, held the default judgment was not final because the damages awarded could not be ascertained from the judgment or the attached Architect’s Initial Decision. Noble argued that even though the damages could not be ascertained, the default judgment was final because it stated, “[t]his judgment finally disposes of all parties and all claims and is appealable.” This language is the example given by the Texas Supreme Court in Lehmann v. Har–Con Corp. as a statement that would leave no doubt that the court’s intention was to make a final, appealable order. 39 S.W.3d 191, 206 (Tex. 2001). Because the default judgment had this language, Noble argued the default judgment was a final judgment. The Court rejected this argument and concluded the Lehmann did not overrule or create an exception to the Texas Supreme Court’s prior decisions that a judgment must be definite and certain to be final. See e.g., Hinde v. Hinde, 701 S.W.2d 637, 639 (Tex. 1985).

The Court held the trial court abused its discretion by concluding it lacked plenary jurisdiction to hear and consider Relators’ request for an award of damages in a certain amount. The Court directed the trial court to vacate its order denying Relators’ motion for hearing on damages, remand the issue as to the amount of damages to the Architect for determination, and conduct a hearing on Relators’ claim for attorney’s fees.

Southwinds Express Constr., LLC v. D.H. Griffin of Tex., Inc., No. 14-15-00610-CV, 2016 WL 6775759 (Tex. App.—Houston [14th Dist.] Nov. 15, 2016, no pet. h.)

(1) The trial court determines whether claims arising from a subsequent oral agreement are governed by a valid prior arbitration agreement, not the arbitrator.
(2) The trial court determines whether an arbitration agreement is illusory.
(3) A party’s ability to unilaterally bypass mediation in favor of arbitration does not render the arbitration provision illusory.


Southwinds Express Construction, LLC (“Southwinds”) entered into a subcontractor agreement with D.H. Griffin of Texas, Inc. (“Griffin”) for the removal of construction and demolition debris from a project site. The agreement provided that Southwinds would (1) perform concrete excavation and haul-off for free and (2) brick haul-off for $40 per truckload. The original agreement did not include construction and demolition (“C&D”) haul-off. The agreement also required arbitration of claims made by either party.

Later, the parties orally agreed Southwinds would perform C&D haul-off. Southwinds performed C&D haul-off until early 2014. Southwinds said it stopped performing C&D haul-off because Griffin’s payments were not timely. Griffin said Southwinds stopped paying landfill disposal fees and that the landfill owner barred Southwinds from using the landfill. Griffin filed a demand for arbitration, and Southwinds objected arguing the arbitration provision did not extend to claims arising from the subsequent oral agreement to provide C&D haul-off services. The arbitrator overruled Southwinds’ objection, and issued an award for Griffin.

Griffin sought to have the arbitration award confirmed in district court, and the trial court signed a final judgment confirming the arbitration award. Southwinds appealed.

Southwinds first argued on appeal that the C&D haul-off claims were not covered by a valid arbitration agreement because they were the subject of the parties’ oral agreement, separate from the original subcontractor agreement. The arbitrator concluded the oral agreement was a modification of the subcontractor agreement and the C&D haul-off claims fell within the parties’ arbitration agreement. The trial court concluded the subcontractor agreement contemplated additional potential work such as the C&D haul-off work. Therefore, the trial court concluded, the C&D work arose out of the agreement, and consequently, the arbitration agreement contemplated additional work.

The Fourteenth Court of Appeals first analyzed who could decide whether claims are arbitrable. The Court concluded that the question of whether the C&D haul-off claims were governed by a valid arbitration agreement was for the trial court, not the arbitrator. This is because Southwinds was challenging the existence of an agreement to arbitrate the C&D haul-off claims. In re Morgan Stanley & Co., 293 S.W.3d 182, 189 (2009). Therefore, the trial court must determine the threshold issue whether a valid arbitration agreement existed under these circumstances. See Texas La Fiesta Auto Sales, LLC v. Belk, 349 S.W.3d 872, 880 (Tex. App.—Houston [14th Dist.] 2011, no pet.) (holding issue of whether a subsequent contract’s arbitration provision superseded the initial arbitration agreement was a question for the trial court).

Because the trial court already made an independent determination that the claims were arbitrable, the court reviewed the trial court’s determination de novo. The Court concluded the C&D haul-off claims were arbitrable.

Southwinds next argued the trial court erred in determining that mediation was not a condition precedent to arbitration. The arbitration provision provided claim resolution would be resolved through mediation, unless Griffin believed mediation would be useless, then Griffin could escalate claims to binding arbitration at any time. Southwinds argued that if the agreement was reformed to remove the illusory portion, then the agreement required arbitration only if claims were first unsuccessfully mediated.

Generally, the arbitrator decides procedural questions, such as whether conditions precedent are met. Southwinds argued the trial court should decide whether the condition precedent of mediation was met, because this case falls within the narrow exception. Southwinds relied on Amir v. International Bank of Commerce, 419 S.W.3d 687 (Tex. App.—Houston [1st Dist.] 2013, no pet.). Amir held that a court can deny a motion to compel arbitration if there is clearly established proof that a strictly procedural requirement was not met and that procedural requirement precludes arbitration. This case did not fall within this narrow exception, however, because it involved an arbitration provision that allowed Griffin to unilaterally escalate claims to binding arbitration. Therefore, the Court had to decide first whether the arbitration agreement was illusory.

The Court first decided who could determine whether an arbitration provision is illusory. The Court concluded that the trial court decides whether the arbitration provision is illusory. This is because the illusory argument challenges the enforceability of the arbitration agreement, which is for the trial court to decide.

The Court concluded Griffin’s ability to unilaterally bypass mediation in favor of arbitration did not render the arbitration provision illusory. Therefore, Griffin’s option to bypass mediation was not a condition precedent to arbitration.

In its last issue, Southwinds argued the arbitration award should be vacated because it was tainted by manifest disregard for the law and gross mistake in applying the law. The Court concluded the arbitration award could not be vacated on these grounds, because neither an arbitrator’s manifest disregard for the law nor gross mistake is a statutory ground for vacating an arbitration award under the Texas Arbitration Act. Neither are these grounds a basis for vacating an award under the Federal Arbitration Act. Accordingly, the trial court properly confirmed the arbitrator’s award.

In Chief Justice Frost’s concurrence, she stated that because neither party asked to compel or stay arbitration, the only grounds on which Southwinds could obtain vacatur of the arbitration award were grounds listed in section 171.088 of the Texas Civil Practice and Remedies Code. Southwinds sought vacatur on grounds that the award was tainted by manifest disregard of law and gross mistake, and that by failing to mediate, Griffin failed to fulfill a condition precedent. Section 171.008 does not include these grounds for vacatur, therefore, the court lacked authority to vacate the award on these grounds and did not err in rejecting them. Southwinds did not establish entitlement to vacatur under grounds that were included in section 171.088. Therefore, the trial court did not err in confirming the arbitration award.

The majority, the concurrence stated, did not need to address whether the trial court or the arbitrator decides issues as to Southwinds’ arguments that mediation was a condition precedent to arbitration. Even if the majority had to decide this, a sounder option would be to analyze it under section 171.088. The analysis should have been as follows: (1) to the extent Southwinds was only arguing that mediation was a condition precedent, this would not be a valid grounds for vacatur under section 171.088; (2) to the extent Southwinds argued the trial court should have vacated the arbitration because the failure to mediate means there is no arbitration agreement, section 171.088 provides that courts, rather than arbitrators, are to resolve this issue if it was raised at the arbitration. The majority based its analysis on cases that were reviewing motions to compel or stay arbitration. The concurrence stated these cases are not on point for cases like this one. Additionally, those cases reveal considerable conflict and uncertainty as to the analysis of purported conditions precedent to arbitration.