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Because Contract Incorporates Federal Arbitration Act, Court Cannot Compel Litigation as California Law Allows
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February 25, 2008
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By Brienne Wesolek
Thelen LLP
After owners discovered mold contamination in their home, their insurers hired a remediation contractor. The owners entered into a contract for remediation and repair work on the home with the contractor.
After the work was completed, the owners sued the contractor for negligence and the insurance companies for breach of contract and breach of the implied covenant of good faith and fair dealing. Because the repairs were negligently conducted, the homeowners alleged, they were forced to sell their home below market value, had to dispose of unsalvageable items of personal property and suffered illness from exposure to mold contamination. They also alleged that the insurance companies failed to pay adequate benefits for the damages.
The repair contract between the homeowners and contractor included an arbitration clause. The contract specified that claims would be arbitrated “pursuant to the Federal Arbitration Act.” Although the contract contained references to certain provisions of California law, it contained no express choice-of-law provision designating California law.
Pursuant to the California Arbitration Act (Code of Civil Procedure §§1280, et seq.), the contractor moved to compel arbitration and to stay the judicial proceeding.
Under the California act, when a party to an arbitration agreement also is a party to a pending court action with a third party and there is a possibility of conflicting rulings, the court has the option to refuse to compel arbitration and consolidate all or some issues in one court proceeding or it may stay either the arbitration or the judicial proceeding pending completion of the other proceeding.
In contrast, under the Federal Arbitration Act (9 USC §§1, et seq.), the court’s only option is to compel the arbitration and stay court proceedings.
Because the contract provided for application of the Federal Arbitration Act, the contractor argued that the arbitration could not be stayed. The homeowners, relying on the California law, opposed the motion to compel arbitration. The trial court denied the contractor’s petition to compel arbitration and refused to stay the court proceedings.
The contractor appealed. The Court of Appeal reversed and directed the court to grant the motion to compel arbitration. Rodriguez v. American Technologies, Inc., 136 Cal.App.4th 1110, 39 Cal.Rptr.3d 437 (2006).
The appeals court held that the arbitration clause, specifying that the claims shall be arbitrated “pursuant to the Federal Arbitration Act,” expressed a clear intent by the owners and contractor that the Federal Arbitration Act controlled. Therefore, under the Federal Arbitration Act, the court held that it was required to stay the court proceedings and compel the arbitration as to the contractor.
The court noted that the California Supreme Court had held that the parties to a contract could expressly agree that the Federal Arbitration Act rather than California procedural law governed their disputes.
However, the court noted that because defendant insurance companies did not make an arbitration agreement with the owners, the trial court could, on remand, consider whether to stay court proceedings against the insurance companies pending arbitration of the homeowner-contractor dispute if the insurance companies moved to stay the action under California law.
The appeals court also held that the arbitrator would determine which disputes between the homeowner and contractor were to be arbitrated. While the scope of an arbitration clause usually is a matter for judicial determination, the court held, the parties, by agreeing to proceed under American Arbitration Association rules, had given this power to the arbitrator because the AAA rules so provide.
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For more information about the issues covered in this report, please contact Brienne Wesolek in our San Francisco office at 415-369-7769 or at bwesolek@thelen.com or contact your Thelen attorney. For more information about Thelen’s Construction and Government Contracts Department, click here.
©2008 Thelen LLP
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