Upholding Pattern

Court Endorsement of Arbitration Clauses

by Lawrence C. Waddington

    Costs and prejudgment Interest.  In Parker v. Babcock, 37 Cal.App.4th 1682 (1995), the parties stipulated to binding arbitration. A clause in The agreement authorized the prevailing party to enforce the award pursuant to California Rule of Court 1615 and Code Of Civil Procedure Section 1141.10 et seq. After the hearing, the prevailing party sought costs and prejudgment interest.  The court noted the distinction between judicially ordered arbitration, governed by California Rules of Court, and arbitration by contractual agreement or stipulation. Although the contract included an arbitration clause, the parties inserted a provision enforcing the award pursuant to rules of judicial arbitration that do not apply to contractual arbitration.

Although the court concluded that the parties intended to arbitrate contractually, the case alerts practitioners to a signifi cant difference in seeking costs and fees. In contractual arbitration, the parties can draft the contrac t to assign or waive costs; otherwise, statutory pro visions for pre- ????? 

• Are the parties “involved” in. interstate, commerce?
• If so, the FAA preempts any state anti-arbitration policy.
• Then, the state court applies its substantive law of contracts.

    According to the Allied court, the question is whether a state statute regulating arbitration would undermine the FAA's goals. The court has agreed to hear a Montana Supreme Court decision in a further attempt to clarify the law. Doctor’s Associates Inc. v. Casaivito, 116 S.Ct 690 (1996).

    The Allied court noted one straightforward method to avoid the legal morass:  The parties can agree to be bound by state law even if engaged in interstate commerce. Volt Information Sciences Inc. v. Leland Stanford Jr. University, 489 U.S. 468 (1989). To prevent argument on the applicable law, a provision authorizing arbitration under California law eliminates the issue. Nor is the subject matter of arbitral claims restricted. In Crown Homes Inc. v. Landes, 22 Cal.App.4th 827 (1994), the court validated a contract between parties who had agreed to arbitrate antitrust causes of action.

    Validity. A petition to compel arbitration, filed as part of conventional, motion practice, should cite the arbitration stat ???? the court concluded, that absent an allegation of an invalid arbitration clause, it would not resolve the arbitrability issue. Moreover, general allegations of fraud in the inducement or execution of the contract, whether intentional or negligent, are not subject to prior judicial interpretation.

    Only if the, arbitration clause itself was fraudulently induced or execution of the contract was fraudulently generated by the arbitration clause, will the court intervene. Although the issue is not entirely resolved by the U.S. Supreme Court, the result for contracts in volving interstate commerce under the FAA is probably the same. Prima Paint v Flood and Conklin, 388 U.S. 395 (1967).

    Challenges to alleged contracts of adhesion contain ing an arbitration clause continue to be asserted on grounds equivalent to actions for fraud. But inclusion of an arbitration clause is not per se unconscionable, particularly in commercial transactions.  Strotz v. Dean Witter Reynolds Inc., 223 Cal.App.3d 208 (1990).

    Claims not only for breach of contract, but breach of the covenant of good faith and fair dealing, abuse Of process, negli gence and fraud are often alleged. Whether these claims are rooted in the arbitration clause turns on the contractual language. Izzy v. Mesquite Country Club, 186 Cal.App.3d 1309 (1986). If the object ing party contends it is. not a signatory to the contact, as is often the case in construction contracts, the court must judicially determine whether to include that party in the arbitration process as a named party, a third-party beneficiary or, an assignee.  Hayes; C.C.P. Section 1281.2..

    Appointment of arbitrators. Contracts ????? California Permenante Medical Group, 171 Cal.App.3d 656(1985). In judicial arbitration, initiated under the aegis of the court, the prevailing party may petition the court to include prejudgment interest (if applicable) and costs. Joyce v. Black, 217 Cal.App.3d 318 (1990).

    Jurisdiction. Questions between feder al and state law arose in Allied-Bruce Terminix Cos. Inc. v. Dobson 115 S.Ct. 834 (1995). The court held that the Federal Arbitration Act (FAA), 9 U.S.C. Section 1 et seq., enacted pursuant to congressional power authorized by the Commerce Clause, applies to all written contracts for transactions that involve interstate commerce, whether or not the parties contemplated an interstate transaction. And pursuant to the Supremacy Clause, federal legislation pre-empts state law if Congress intends, to occupy the field.  Southland Corp. v. Keating,  465 U.S. 1 (1984).

    But the Supreme Court also endorsed state regulation of contracts, including arbitration clauses, under general contract principles. Apparently a three-step process ensues: ?????  request a stay of litigation. If the validity of the arbitration agreement is challenged, the parties may submit affidavits or declarations to establish whether "grounds exist for the revocation of the agreement" C.C.P. Section 1281.2.

    Unsupported allegations are an insufficient basis to revoke the arbitration agreement Owens v. Intertec Design Inc., 38 Cal.App.4th 72 (1995).  In arguing against a petition to compel arbitration, merely asserting a series of legal objections or conclusions, or indirectly "demurring”’ on the ground that the petition does not state a cause of action, is insufficient.

    In objecting to a petition to compel, a party may attempt to avoid arbitration by alleging various grounds:

• The absence of any contract between the parties.
• Unawareness of any " claims arising out of or related to the agreement” (a standard clause often inserted to broaden the scope of arbitration), as distinct from an alleged breach of’ a specific clause of the contract.
• Coercion or duress in signing the contract
• Fraud.
• A breached fiduciary relationship.
• A contract of adhesion.

    But in Hayes Children Leasing Co. v. NCR Corp., 37 Cal.App.4th 775 (1995), ????? include time frames for appointment of an arbitrator. If one party fails or refuses to comply with the deadlines, C.C.P. Section 1281.6 authorizes the other party to petition the court for an order appointing a neutral arbitrator. Whether or not time lines are established the contract, C.C.P. Section 1283.8 authorizes the court, on petition, to set guidelines. If the contract permits discovery, or the arbitrator authorizes it (C.C.P. Section. 1283.05), potential for delay exists, just as in conventional litigation.

    Should a party petition the court for a discovery order or does statutory author ity invest the arbitrator with power to issue orders and impose sanctions for noncompliance? If the trial court stays litigation concurrent with an order granting the petition to arbitrate, its jurisdiction is "vestigial."  Titan/Value Equities Group Inc. v. Superior Court, 29 Cal.App.4th 482 (1994). But if the parties submitted their dispute to arbitration without a petition to arbitrate (i.e., by agreement) and without a petition to compel, the arbitration takes on a life of its own and the court could not intervene without statutory authority, Byerly v. Sale, 204 Cal.App.3d 1312 (1988). In either scenario, the arbitrator is empowered with substantial authority to resolve procedural as well as substantive issues. Brock v. Kaiser Foundation Hospitals, 10 Cal.App.4th 1790 (1992).

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