Archives: November 2005
Tue Nov 29, 2005
Arbitrable and Non Arbitrable Claims
Under California law, CCP 1281.2 (c) allows alternatives to a trial court when confronted with the same parties, or third parties, asserting claims potentially in arbitration or litigation with each other. The statute authorizes joinder, consolidation (CCP 1281.3) and severance (CCP 1281.4) of parties and issues. The most controversial statutory option allows the court to stay arbitration, an order directly in conflict with the FAA and its pre emptive demand that states not inhibit or burden arbitration by invoking procedural rules; Gilmer, supra.
In Cronus Investments, Inc. v. Concierges Services, 35 Cal.4th 376 (2005) the evidence clearly established conflicts among parties who had signed contracts containing arbitration clauses and those who had signed contracts without an arbitration clause destined to proceed in litigation.
At the hearing to compel arbitration, the trial court stayed arbitration pending litigation with the non signatories but the arbitration clause contained a choice of law term requiring FAA rules to govern the arbitration. The FAA provides no statutory grounds for consolidation, severance or joinder and federal decisional law prohibits staying arbitration under these circumstances in United States District Courts; Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985).
In Cronus, the California Supreme Court held the FAA does not pre empt CCP 1281.2. Distinguishing between state substantive and procedural law, the court concluded the FAA only pre empts state substantive law inhibiting arbitration, citing the U.S. Supreme Court decision inVolt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 493. U.S. 871 (1989). In Volt, the Supreme Court approved the CCP 1281.2 procedural resolution of potential conflicts between arbitration and ligation, confirming the order staying arbitration to avoid inconsistent results in litigation on the same issues. Volt assumed the California procedural rule facilitated arbitration by removing this impediment.
In a diversity case, the Ninth Circuit refused to apply state procedural law in a District Court arbitration despite a California choice of law clause in the arbitration agreement. According tothe court, a choice of law clause applies only to California substantive law; First Fidelity Bank, FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 2004).
Sun Nov 27, 2005
Arbitrabililty: Enforcing & Revoking Arbitration Clauses
Federal courts interpreting the Federal Arbitration Act (FAA; 9 U.S.C. 1 et. seq.) and California courts applying the California Arbitration Act (CAA; CCP 1280 et. seq.) continue to shape the arbitration legal landscape. Confronting challenges to the substantive terms of an arbitration clause or interpreting procedural statutes, courts increasingly invoke litigation language to resolve challenges to arbitration.
In ruling on a petition to compel arbitration pursuant to the FAA (9 U.S.C. 4), the United States Supreme Court clarified the judicial role by identifying "gateway issues" for trial courts to resolve in deciding validity and enforcement of an arbitration clause; Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002). Characterizing this phrase as the doctrine of "arbitrability," the Court confined trial courts to determining only the existence of an arbitration clause in a contract, the parties bound by the agreement, and the scope of arbitrable issues.
Howsam further refined the role of courts by narrowing the scope of "arbitrability." Distinguishing between substantive and procedural law, the Court assigned procedural issues to arbitrators. Conditions precedent, laches, estoppel, and clauses imposing non statutory contractual time limits to file claims are classified as "procedural" and present no issue of "arbitrability" for the court.
Interpretation of substantive contract law remains the purview of the court to determine the validity of the arbitration clause and whether to enforce or revoke its terms on "such [contractual] grounds as exist at law or in equity." 9 U.S.C. 2. To test the validity of the arbitration clause, the court applies state general contract law. To determine whether to enforce the clause, the court invokes equity. Enforcement or revocation is initially a question of federal law but its application to the facts is an issue of state substantive contract law; Green Tree Financial Corp.v. Bazzle, 539 U.S. 444 (2003).
In addition to constraining judicial authority interpreting arbitration clauses, the Court has reduced challenges to remedial limitations contained in an arbitration clause. In PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003) the Justices ruled that trial courts cannot deny a petition to arbitrate on grounds the clause prohibits punitive damages or restricts federal statutory remedies.
According to the Court, these terms are "abstract" and not subject to review until the arbitrator renders an award; 9 U.S.C.(a)(b). Despite this restriction, the Court has required an arbitrator to issue an award respecting remedies authorized by Congress in federal statutes. An arbitrable forum must "vindicate statutory rights" available to a claimant in litigation; Gilmer v. Interstate/Johnson Corp., 500 U.S. 20 (1994).
California statutes authorizing arbitration are linguistically comparable to the FAA. CCP 1281 confers validity on written arbitration clauses and permits judicial enforcement of the terms "unless grounds exist for revocation (in actuality, ‘recission') of any contract."A court hearing a petition to compel arbitration in California similarly considers whether an arbitration clause exists in a contract, identifies parties named to arbitrate and decides the scope of arbitrable issues; CCP 1282.
State courts have also distinguished substantive arbitrability from procedural arbitrability but in a context different than the Howsam division of judicial and arbitrator authority. In California, the most complicated arbitrability issues arise in cases involving parties who have signed contracts with each other but not all their agreements contain arbitration clauses. This dilemma results in potential conflicting results between a party with arbitrable claims in arbitration and a party with non arbitrable claims in litigation.
Under California law, CCP 1281.2 (c) allows alternatives to a trial court when confronted with the same parties, or third parties, asserting claims potentially in arbitration or litigation with each other. The statute authorizes joinder, consolidation (CCP 1281.3) and severance (CCP 1281.4) of parties and issues. The most controversial statutory option allows the court to stay arbitration, an order directly in conflict with the FAA and its pre emptive demand that states not inhibit or burden arbitration by invoking procedural rules; Gilmer, supra.