California Court of Appeal Holds Arbitration Clause Containing Multiple Options for Selection of Arbitrator Is Enforceable

Under California law, parties to a contract may include language in the contract agreeing that any disputes over the contract will be resolved by arbitration.  Such an arbitration clause may specify a method for selecting an arbitrator.  But what about arbitration clauses that are silent or that present multiple options for the selection of an arbitrator?  A California court of appeal recently confirmed that an arbitration clause is enforceable even when it does not specify one particular method for selection of an arbitrator.

In HM DG, Inc. v. Amini and Beizai (--- Cal.Rptr.3d ----, Cal.App. 2 Dist., September 20, 2013), Farzad Amini and Pouneh Beizai (“Defendants”) sought remodeling services for their home from Hassan Majd and HM DG, Inc. (collectively, “HM DG”).  After discussions, HM DG presented a contract containing an arbitration clause to the Defendants, who signed it without asking for any changes to the arbitration provision.  A little over a year later, the Defendants and HM DG ran into disagreements over the quality of work.

HM DG asked the Defendants to put funds into escrow to cover payment for the remaining work on the project.  The Defendants refused.  HM DG stopped work, recorded a lien on the property, and filed suit against the Defendants.  The attorney for the Defendants sent a request to HM DG’s counsel requesting arbitration of the dispute according to the arbitration clause, but HM DG refused.  The Defendants petitioned the court to compel HM DG to arbitrate.  The trial court denied the petition, finding that the clause could not be enforced because it only presented various options for picking an arbitrator rather than identifying a particular method of selection.

On appeal, the Second District Court of Appeal reversed the trial court decision, finding that California law specifically provided for enforcement of an arbitration agreement even where the  “agreement does not provide a method for appointing an arbitrator.”  The Code of Civil Procedure section 1281.6 states that when no method is stated, or if the stated method fails, a court may appoint an arbitrator if a party to the agreement petitions for it to do so.  The court held that the “multiple alternative methods for selecting an arbitrator” in the HM DG contract did not invalidate the arbitration clause.

The appellate court rejected HM DG’s argument that the presence of various options for key terms, such as the arbitration rules and forum, showed that there was no “meeting of the minds”  or mutual consent to arbitrate.  The court pointed out that the contract unequivocally stated that the parties agreed to refer disputes to arbitration according to one of three methods for selection of an arbitrator, and that the arbitrator's decision would be final and legally binding.  The court did note that when an arbitration agreement specifies a particular forum for arbitration, that method must be followed and courts may not choose a different forum.

The appellate court also rejected HM DG’s contention that the Defendants did not properly demand arbitration because the letter included terms to which the parties had not agreed.  The court noted that the letter sent by the Defendants’ attorney made a clear demand under the terms of the arbitration agreement.  The court found that the additional items in the letter were merely proposals that HD MG was “invited to negotiate” as provided by the contract’s arbitrator selection options.

Topics:  Arbitration, Arbitration Agreements, Arbitrator Selection Disputes, Forum Selection Clause

Published In: Alternative Dispute Resolution (ADR) Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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