“Just ‘Cause I Said It, Don’t Mean That I Meant It” – Not When it Comes to Construction Contracts

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“Just ’cause I said it, don’t mean that I meant it.  People say crazy things.” – Adele, Rumour Has It.

When You Say Yes bookMaybe in Adele’s world, but not in the world of construction contracts.

In HM DG, Inc. v. Amini, Case No. B242540 (September 20, 2013), general contractor HM DG, Inc. (“HMDG”) sued homeowners Farzad Etemad Amini and Pouneh Beizai in the Superior Court after they weren’t paid.

One problem.

The construction contract had an arbitration clause:

In the event a dispute shall arise between the parties to this contract, it is hereby agreed that the dispute shall be referred to [one of the following choices: (1) designate a specific USA&M office or alternate service by agreement of the parties; (2) provide a method of selecting the arbitrator and suits of the hearing, such as `from the county wherein the manufacturing plant is located'; or for multi-jurisdictional disputes (3) insert `a USA&M office to be designated by USA&M National Headquarters'] for arbitration in accordance with the applicable United States Arbitration and Mediation Rules of Arbitration. The arbitrator’s decision shall be final and legally binding and judgment may be entered thereon.

Each party shall be responsible for its share of the arbitration fees in accordance with the applicable Rules of Arbitration. In the event a party fails to proceed with arbitration, unsuccessfully challenges the arbitrator’s award, or fails to comply with the arbitrator’s award, the other party is entitled to costs of suit, including a reasonable attorney’s fee for having to compel arbitration or defend or enforce the award.

After HMDG filed suit, the homeowners demanded that HMDG arbitrate rather than litigate its dispute pursuant to the arbitration provision.  HMDG refused, and the homeowners petitioned the court to compel HMDG to arbitrate.

But, at the hearing, the trial court denied the homeowner’s petition, finding that the arbitration clause was invalid because it failed to specify who the parties were to arbitrate before or how an arbitrator or arbitrators were to be selected.

The Court of Appeals for the Second District, however, reversed. While acknowledging that the arbitration provision failed to specify who the parties were to arbitrate before or how an arbitrator or arbitrators were to be selected, the Court of Appeals noted that Code of Civil Procedure section 1281.6 addresses such situations.

Section 1281.6, explained the Court, provides that:

If the arbitration agreement provides a method of appointing an arbitrator, that method shall be followed. If the arbitration agreement does not provide a method for appointing the arbitrator, the parties to the agreement who seek arbitration against whom arbitration is sought may agree on a method of appointing an arbitrator and that method shall be followed.  In the absence of an agreed method, or of the agreed method fails or for any reason cannot be followed, or when an arbitrator appointed fails to act and his or successor has not been appointed, the court, on petition of a party to the arbitration agreement, shall appoint the arbitrator. (emphasis added)

And, because Section 1281.6 provides a procedure in cases in which an arbitration agreement does not specify who the parties are to arbitrate before or how an arbitrator or arbitrators are to be selected, the arbitration provision was as not invalid and the trial court should have, as provided under Section 1281.6,  appointed an arbitrator.

Although this case was clear cut, courts in general are reluctant to step in and change dispute resolution procedures agreed to by parties, both because they don’t want to disturb the agreement of the parties, but as well (I think) due to a sense of judicial deference to other dispute resolution bodies.