What Happens When Some Investors Agree To Arbitration But Others Don’t?

Arbitration continues to be a hot topic for the courts. See Achilles’ Shield And Judicial Review Of Arbitration Awards and U.S. Supreme Court Holds That State Courts Must Not Assume The Arbitrator’s Role By Declaring Non-Compete Agreements Null And Void. Yesterday, the Fourth District Court of Appeal tackled the question of what happens when some investors agree to arbitrate their claims but others do not?

In Acquire II, LTD. v. Colton Real Estate Group, Cal. Ct. of Appeal Case No. G046241 (Feb. 11, 2013), some 250 individual plaintiffs were investors in six investment funds created over a decade-long period by the defendants to purchase and manage six portfolios of commercial real estate assets. The defendants filed motions seeking to compel some of the plaintiffs to arbitrate their investment claims. The defendants didn’t try to force all of the plaintiffs into arbitration because they had neglected to include arbitration clauses in the governing documents for the different investment options. The trial court denied the defendants’ motions based on Section 1281.2(c) of the California Code of Civil Procedure. That statute grants trial courts discretion to enforce a written arbitration agreement when:

  • A party to the arbitration agreement is also a party to pending litigation with a third party who did not agree to arbitration;
  • The pending third-party litigation arises out of hte same transaction or series of related transactions as the claims subject to arbitration; and
  • the possiblity of conflicting rulings on common factual or legal issues exists.

According to the Court of Appeal, a trial court has no discretion to deny arbitration under Section 1281.2(c) unless all three of the above conditions are met. In an opinion by Justice Richard M. Aronson, the Court of Appeal reversed the trial court – finding a lack of substantial evidence to support the findings that these three conditions had been met. Justice Aronson further noted that even when Section 1281.2(c) applies, the trial court has other options to simply denying arbitration. The trial judge may, for example, stay the arbitration and let the litigation proceed (or vice versa).

Perhaps Both Parties Would Have Been Better Served By Honoring This Arbitration Agreement

The ancient Greeks were familiar with arbitration as a means to settle both private and disputes between states. Perhaps the greatest failure of arbitration was the so-called “thirty years peace” entered into by the city states of Athens and Sparta in the middle of the fifth century B.C.E. One of the key elements of this agreement was to submit future disputes to third party arbitration. Despite this dispute resolution clause, the peace ended less than 15 years later with the outbreak of the Peloponnesian War between democratic Athens and the diarchy of Sparta.


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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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