Arbitration Compelled, Despite Ambiguous Agreement

Constangy, Brooks, Smith & Prophete, LLP

Constangy, Brooks, Smith & Prophete, LLP

And in California, yet!

Finally, some good news for employers on the arbitration front. In a recent decision, a California appeals court decision sent a case to binding arbitration, despite clear ambiguities in the arbitration agreement.

Western Bagel Co. v. Superior Court (Calderon)

Jose Calderon, who worked at a Western Bagel retail store, filed a putative class action, alleging that his employer failed to provide meal and rest breaks, in violation of California’s wage and hour laws. Western Bagel moved to compel binding arbitration based on an agreement signed by Mr. Calderon. This is where the fun begins.

Mr. Calderon, a native Spanish speaker, signed a version of the Western Bagel employment arbitration agreement that had been translated into Spanish by a third party company. Paragraph 1 of the translated agreement correctly stated, “To the maximum extent permitted by law, [Western Bagel] and I mutually agree to resolution through binding arbitration for all claims or causes of action… that [Western Bagel] may bring against me or that I may bring against [Western Bagel]…” (Emphasis added.)  Other portions of the agreement also referred to resolution of disputes through binding arbitration.

If the story stopped there, this case would be no fun at all. But there’s more. Paragraph 10 of the agreement contained what Western Bagel considered to be a typo. A big, agreement-altering typo. This Paragraph read, “If any provision of this Agreement… is found to be unenforceable…this finding will not affect the validity of the rest of this Agreement and the Agreement will be carried out to the fullest possible extent to ensure that the resolution of all disputes between the parties as described herein are resolved via neutral, non-binding arbitration.” (Emphasis added.) This typo was apparently the error of the company that Western Bagel used to translate the agreement, because Paragraph 10 of the English version of the agreement clearly provided for binding arbitration.

A trial court granted Western Bagel’s motion to compel arbitration, but required the case to go to non-binding arbitration. Relying on a canon of contract interpretation called “contra proferentem,” which means that any ambiguous terms in a contract must be construed against the drafter of the contract, the trial court found that the ambiguous term must be construed against Western Bagel as the drafter of the arbitration agreement. According to the court, because the agreement referred to both binding arbitration and non-binding arbitration, the agreement must be interpreted as requiring only non-binding arbitration.

Western Bagel appealed. Thankfully (and correctly), the appeals court disagreed with the trial court’s order. Citing to a 2019 U.S. Supreme Court decision, Lamps Plus, Inc. v. Varela, the California appellate court held that “contra proferentem” is triggered only when a court determines that it cannot discern the intent of the parties using traditional methods of contract interpretation. 

For arbitration agreements governed by the Federal Arbitration Act, the default rule is that the scope of an arbitration agreement must be resolved in favor of arbitration. This default rule includes the expectation that the arbitrator’s decision will be both binding and final. As a result, the Court of Appeal vacated the trial court’s order compelling non-binding arbitration and entered a new order compelling binding arbitration under the terms of the employer’s arbitration agreement.

Moral of the Story: Draft carefully!

Western Bagel is a valuable lesson in carefully drafting arbitration agreements. Every word counts. Even though Western Bagel prevailed, the drafting or translation error no doubt caused it to incur significant and unnecessary legal fees. Had the agreement not been governed by the FAA, the trial court decision probably would have remained in place. Employers who are considering adopting or revising an arbitration agreement should seek advice from competent legal counsel.

(And hire a good translator.)

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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