Federal Arbitration Act Does Not Preempt California Code of Civil Procedure § 1281.2; California Court May Refuse to Enforce Arbitration Agreement To Prevent Possibility of Conflicting Rulings

Best Interiors, Inc. v. Millie and Severson, Inc., 2008 WL 1122182 (Cal. Ct. App. Apr. 11, 2008)

A dispute arose between general contractor Millie and Severson, Inc. and subcontractor Best Interiors, Inc. related to the construction of a hospital in Whittier, California.  Best sued M&S, the hospital and two building inspectors, alleging various delay and disruption damages caused by improper management and inspection of the project.  M&S petitioned to compel arbitration of the dispute and to stay Best’s lawsuit, based on arbitration clauses in the subcontract and the prime contract.  Best opposed on the grounds that (1) the building inspectors could not be compelled to arbitrate; (2) the arbitration might result in inconsistent results; and (3) the court had authority under California Code of Civil Procedure § 1281.2 to refuse to enforce the arbitration clause.  The trial court granted Best’s petition.  On appeal, M&S raised two arguments.  First, M&S argued that the Federal Arbitration Act, 9 U.S.C. § 1 et seq., applied to the arbitration agreement and did not give the trial court discretion to deny arbitration.  Second, M&S argued that, even if California law applied to the arbitration agreement, there was no possibility of conflicting rulings.

The court of appeal rejected both arguments and affirmed the trial court’s ruling.  The court of appeal recognized that the FAA governs contracts in interstate commerce and, unlike its California counterpart, does not contain any provisions permitting a court to stay arbitration pending resolution of related litigation involving third parties not bound by the arbitration agreement.  However, the court noted that the United States Supreme Court has expressly held that the FAA does not preempt California Code of Civil Procedure § 1281.2 where the parties have agreed that their arbitration agreement will be governed by the laws of California.  The court of appeal further explained that the FAA does not confer a right to compel arbitration of any dispute at any time, but instead confers only the right to obtain an order directing the parties to proceed in the manner provided for in the parties’ agreement.  Thus, the court found that, even if the contract between M&S and Best implicated interstate commerce, the parties had agreed that California law would govern the arbitration agreement.

Furthermore, the court of appeal found that the trial court did not abuse its discretion in determining that there was a possibility of conflicting rulings if the arbitration between M&S and Best proceeded separately from the lawsuit between Best and the building inspectors.