489 U.S. 468 (1989), 87-1318, Volt Information Sciences, Inc. v. Board of Trustees,

Docket Nº:No. 87-1318
Citation:489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488, 57 U.S.L.W. 4295
Party Name:Volt Information Sciences, Inc. v. Board of Trustees,
Case Date:March 06, 1989
Court:United States Supreme Court
 
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Page 468

489 U.S. 468 (1989)

109 S.Ct. 1248, 103 L.Ed.2d 488, 57 U.S.L.W. 4295

Volt Information Sciences, Inc.

v.

Board of Trustees,

No. 87-1318

United States Supreme Court

March 6, 1989

Leland Stanford Junior University

Argued November 30, 1988

APPEAL FROM THE COURT OF APPEAL OF CALIFORNIA, SIXTH

APPELLATE DISTRICT

Syllabus

A construction contract between appellant and appellee contained an agreement to arbitrate all disputes arising out of the contract and a choice-of-law clause providing that the contract would be governed by the law of "the place where the Project is located." When a dispute arose under the contract, appellant made a formal demand for arbitration. In response, appellee filed an action against appellant in the California Superior Court alleging fraud and breach of contract; in the same action, appellee sought indemnity from two other parties involved in the construction project, with whom it did not have arbitration agreements. The trial court denied appellant's motion to compel arbitration and granted [109 S.Ct. 1250] appellee's motion to stay arbitration under Cal.Civ.Proc.Code Ann. § 1281.2(c), which allows such a stay pending resolution of related litigation between a party to the arbitration agreement and third parties not bound by it. The State Court of Appeal affirmed, holding that (1) by specifying that the contract would be governed by "the law of the place where the Project is located," the choice-of-law clause incorporated the California rules of arbitration, including § 1281.2(c), into the parties' arbitration agreement, and (2) application of § 1281.2(c) was not preempted by the Federal Arbitration Act (FAA or Act), even though the contract involved interstate commerce.

Held:

1. The Court of Appeal's conclusion that the parties intended the choice-of-law clause to incorporate the California arbitration rules into their arbitration agreement is a question of state law, which this Court will not set aside. Pp. 474-476.

(a) Appellant's contention that the state court's construction of the choice-of-law clause was in effect a finding that appellant had "waived" its federally guaranteed right to compel arbitration, a waiver whose validity must be judged by reference to federal, rather than state, law, fundamentally misconceives the nature of the rights created by the FAA. Section 4 of that Act does not confer an absolute right to compel arbitration, but only a right to obtain an order directing that "arbitration proceed in the manner provided for in [the parties'] agreement." (Emphasis

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added.) Here, the state court found that, by incorporating California arbitration rules into their agreement, the parties had agreed that arbitration would not proceed in situations within the scope of § 1281.2(c). This was not a finding that appellant had "waived" an FAA-guaranteed right to compel arbitration, but a finding that it had no such right in the first place, because the parties' agreement did not require arbitration to proceed in this situation. Pp. 474-475.

(b) Also without merit is appellant's argument that the state court's construction of the choice-of-law clause must be set aside because it violates the settled federal rule that questions of arbitrability in contracts subject to the FAA must be resolved with a healthy regard for the federal policy favoring arbitration. See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25. There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate. Interpreting a choice-of-law clause to make applicable the California arbitration rules -- which are manifestly designed to encourage resort to the arbitral process -- does not offend Moses H. Cone's rule of liberal construction. Pp. 475-476.

2. Application of § 1281.2(c) to stay arbitration under the parties' contract is not preempted by the FAA. The FAA contains no express preemptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration. Moreover, since the FAA's principal purpose is to ensure that private arbitration agreements are enforced according to their terms, it cannot be said that application of § 1281.2(c) here would undermine the Act's goals and policies. Arbitration under the Act in a matter of consent, not coercion, and the parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 628, so too may they specify by contract the rules under which the arbitration will be conducted. Where, as here, the parties have agreed to abide by state arbitration rules, enforcing those rules according to the terms of the agreement is fully consistent with the FAA's goals, even if the result is that arbitration is stayed when the Act would [109 S.Ct. 1251] otherwise permit it to go forward. Pp. 476-479.

Affirmed.

REHNQUIST, C.J., delivered the opinion of the Court, in which WHITE, BLACKMUN, STEVENS, SCALIA, and KENNEDY, JJ., joined. BRENNAN, J., filed a dissenting opinion, in which MARSHALL, J., joined, post p. 479. O'CONNOR, J., took no part in the consideration or decision of the case.

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REHNQUIST, J., lead opinion

CHIEF JUSTICE REHNQUIST delivered the opinion of the Court.

Unlike its federal counterpart, the California Arbitration Act, Cal.Civ.Proc.Code Ann. § 1280 et seq. (West 1982), contains a provision allowing a court to stay arbitration pending resolution of related litigation. We hold that application of the California statute is not preempted by the Federal Arbitration Act (FAA or Act), 9 U.S.C. § 1 et seq., in a case where the parties have agreed that their arbitration agreement will be governed by the law of California.

Appellant Volt Information Sciences, Inc. (Volt), and appellee Board of Trustees of Leland Stanford Junior University (Stanford) entered into a construction contract under which Volt was to install a system of electrical conduits on the Stanford campus. The contract contained an agreement to arbitrate all disputes between the parties "arising out of or relating to this contract or the breach thereof."1 The contract also contained a choice-of-law clause providing that "[t]he Contract shall be governed by the law of the place where the Project is located." App. 37. During the course of the project, a dispute developed regarding compensation for extra work, and Volt made a formal demand for arbitration. Stanford responded by filing an action against Volt

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in California Superior Court, alleging fraud and breach of contract; in the same action, Stanford also sought indemnity from two other companies involved in the construction project, with whom it did not have arbitration agreements. Volt petitioned the Superior Court to compel arbitration of the dispute.2 Stanford, in turn, moved to stay arbitration pursuant to Cal.Civ.Proc.Code Ann. § 1281.2(c) (West 1982), which permits a court to stay arbitration pending resolution of related litigation between a party to the arbitration agreement and third parties not bound by it, where "there is a possibility of conflicting rulings on a common issue of law or fact."3 The Superior Court denied Volt's motion to compel arbitration and [109 S.Ct. 1252] stayed the arbitration proceedings pending the outcome of the litigation on the authority of § 1281.2(c). App. 59-60.

The California Court of Appeal affirmed. The court acknowledged that the parties' contract involved interstate

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commerce, that the FAA governs contracts in interstate commerce, and that the FAA contains no provision permitting a court to stay arbitration pending resolution of related litigation involving third parties not bound by the arbitration agreement. App. 64-65. However, the court held that, by specifying that their contract would be governed by "`the law of the place where the project is located,'" the parties had incorporated the California rules of arbitration, including § 1281.2(c), into their arbitration agreement. Id. at 65. Finally, the court rejected Volt's contention that, even if the parties had agreed to arbitrate under the California rules, application of § 1281.2(c) here was nonetheless preempted by the FAA because the contract involved interstate commerce. Id. at 68-80.

The court reasoned that the purpose of the FAA was

"not [to] mandate the arbitration of all claims, but merely the enforcement . . . of privately negotiated arbitration agreements."

Id. at 70 (quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 219 (1985)). While the FAA therefore preempts application of state laws which render arbitration agreements unenforceable,

[i]t does not follow, however, that the federal law has preclusive effect in a case where the parties have chosen in their [arbitration] agreement to abide by state rules.

App. 71. To the contrary, because "[t]he thrust of the federal law is that arbitration is strictly a matter of contract," ibid., the parties to an arbitration agreement should be "at liberty to choose the terms under which they will arbitrate." Id. at 72. Where, as here, the parties have chosen in their agreement to abide by the state rules of arbitration, application of the FAA to prevent enforcement of those rules would actually be "inimical to the policies underlying state and federal arbitration law," id. at 73, because it would "force the parties to arbitrate in a manner contrary to their agreement." Id. at 65. The California Supreme

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Court denied Volt's petition for discretionary review. Id. at 87. We...

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