Best Interiors, Inc. v. Millie and Severson, Inc.

• Decision Date: 12 March 2008
• Docket Number: No. B195253.,B195253.
• Citation: 161 Cal.App.4th 1320,75 Cal.Rptr.3d 1
• Court: California Court of Appeals Court of Appeals
• Parties: BEST INTERIORS, INC., Plaintiff and Respondent, v. MILLIE AND SEVERSON, INC., Defendant and Appellant.

75 Cal.Rptr.3d 1

161 Cal.App.4th 1320

BEST INTERIORS, INC., Plaintiff and Respondent, v. MILLIE AND SEVERSON, INC., Defendant and Appellant.

No. B195253.

Court of Appeal, Second District, Division 8.

March 12, 2008.

As Modified April 11, 2008.

Law Offices of Ted R. Gropman and Ted R. Gropman, Woodland Hills; Benedon & Serlin, Douglas G. Benedon, Los Angeles, and Gerald M. Serlin, Westbury, NY, for Defendant and Appellant Millie and Severson, Inc.

Rippetoe Miles, Gregory L. Rippetoe and Laura A. Miles for Plaintiff and Respondent Best Interiors, Inc.

Bewley, Lassleben & Miller, Kevin P. Duthoy and Jeffrey S. Baird, Whittier, for Defendant and Respondent Presbyterian Intercommunity Hospital, Inc.

EGERTON, J.^*

SUMMARY

Under Code of Civil Procedure section 1281.2, the trial court denied a petition to compel arbitration. That section gives the court the discretion to deny enforcement of an arbitration agreement, and to order all parties to litigate in a single action, if the court determines that (1) a party to the arbitration agreement is also a party to a pending court case with a third party arising out of the same transaction, and (2) there is a possibility of conflicting rulings on a common issue of law or fact. We find no abuse of discretion in the trial court's decision. We also reject the contention that the Federal Arbitration Act prevents the trial court from exercising its discretion under Code of Civil Procedure section 1281.2.

FACTUAL AND PROCEDURAL BACKGROUND

Millie and Severson, Inc. (M & S) is a general contractor. M & S contracted with Presbyterian Intercommunity Hospital, Inc. (Presbyterian) to construct a facility in Whittier, California. M & S in turn contracted with Best Interiors, Inc. (Best) for the construction and installation of metal framing, gypsum board, and Portland cement plaster construction for the facility, for a contract price of $2,848,161.

The facility was completed. But Best claims that more than $1.2 million of the contract price remains unpaid; that it incurred additional construction costs because of various disruptions to the construction schedule; and that the reasonable value of materials and services Best actually furnished for which M & S has not paid is more than $2 million. Best sued M & S, Presbyterian, and two building inspectors, Steve Seals and Joseph Alcantara.¹

Best alleged that M & S's failure to manage, coordinate, and schedule the work properly interfered with, hindered, and delayed Best's work on the project. These disruptions significantly increased the nature, scope, and duration of Best's work. Moreover, because the project was a healthcare facility, state law required an observation, inspection, and testing program, including an inspector of record (IOR) hired by Presbyterian and certified by the state to perform inspections during the construction. Best alleged that improper and unnecessary inspections by the building inspectors Presbyterian hired (Seals and Alcantara) disrupted and hindered its work. Specifically, Best alleged Presbyterian obtained state approval for Seals to serve as IOR for the project, and that Seals and Presbyterian improperly allowed Alcantara—who was not qualified or certified as an inspector—to oversee and inspect the project and otherwise to perform the IOR's duties. Best alleged that Alcantara carried on his improper and illegal inspection activities with the full knowledge, consent, authorization, or ratification of Seals, Presbyterian, and M & S.

M & S petitioned to compel arbitration of the dispute between M & S and Best and to stay Best's lawsuit pending arbitration, based on arbitration clauses in the subcontract between M & S and Best and in the prime contract between M & S and Presbyterian. Best opposed the petition. Best argued that Seals and Alcantara could not be compelled to arbitrate; that arbitration would subject Best to a risk of inconsistent results; and that the court had authority under Code of Civil Procedure section 1281.2 to refuse to enforce the arbitration clause.²

The trial court initially granted M & S's petition.³ However, after two more rounds of briefing and hearings, the trial court denied M & S's petition to compel arbitration. The trial court observed:

• The main factual disputes involved whether M & S's improper management of the contract work caused Best's delay in completing the project; whether the inspections Seals and Alcantara performed were improper; and the nature of the legal relationship between Presbyterian and the inspectors.

• Presbyterian agreed to participate in arbitration so long as the entire action was heard in that forum, but the inspectors were not parties to an arbitration agreement and did not stipulate to arbitration.

• Both Seals and Alcantara had filed cross-complaints for indemnity and declaratory relief.

The court concluded:

"Separating the claims to be judicially determined and those subject to arbitration would not serve judicial economy and more importantly, may lead to inconsistent results. [Citation.] The issues between the parties ... overlap and would have to be heard and decided in both forums. Multiple rulings will likely create problems. First, if a portion of the case is sent to arbitration in accordance with the contracts, the arbitrator could find that the inspectors acted as agents, thereby exposing Presbyterian to liability. The inspectors] interest would not adequately be represented in that forum. Once agency was found, Presbyterian would likely seek indemnity from the inspectors. The court, not bound by the arbitrator's findings, would have to decide the issue of agency and might find that there was none. If it finds that there was no agency, Presbyterian would still be bound by the inconsistent arbitration decision. Second, the issue of whether the inspectors were at fault would have to be determined in both forums. The amount of fault assigned to them, if any, would likely differ. Finally, the resolution of these issues also affects the finding as to whether Presbyterian is independently liable for negligently hiring the inspectors and improperly ratifying their alleged misconduct. [¶] ... The somewhat unique facts of this case require, in the interest of judicial economy, that the various disputes between the parties be heard in the same forum. Balancing the interests of the parties who signed a contractual arbitration agreement with those who did not, the court finds that equity rules in favor of denying the petition to compel arbitration and the action litigated in one forum."

M & S filed a timely appeal from the trial court's order.

DISCUSSION

M & S raises two arguments. First, M & S contends that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) (FAA) governs its arbitration agreement with Best, and the FAA does not give the trial court discretion to deny arbitration. Second, M & S contends that, even if California law applies, the trial court erred in refusing to order arbitration because there is no possibility of conflicting rulings. We disagree on both points, and affirm the order.⁴

A. The FAA does not preempt Section 1281.2 here.

The FAA governs contracts in interstate commerce. Unlike its California counterpart, 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." (Volt Information Sciences, Inc. v. Board of Trustees (1989) 489 U.S. 468, 472, 109 S.Ct. 1248, 103 L.Ed.2d 488 (Volt.) However, the United States Supreme Court has expressly held that the FAA does not preempt the California statute, section 1281.2, subdivision (c) (hereafter, section 1281.2(c)), "where the parties have agreed that their arbitration agreement will be governed by the law of California." (Id. at p. 470, 109 S.Ct. 1248.) The Court explained that the FAA "does not confer a right to compel arbitration of any dispute at any time; it confers only the right to obtain an order directing that `arbitration proceed in the manner provided for in [the parties'] agreement.'" (Id. at pp. 474-475, 109 S.Ct. 1248, quoting 9 U.S.C. § 4.) So, even if the FAA applies because the subcontract affects interstate commerce—a point we need not discuss—the parties may agree that California law governs their agreement to arbitrate.

Volt is illustrative, and controlling. In Volt, a construction contract contained an agreement to arbitrate all disputes arising from the contract. The contract also contained a choice-of-law clause, providing that the contract would be governed by the law of "`the place where the Project is located.'" (Volt, supra, 489 U.S. at p. 470, 109 S.Ct. 1248.) That place was California. The Supreme Court affirmed a California court of appeal decision finding that, "by incorporating the California rules of arbitration into their agreement, the parties had agreed that arbitration would not proceed in situations which fell within the scope of [section 1281.2(c)]." (Volt, supra, 489 U.S. at p. 475, 109 S.Ct. 1248.) The Supreme Court concluded that application of section 1281.2(c) would not undermine the FAA's policies and goals.⁵ (Id. at p. 479, 109 S.Ct. 1248.)

Our own Supreme Court also has held that, where the parties both provided that California law would govern their arbitration agreement and agreed that the designation of California law would "`not be deemed an election to preclude application of the [FAA], if it would be applicable,'" the FAA did not preempt the application of section 1281.2(c). (Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 380, 25 Cal.Rptr.3d 540, 107 P.3d 217 (Cronus.)

The subcontract here between Best and M & S did not contain a choice-of-law provision. However, the subcontract stated that any dispute resolution procedure in the prime contract was incorporated in the subcontract and would apply to any disputes arising under the subcontract:

"20.1 Preliminary Dispute...