Christensen v. Dewor Developments

• Decision Date: 02 May 1983
• Citation: 191 Cal.Rptr. 8,33 Cal.3d 778,661 P.2d 1088
• Parties: , 661 P.2d 1088 Richard A. CHRISTENSEN et al., Plaintiffs and Appellants, v. DEWOR DEVELOPMENTS et al., Defendants and Appellants. L.A. 31691.
• Court: California Supreme Court

Page 8

191 Cal.Rptr. 8

33 Cal.3d 778, 661 P.2d 1088

Richard A. CHRISTENSEN et al., Plaintiffs and Appellants, v. DEWOR DEVELOPMENTS et al., Defendants and Appellants.

L.A. 31691.

Supreme Court of California In Bank.

May 2, 1983.

Rehearing Denied June 23, 1983.

F. Glenn Nichols, Los Angeles, for plaintiffs and appellants.

Feinberg & Wolf, Isman, Wolf & Feinberg and Arthur R. Bergen, Encino, for defendants and appellants.

GRODIN, Justice.

We grapple here with a variation on a recurring and often vexing theme concerning waiver of the right to arbitrate. Specifically, we consider whether a party retains the right to insist upon arbitration after he has filed a lawsuit over admittedly arbitrable disputes, for the asserted purpose of discovering his opponent's legal theories, and has pursued that litigation through successive demurrers, abandoning it only a day before a scheduled hearing on the adequacy of his amended complaint. While this court has in other contexts been reluctant to find waiver, partly in recognition of this state's policy to encourage arbitration as an alternative to litigation, we conclude that the state's policy would be undermined, rather than served, by permitting this sort of deliberate end-run around the arbitral process. Accordingly, we hold that the trial court properly found waiver on the facts of this case.

Factual and Procedural Background

On October 28, 1977, plaintiffs Richard A. and Rose J. Christensen entered into a construction contract with defendants Dewor Developments and Wladimir Worotko, pursuant to which defendants, as prime contractors, undertook construction of a 2-story, 10-unit apartment building, to be completed within 180 working days after commencement of construction. Paragraph 17 of the contract provided for arbitration, in accordance with American Arbitration Association rules, of "[a]ny controversy arising out of the construction of the project ... or regarding the interpretation of this contract or any subcontract or sub-subcontract."

Construction began September 11, 1978, and, according to plaintiffs' allegations, was not substantially completed until November 13, 1979. On December 23, 1980, plaintiffs filed against defendants a 32-page complaint stating 7 causes of action including breach of contract, "promissory estoppel," intentional and negligent misrepresentation, intentional and negligent interference with prospective economic advantage, and "pierce of corporate veil." Buried on page 17, in paragraph 83 of the complaint, plaintiffs noted the existence of the arbitration provision in the construction agreement, and asserted that plaintiffs "are therefore entitled to have the present action arbitrated in accordance with said contractual provision."

If filing a 32-page complaint seemed a strange way to preserve arbitration rights, plaintiffs later cleared the mystery by asserting it was their intent to "arbitrate this case from its inception as evidenced by their specific reservations of their arbitration rights," and that the purpose of filing the complaint was to "obtain from the defendants an answer and affirmative defenses so that the Christensens could have some feel for what the Defendants' position would be at arbitration ...."

This novel strategy backfired when defendants, instead of answering the complaint, filed a demurrer, and matters got still worse for plaintiffs when the trial court sustained the demurrer as to each cause of action except the first, which it struck on its own motion.

Apparently undaunted, plaintiffs filed a trimmed-down but still substantial amended complaint stating the same seven causes of action. The amended complaint, like the original, acknowledged the arbitrability of the dispute and asserted the right to arbitrate.

Defendants again filed a demurrer, this time responding to the complaint's assertions regarding arbitration with an allegation that plaintiffs' right to arbitrate had been waived. One day before the hearing set on the second demurrer, plaintiffs dismissed their complaint "without prejudice" and, two months later, filed a petition to compel arbitration in the Los Angeles County Superior Court. That court denied the petition, finding that plaintiffs, by litigating their complaint through a demurrer and a first amended complaint for the purpose of "unilateral discovery" and at all times intending to dismiss, had acted in bad faith, and had thereby waived the right to arbitrate. The court also denied defendants' claim for attorney's fees pursuant to contract. Both parties have appealed.

Discussion

I. Waiver of the Right to Arbitrate

Determination by a trial court that "[t]he right to compel arbitration has been waived by the petitioner" is one of three statutory grounds for withholding an order to arbitrate an otherwise arbitrable controversy. (Code Civ.Proc., § 1281.2, subd. (a).) Such a determination is ordinarily one of fact which " 'if supported by substantial evidence, is binding on an appellate court.' " An appellate court will reverse a finding of waiver by the trial court only " 'in cases where the record before the trial court establishes a lack of waiver as a matter of law.' " (Keating v. Superior Court (1982) 31 Cal.3d 584, 605, 183 Cal.Rptr. 360, 645 P.2d 1192 [U.S. Supreme Ct. jur. postponed until hg. on the merits, sub nom. Southland Corp. v. Keating, 459 U.S. 1101, 103 S.Ct. 721, 74 L.Ed.2d 948], quoting Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 185, 151 Cal.Rptr. 837, 588 P.2d 1261.)

In Keating, our most recent pronouncement on the subject, we summarized certain of the principles applicable to determination of waiver. We reconfirmed that "[a]rbitration is strongly favored. Courts will closely scrutinize any claims of waiver [citations] and ' "indulge every intendment to give effect to [arbitration] proceedings." [Citations.]' Moreover, the burden of proof is 'heavy' and rests on the party seeking to establish waiver [citations] which 'is not to be lightly inferred.' [Citations.]" (Keating v. Superior Court, supra, 31 Cal.3d at pp. 604-605, 183 Cal.Rptr. 360, 645 P.2d 1192.) We explained that while there is no "single test" for establishing waiver, "the relevant factors include whether the party seeking arbitration (1) has 'previously taken steps inconsistent with an intent to invoke arbitration,' (2) 'has unreasonably delayed' in seeking arbitration, (3) or has acted in 'bad faith' or with 'wilful misconduct.' " (Keating, supra, 31 Cal.3d at p. 605, 183 Cal.Rptr. 360, 645 P.2d 1192, quoting Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 425-426, 158 Cal.Rptr. 828, 600 P.2d 1060.) And, we stressed the "significance of the presence or absence of prejudice. Waiver does not occur by mere participation in litigation; there must be 'judicial litigation of the merits of arbitrable issues' (Doers v. Golden Gate Bridge etc. Dist., supra, 23 Cal.3d at p. 188 [151 Cal.Rptr. 837, 588 P.2d 1261] ), although 'waiver could occur prior to a judgment on the merits if prejudice could be demonstrated' (id., at p. 188, fn. 3 [151 Cal.Rptr. 837, 588 P.2d 1261] )." (Keating, supra, 31 Cal.3d at p. 605, 183 Cal.Rptr. 360, 645 P.2d 1192.)

Applying these principles in Keating we concluded that the record supported the trial court's refusal to find waiver on the part of a defendant who, confronted with several lawsuits, engaged in certain preliminary skirmishes before moving to compel arbitration. Here, it is the plaintiff who seeks to change course, and the difference is significant. A party who brings suit over a dispute which he has agreed to arbitrate has acted in violation of his agreement, while a defendant in such a suit has done no legal wrong. The defendant may seek a stay, or dismissal, of the action (see Charles J. Rounds Co. v. Joint Council of Teamsters No. 42 (1971) 4 Cal.3d 888, 899, 95 Cal.Rptr. 53, 484 P.2d 1397), and it is normally desirable that he do so promptly if he intends to do so at all; but, given the " 'overriding ... policy favoring arbitration ... mere delay in seeking a stay of the proceedings without some resultant prejudice to a party [citation] cannot carry the day.' " (Keating, supra, 31 Cal.3d at pp. 605-606, 183 Cal.Rptr. 360, 645 P.2d 1192, quoting from Carcich v. Rederi A/B Nordie (2d Cir.1968) 389 F.2d 692, 696; cf. Note, Contractual Agreements to Arbitrate Disputes: Waiver of the Right to Compel Arbitration (1979) 52 So.Cal.L.Rev. 1513, 1546, suggesting a more stringent standard.) Neither the trial court, nor we, found such prejudice in Keating.

Similar considerations apply when the plaintiff brings his action in good faith, as in Doers v. Golden Gate Bridge etc. Dist., supra, 23 Cal.3d 180, 151 Cal.Rptr. 837, 588 P.2d 1261. Doers, who had been employed by Greyhound Lines as a baggage clerk at the Santa Rosa Greyhound terminal, suffered a loss in regular employment and job security when the district began commute bus service from Santa Rosa to San Francisco, and Greyhound converted its Santa Rosa terminal from a company operation to a "commission agency." Doers brought suit in federal district court against the district and the Amalgamated Transit Union (which had contracts with both Greyhound and the district) claiming rights under the Urban Mass Transit Act of 1964 (49 U.S.C. § 1601 et seq.). When his federal action was dismissed for lack of subject matter jurisdiction, he joined with the union in seeking arbitration of his grievances under the union's contract with the district. The trial court denied their joint petition to compel arbitration on the ground that both Doers' and the union's rights to arbitrate were waived when Doers brought his action in federal court; but we reversed, holding that the mere filing of the action did not result in waiver. (23 Cal.3d at p. 188, 151 Cal.Rptr. 837, 588 P.2d 1261.)

Doers is distinguishable from this case in a number of respects. Doers was not a direct party to the...