Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street

• Decision Date: 29 December 1983
• Docket Number: S.F. 24568
• Citation: 673 P.2d 251,35 Cal.3d 312,197 Cal.Rptr. 581
• Court: California Supreme Court
• Parties: , 673 P.2d 251 ERICKSEN, ARBUTHNOT, McCARTHY, KEARNEY & WALSH, INC., Plaintiff and Respondent, v. 100 OAK STREET et al., Defendants and Appellants.

Page 581

197 Cal.Rptr. 581

35 Cal.3d 312, 673 P.2d 251

ERICKSEN, ARBUTHNOT, McCARTHY, KEARNEY & WALSH, INC., Plaintiff and Respondent, v. 100 OAK STREET et al., Defendants and Appellants.

S.F. 24568.

Supreme Court of California,

In Bank.

Dec. 29, 1983.

Randall I. Barkan, Sternberg & Barkan, Oakland, for defendants and appellants.

William B. Hoback, Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Oakland, for plaintiff and respondent.

GRODIN, Justice.

The question presented here is whether a party to an agreement which includes an arbitration clause may bypass the arbitral process, and invoke the jurisdiction of the courts, by asserting that the agreement itself was the product of fraud. We conclude, in accord with the United States Supreme Court and the overwhelming majority of state courts which have considered the question, that the arbitration commitment is severable from the underlying agreement and that where, as in this case, the arbitration clause may reasonably be construed to encompass the fraud claim, the entire dispute should be resolved through arbitration.

Facts and Procedural History

The underlying dispute concerns a lease executed by plaintiff and respondent Ericksen, Arbuthnot, McCarthy, Kearney and Walsh, Inc., an Oakland law firm, hereinafter referred to as Ericksen, and 100 Oak Street, a California limited partnership which owns a three-story office building in Oakland. The lease, dated August 15, 1979, was for a five-year term and provided that Ericksen would occupy the first floor of the 100 Oak Street building, starting November 15, 1979.

Shortly after it occupied the premises, Ericksen began complaining that the air conditioning in the building was defective. Halfway through the lease term, Ericksen vacated the premises, moving to another office during Memorial Day weekend, 1982.

Notwithstanding a lease clause in which it agreed to arbitrate "[i]n the event of any dispute between the parties hereto with respect to the provisions of this Lease exclusive of those provisions relating to payment of rent," Ericksen filed suit on June 30, 1982. The complaint sought damages and declaratory relief and alleged a breach of the implied covenant of quiet enjoyment; breach of the implied warranty of habitability; frustration of purpose; simple breach of contract; constructive eviction; and fraud. Ericksen claimed it was entitled to rescind the agreement, and sought general and punitive damages.

Within a few days after it was served with the complaint, 100 Oak Street filed a petition to compel arbitration of the dispute (Code Civ.Proc., § 1281.2), and to stay the civil proceedings. Ericksen filed a response in which it admitted that it and 100 Oak Street had "entered into a written agreement requiring that the controversy alleged in the petition to be submitted to arbitration," but asserted that "[g]rounds exist for revocation of the agreement to arbitrate the alleged controversy in that [Ericksen] was falsely and fraudulently induced to enter into the lease agreement." On the basis of this general and unverified allegation, ¹ the trial court denied 100 Oak Street's petition, and this appeal followed.

Discussion

Code of Civil Procedure section 1281.2 provides, in relevant part: "On the petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: ... [p] (b) Grounds exist for the revocation of the agreement."

The language of the statute on its face would not appear to countenance the trial court's view that the mere general assertion of fraud in an unverified response is sufficient basis for the denial of a petition to compel arbitration. Rather, the statute calls for a "determination" by the court as to the existence of the requisite agreement, and manifestly no such determination has been made.

There exists a more fundamental question, however, and that is whether the California Arbitration Act contemplates that a court, confronted with an agreement containing an arbitration clause and a petition to compel arbitration, will preliminarily entertain and decide a party's claim that the underlying agreement (as distinguished from the agreement to arbitrate) was produced by fraud. The question is one of first impression in this state. (See Sauter v. Superior Court (1969) 2 Cal.App.3d 25, 29, fn. 2, 82 Cal.Rptr. 395.) ² We therefore turn to decisions of the federal courts and the courts of our sister states for guidance.

I. The Federal Rule

In Robert Lawrence Company v. Devonshire Fabrics, Inc. (2d Cir.1959) 271 F.2d 402, cert. dism. (1960) 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37, plaintiff sought damages for allegedly fraudulent misrepresentations made by defendant in inducing it to pay for a quantity of woolen fabric, which, plaintiff claimed, was not of "first quality" as the agreement provided. Defendant moved to stay the suit pending arbitration pursuant to a provision of the sales agreement calling for arbitration of "[a]ny complaint, controversy or question which may arise with respect to this contract that cannot be settled by the parties thereto." The trial court denied the stay on the ground that the existence of a valid contract was a question which must first be determined by the court.

The court of appeals, in what proved to be a seminal decision on this issue, reversed. Calling the trial court's approach an "oversimplification of the problem," the court held that the federal arbitration statute "envisages a distinction between the entire contract between the parties on the one hand and the arbitration clause of the contract on the other." (271 F.2d at p. 409.) Such a construction was compelled, the court reasoned, not only by the language of the statute ³ but also by other pertinent considerations as well. "Historically arbitration clauses were treated as separable parts of the contract, although such treatment generally meant the agreement was being deprived of its efficacy. [Citations.] And since the passage of the [federal] Arbitration Act, the courts have similarly held that the illegality of part of the contract does not operate to nullify an agreement to arbitrate. [Citations.] Nor does the alleged breach or repudiation of the contract preclude the right to arbitrate. [Citations.] [p] Finally, any doubts as to the construction of the Act ought to be resolved in line with its liberal policy of promoting arbitration both to accord with the original intention of the parties and to help ease the current congestion of court calendars. Such policy has been consistently reiterated by the federal courts and we think it deserves to be heartily endorsed." (271 F.2d at p. 410.)

Referring to the case before it, the court observed that "[t]he issue of fraud seems inextricably enmeshed in the other factual issues of the case. Indeed, the difference between fraud in the inducement and mere failure of performance by delivery of defective merchandise depends upon little more than legal verbiage and the formulation of legal conclusions. Once it is settled that arbitration agreements are 'valid, irrevocable, and enforceable' we know of no principle of law that stands as an obstacle to a determination by the parties to the effect that arbitration should not be denied or postponed upon the mere cry of fraud in the inducement, as this would permit the frustration of the very purposes sought to be achieved by the agreement to arbitrate, i.e. a speedy and relatively inexpensive trial before commercial specialists." (Id., at p. 410, emphasis added.) It would be different, the court suggested, if there were a claim, supported by a showing of substance, that the arbitration clause was itself induced by fraud, but "[i]t is not enough that there is substance to the charge that the contract to deliver merchandise of a certain quality was induced by fraud." (Id., at p. 411.) Since the contract language was broad enough to include a claim of fraud in the inducement of the contract itself, that was a question for the arbitrator to determine.

In Prima Paint v. Flood & Conklin (1967) 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 the United States Supreme Court confronted the Devonshire issue in the context of a consulting agreement in which Flood & Conklin agreed to perform certain services for and not to compete with Prima Paint. The agreement contained an arbitration clause providing that " '[a]ny controversy or claim arising out of or relating to this Agreement ... shall be settled by arbitration in the City of New York, ...' " (388 U.S. at p. 398, 87 S.Ct. at p. 1803.) Flood & Conklin, contending that Prima had failed to make a payment under the contract, sent Prima a notice requesting arbitration. Prima responded with an action in federal district court to rescind the entire consulting agreement on the ground of fraud. The fraud allegedly consisted of Flood & Conklin's misrepresentation at the time the contract was made, that it was solvent and able to perform the agreement, when in fact it was completely insolvent. Flood & Conklin moved to stay Prima's lawsuit pending arbitration of the fraud issue. The lower courts, relying on the Second Circuit's decision in Devonshire, held that the action should be stayed to permit arbitration of the issue.

The Supreme Court noted it was the view of the Second Circuit in Devonshire and other cases that "except where the parties otherwise intend --arbitration clauses are 'separable' from the contracts in which they are embedded, and that where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by...