New Linen Supply v. Eastern Environmental Controls, Inc.

• Decision Date: 11 September 1979
• Citation: 96 Cal.App.3d 810,158 Cal.Rptr. 251
• Court: California Court of Appeals Court of Appeals
• Parties: EASTERN ENVIRONMENTAL CONTROLS, INC., et al., Defendants and Appellants, v. NEW LINEN SUPPLY, Plaintiff and Respondent. EASTERN ENVIRONMENTAL CONTROLS, INC., et al., Petitioners, v. SUPERIOR COURT, etc., COUNTY OF SAN DIEGO, Respondent, NEW LINEN SUPPLY, etc., et al., Real Parties in Interest. Civ. 18628, Civ. 18630.

Page 251

158 Cal.Rptr. 251

96 Cal.App.3d 810

EASTERN ENVIRONMENTAL CONTROLS, INC., et al., Defendants and Appellants, v. NEW LINEN SUPPLY, Plaintiff and Respondent.

EASTERN ENVIRONMENTAL CONTROLS, INC., et al., Petitioners, v. SUPERIOR COURT, etc., COUNTY OF SAN DIEGO, Respondent, NEW LINEN SUPPLY, etc., et al., Real Parties in Interest.

Civ. 18628, Civ. 18630.

Court of Appeal, Fourth District, Division 1, California.

Sept. 11, 1979.

Procopio, Cory, Hargreaves & Savitch, John C. Malugen and Richard H. Benes, San Diego, for petitioners and defendants and appellants.

Klitgaard & Jones, Jerry M. Cannon and Robert J. Klitgaard, San Diego, for plaintiff and respondent and real parties in interest.

No appearance for respondent Superior Court, Etc., County of San Diego.

WIENER, Associate Justice.

Plaintiff New Linen Supply, a California corporation doing business as Western Environmental Engineering (Western) filed an action for unfair competition against defendants George H. Lerg II (Lerg), a former officer and director of Western, Eastern Environmental Controls, Inc., a Maryland corporation (EEC) and its president, Daniel C. Pavon (Pavon), involving the alleged wrongful termination of plaintiff's distributorship of EEC's products. EEC moved to stay the proceedings and petitioned the court for an order compelling arbitration. The motion and petition were denied on the ground that petitioner had unreasonably delayed its request for arbitration and, therefore, waived its right to arbitrate. EEC and Pavon appeal the order denying arbitration and dismissing the proceedings. We reverse with instructions to the trial court to order arbitration between Western and defendants EEC and Pavon in accordance with the rules of the American Arbitration Association (AAA), ¹ the place of the arbitration to be determined by the trial court after an evidentiary hearing restricted to the issue of whether it is unreasonable for the arbitration to occur in Chestertown, Maryland.

Facts

On June 27, 1977, EEC and Western entered into a written "Distributor Agreement," in which Western was appointed as exclusive distributor in California for sewage treatment plants manufactured by EEC. Similar agreements were executed for Washington, Oregon, Nevada and Mexico. Each agreement required Western to actively promote the sale and distribution of EEC plants in the described territory with the right to appoint subdistributors, dealers and salesmen to sell sewage treatment plants on its behalf provided Western's performance met the standards established by EEC. Paragraph 16 of the agreement provided:

"In the event of a dispute, the parties agree to abide by the rules of the American Arbitration Association, and the jurisdiction for said arbitration shall be Chestertown, Maryland. All legal fees, experts and expenses related to the Arbitration shall be paid by the party losing said Arbitration."

The business dealings between the parties which presumably had been mutually satisfactory from approximately June of 1974 deteriorated rapidly after the contracts were signed. Their exchange of letters is reflective of their respective attitudes. In its letter of August 24, 1977, EEC made clear that unless Western took care of its overdue bills within 30 days, EEC would "have to consider our contract null and void" and on October 8, 1977, EEC wrote Western it was ". . . obliged to cancel the present contracts with (you) . . ." although it was ". . . ready at once to negotiate a new contract with you covering a dealership in part of California on the condition that you bring Western up to date on payments currently owed . . . ." Western responded by acknowledging EEC's letter of cancellation and requested the matter of distributorship agreements be submitted to the AAA. No formal action as required by AAA rules was undertaken by either party and they continued to do business with each other. On December 16, 1977, EEC wrote to Western and stated: "We understand your continuing to do business with us to be a withdrawal of your request for arbitration, we look forward to working toward a new contract." Events between the parties which may have occurred after December 16, 1977, and before EEC was served with the complaint for unfair competition on July 31, 1978, are not part of the record. EEC filed its petition to compel arbitration and its motion to stay proceedings on October 13, 1978.

EEC Did Not Waive Its Right to Arbitration

". . . (A)rbitration has become an accepted and favored method of resolving disputes (citations), praised by the courts as an expeditious and economical method of relieving overburdened civil calendars (citation)." (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 706-707, 131 Cal.Rptr. 882, 886, 552 P.2d 1178, 1182.) The strong public policy in favor of arbitration and its relationship to the courts has most recently been expressed by the Legislature in establishing judicial arbitration to ". . . provide parties with a simplified and economical procedure for obtaining prompt and equitable resolution of their disputes." (Code Civ.Proc., § 1141.10, subd. (b)(1), added by Stats. 1978, ch. 743, p. ----, § 2, operative July 1, 1979; Code Civ.Proc., § 1141.10 et seq.) "Because arbitration is a highly favored means of settling such disputes, the courts have been admonished to 'closely scrutinize any allegation of waiver of such favored right' (citation), and to 'indulge every intendment to give effect to such proceedings' (Citations.)" (Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 189, 151 Cal.Rptr. 837, 842, 588 P.2d 1261, 1266.)

Waiver of a contractual right to arbitration is ordinarily a question of fact and determination of this question, if supported by substantial evidence, is binding on an appellate court. (Sawday v. Vista Irrigation Dist. (1966) 64 Cal.2d 833, 836, 52 Cal.Rptr. 1, 415 P.2d 816.) There are no findings of fact or conclusions of law in this case. (See Code Civ.Proc., § 1291; cf. Wheeler v. St. Joseph Hospital (1976) 63 Cal.App.3d 345, 355, fn. 7, 133 Cal.Rptr. 775.) We examine the entire record to determine whether there is any evidence to support the necessary finding that the conduct by EEC was indicative of its intent to voluntarily give up its right to arbitration and that no other reasonable explanation of its conduct is possible. (Central Bank v. Superior Court (1978) 81 Cal.App.3d 592, 600-601, 146 Cal.Rptr. 503.)

July 1977, when the parties first had difficulties, may not be used as the starting point to compute the delay for there is nothing in the record to support a finding contrary to that contained in the letters that EEC was hopeful that a new contract could be worked out and that the continuance of the business relationship was indicative of Western's withdrawal of its request for arbitration. At no time did Western take the necessary steps required under AAA rules to start arbitration proceedings. It was certainly reasonable for all parties to postpone formal dispute resolution mechanisms while they were attempting to amicably and informally settle their problems. The period from July 31, 1978, when EEC was served, to mid-October when EEC filed its motion to stay proceedings, is also not unreasonably long to result in a waiver of arbitration in the absence of other facts which would evidence prejudice to Western. (Doers v. Golden Gate Bridge etc. Dist., supra, 23 Cal.3d at p. 188, fn. 3, 151 Cal.Rptr. 837, 588 P.2d 1261.) The record is devoid of any evidence to support either an express or implied finding of prejudice.

The term "waiver," however, has also been used to describe the loss of the right to assert the arbitration provisions of a contract following a substantive violation or repudiation of the contract itself. (See Annot., Breach or Repudiation of Contract As Affecting Right to Enforce Arbitration Clause Therein, 32 A.L.R.3d 377.) It is clear from EEC's letter of October 8, 1977, and its subsequent correspondence, that it intended to terminate all written contracts with Western. Thus, the issue presented is whether once having declared the contracts terminated because of the alleged breach by Western, may it now invoke a provision within the contract requiring arbitration. This specific question was addressed in Riess v. Murchison (9th Cir. 1967) 384 F.2d 727, 733, in which the court was "faced with the difficult task of discerning the position that would presently be taken by the California courts in regard to appellants' allegations of repudiation." The Riess court, after a thorough discussion of the historical development of precedent, the applicable California authorities, including Hanes v. Coffee (1931) 212 Cal. 777, 300 P. 963, and the strong public policy favoring arbitration in California, concluded the California courts would resolve the question by adopting the rule that one who repudiates a contract containing an arbitration clause may nevertheless, under California law, claim the benefit of that clause by requiring arbitration. (Reiss v. Murchison, supra, 384 F.2d at p. 735.) The discussion in Reiss is persuasive and we agree with its conclusion, particularly in light of later cases (Madden v. Kaiser Foundation Hospitals, supra, 17 Cal.3d 699, 131 Cal.Rptr. 882, 552 P.2d 1178; Doers v. Golden Gate Bridge etc. Dist., supra, 23 Cal.3d 180, 151 Cal.Rptr. 837, 588 P.2d 1261), in which our Supreme Court has again emphasized the significance and social utility of arbitration as a method of dispute resolution. It is tempting, and certainly human, to respond negatively to a party who, after terminating the contract in a unilateral fashion, perhaps even wrongfully, then elects to seek benefits under it. Although the sincerity of that party who now wishes arbitration, ostensibly to obtain the efficient, inexpensive and expeditious resolution of the controversy, may be questioned, the tactics involved may not be used as the rationale to deny...