Wagner Const. Co. v. Pacific Mechanical

• Decision Date: 21 May 2007
• Docket Number: No. S136255.,S136255.
• Citation: 58 Cal.Rptr.3d 434,41 Cal.4th 19,157 P.3d 1029
• Court: California Supreme Court
• Parties: WAGNER CONSTRUCTION COMPANY, Plaintiff and Appellant, v. PACIFIC MECHANICAL CORPORATION, Defendant and Respondent.

58 Cal.Rptr.3d 434

41 Cal.4th 19

157 P.3d 1029

WAGNER CONSTRUCTION COMPANY, Plaintiff and Appellant, v. PACIFIC MECHANICAL CORPORATION, Defendant and Respondent.

No. S136255.

Supreme Court of California.

May 21, 2007.

Marks, Golia & Finch, P. Randolph Finch, Jr., and Jason R. Thornton, San Diego, for Plaintiff and Appellant.

McInerney & Dillon, Timothy F. Winchester, William A. Barrett and Alexander Bannon, Oakland, for Defendant and Respondent.

WERDEGAR, J.

We' granted review to consider whether the lower courts properly denied a petition to compel arbitration (Code Civ, Proc, § 1281.2¹) on the ground the statute of limitations has run on the claims the parties agreed to arbitrate. We hold the lower courts erred. Where, as here, the parties have agreed to arbitrate any dispute arising out of their contract, the affirmative defense that the statute of limitations has run is for the arbitrator rather than the court to decide.

I. BACKGROUND

On November 21, 1997, defendant Pacific Mechanical Corporation (Pacific) hired plaintiff Wagner Construction Company (Wagner) as a subcontractor to install a temporary shoring system for concrete work on the Moss Avenue Pump Station in Santa Monica. The parties' written agreement provided that, "[s]hould any dispute arise out of this Subcontract, or its performance, either party may demand arbitration." The arbitration clause prescribed a method for selecting arbitrators and declared that their decision "shall be binding and conclusive...." The clause did not, however, set a time limit for demanding arbitration.

On January 11, 1999, Wagner filed a complaint alleging Pacific had failed to pay all amounts due under the subcontract. The complaint included claims against Pacific for breach of contract and the value of services rendered (a common count). In the same action, Wagner also sued Pacific and its surety, American Home Insurance Company, to enforce a contractor's payment bond. Finally, because the construction project had been a public work of improvement, Wagner asserted statutory claims based on a stop notice (Civ.Code, §§ 3103, 3179 et seq.) against Pacific, the City of Santa Monica and Montgomery Watson Americas, Inc., the city's general contractor.

Sometime thereafter, Wagner and Pacific were sued for personal injuries related to the construction project. Pacific tendered its defense to Wagner, who agreed to defend. Wagner then dismissed its complaint against Pacific without prejudice. Wagner alleges the dismissal was pursuant to an agreement with Pacific under which the statute of limitations on Wagner's claims would be tolled until the personal injury suit was resolved. Pacific denies this, and Wagner does not allege the agreement was in writing. In any event, on July 22, 2004, after the personal injury action was resolved, Wagner filed a new complaint against Pacific alleging breach of contract, a common count, and new claims for statutory penalties based on Pacific's alleged failure to pay Wagner its share of funds received from the general contractor (Pub. Contract Code, § 7107; Bus. & Prof.Code, § 7108.5).

On August 18, 2004, Wagner demanded arbitration. Two days later, anticipating Pacific's refusal, Wagner filed the instant petition to compel. Pacific opposed the petition, arguing that Wagner had waived its right to compel by failing to demand arbitration within a reasonable time. Pacific thus invoked section 1281.2, subdivision (a), which permits a court to deny a petition to compel if it determines that "[t]he right to.compel arbitration has been waived by the petitioner...." Pacific also argued that the four-year statute of limitations for actions based on written contracts (§ 337) barred Wagner's claim and that the alleged tolling agreement was ineffective because it was not in writing (§§ 360, 360.5).

The superior court denied Wagner's petition. In a tentative ruling, which the court subsequently adopted as its decision, the court determined that all of Wagner's claims were barred, either by section 337 or by section 338, subdivision (a) (the three-year statute of limitations on statutory claims). "From these statutes," the court concluded, "it is clear that the claims in this case are barred by the statute of limitations, unless Wagner has a written tolling agreement. The Court does not need to reach the argument that this Petition was not brought within a reasonable time."

On appeal, Wagner argued that the arbitrator, rather than the court, should decide whether the statute of limitations bars claims the parties have agreed to arbitrate; Pacific, in opposition, argued the superior court had properly decided the issue. While the parties thus did not argue the waiver issue (§ 1281.2, subd. (a)) and the superior court had expressly declined to decide it, the Court of Appeal nevertheless cast its decision in those terms, apparently concluding that Wagner's failure to demand arbitration before the statute of limitations had run on the underlying claims in itself justified a finding of waiver. Mistakenly attributing similar reasoning to the superior court, a divided Court of Appeal concluded that "the trial court properly ruled plaintiffs right to arbitrate was waived by the failure to seek arbitration in a timely manner. (§1281.2, subd. (a)....)" We granted Wagner's petition for review.

II. DISCUSSION

The question before us is whether a court may deny a petition to compel arbitration on the ground the statute of limitations has run on the claims the parties agreed to arbitrate. We conclude the answer is no.

Sections 1281² and 1281.2,³ which govern petitions to compel arbitration reflect a "`strong public policy in favor of arbitration as a speedy and relatively inexpensive m'eans of dispute resolution.'" (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9, 10 Cal.Rptr.2d 183, 832 P.2d 899, quoting Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 322, 197 Cal.Rptr. 581, 673 P.2d 251 (Ericksen).) When the parties to an arbitrable controversy⁴ have agreed in writing to arbitrate it and one has refused, the court, under section 1281.2, must ordinarily grant a petition to compel arbitration. Exceptions to this rule are recognized by statute⁵ and judicial decision.⁶ That the statute of limitations has run on the underlying claims, however, is not among the legislatively or judicially recognized justifications for denying a petition to compel. Instead, the assertion that the statute of limitations has run is an affirmative defense that falls naturally within the plain language of the parties' broad agreement to submit to arbitration "any dispute aris[ing] out of their contract. Even were the language less clear, "doubts concerning the scope of arbitrable issues" would still have to be "resolved in favor of arbitration." (Ericksen, supra, 35 Cal.3d 312, 323, 197 Cal. Rptr. 581, 673 P.2d 251; see also Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765.) For a court to deny a petition to compel arbitration based on its adjudication of an affirmative defense would, moreover, violate section 1281.2, subdivision (c), which declares that, "[i]f the court determines that a written agreement to arbitrate a controversy exists, an order to arbitrate such controversy may not be refused on the ground that the petitioner's contentions lack substantive merit."

The only California decision squarely addressing the question holds that a court may not deny a petition to compel arbitration on the ground that the statute of limitations has run on the claims the parties have agreed to arbitrate.⁷ In Meyer v. Carnow (1986) 185 Cal.App.3d 169, 229 Cal.Rptr. 617, the Court of Appeal reversed a superior court's order denying a patient's petition to compel a physician to arbitrate malpractice claims under the terms of an agreement for medical treatment. Rejecting the physician's argument the petition had to be denied because the statute of limitations on the malpractice claims had expired, the court explained that "reliance upon the statute of limitations applicable to medical malpractice lawsuits is misplaced. [The patient] is not seeking to invoke the jurisdiction of a judicial forum to litigate the merits of a malpractice claim but rather seeks from the superior court an order that [the physician] abide by a contract he signed." (Id., at p. 174, 229 Cal.Rptr. 617.)

Pacific would read Freeman v. State Farm Mut. Auto. Ins. Co. (1975) 14 Cal.3d 473, 121 Cal.Rptr. 477, 535 P.2d 341 (Freeman),⁸ as stating a different rule. It does not. Freeman held that a court properly denied a petition to compel arbitration under section 1281.2, subdivision (a), because the plaintiff had waived the right to arbitrate by failing to demand arbitration within the time period specifically allowed therefore by statute. (Freeman, supra, at pp. 482-187, 121 Cal.Rptr. 477, 535 P.2d 341.) The applicable statute was former section 11580.2 of the Insurance Code, which regulated the terms and enforcement of insurance policies covering damages caused by uninsured motorists. The former statute's subdivision (i) provided: "No cause of action shall accrue to the insured under any policy or endorsement provision issued pursuant to this section unless within one year from the date of the accident: [¶] (1) Suit for bodily injury has been filed against the uninsured motorist, in a court of competent jurisdiction, or [¶] (2) Agreement as to the amount due under the policy has been concluded, or [¶] (3) The insured has formally instituted arbitration proceedings." (Ins.Code, former § 11580.2, subd. (i), as amended by Stats.1974, ch. 1409, § 3, p. 3093, italics added.) The authority on which Freeman relied explains the point more clearly: "It appears to be the legislative intent that compliance with [Insurance Code, former section 11580.2, subdivision (i) ] is a condition precedent to arbitration as well as to...