Summary
interpreting a broad arbitration clause to cover any legal liabilities between the parties that “have their roots in the relationship between the parties which was created by the contract.”
Summary of this case from Ambler v. BT Ams., Inc.Opinion
NOT TO BE PUBLISHED
Appeal from an order of the Superior Court No. 30-2008-00111291 of Orange County, William M. Monroe, Judge. Reversed with directions.
Sedgwick, Detert, Moran & Arnold and Frederick B. Hayes for Defendant and Appellant.
Marshack Hays and D. Edward Hays for Plaintiff and Respondent.
OPINION
ARONSON, J.
Here we find the arbitration clause in an international commercial dispute, dealing with “any” dispute “arising out of” or “relating to” a plaintiff’s collections claim in a bankruptcy proceeding, encompasses all aspects of the underlying dispute between the parties. Because this broad clause covers the controversy in question, we reverse the trial court’s denial of the defendant’s motion to compel arbitration.
I
Factual and Procedural Background
The following allegations and facts are taken from the complaint and the evidence submitted on the motion to compel arbitration.
A. The Underlying Commercial Transaction
Plaintiff and respondent Shanghai Freeman Lifescience Company (Shanghai), a Chinese corporation, had an ongoing relationship to sell glucosamine sulfates, a product used to treat osteoarthritis, to American Ingredients, Inc., a nutritional supplements company based in Anaheim.
In October 2000, Shanghai sold several metric tons of glucosamine sulfates to American Ingredients for $172,500. American Ingredients agreed to pay 50 percent down - or $86,250 as well as $57,500 for an outstanding invoice for a previous shipment.
Shanghai shipped the new glucosamine order, and American Ingredients made the initial payment to Shanghai of $143,750. American Ingredients, however, failed to pay the $86,250 balance. Instead, in January 2001, American Ingredients and its corporate parent, Global Health Sciences, Inc., filed for bankruptcy. In January 2003, the chapter 11 trustee filed an adversary complaint against Shanghai to recover the $143,750 in payments as preferential transfers on the grounds they were made during the 90-day period before bankruptcy. (11 U.S.C. §§ 547, 550.)
B. Shanghai’s Collection Contract with ABC
In September 2003, Shanghai entered into an international commercial contract with defendant and appellant ABC-Amega, Inc., (ABC) to collect the outstanding debt. The two-page contract was written in both English and Chinese “for the purpose of collection efforts.” ABC was to be paid a flat “placement fee” as well as a 19 percent commission for ABC’s “successful amicable collection efforts....”
Paragraph 4 of the contract required ABC to secure Shanghai’s prior approval “[s]hould litigation or arbitration be necessary to collect the debts....” If Shanghai authorized litigation to proceed, the contract increased ABC’s commission to 29 percent “upon collection,” in addition to court costs. The contract further provided that “[a]ttorneys’ fees for defense of a counterclaim may be subject to separate compensation arrangements.” (Italics added.) Paragraph 13 of the contract required ABC to “protect creditor’s interests” and to report to Shanghai “any development involved in collecting the account in a timely manner.”
Finally, paragraph 14 of the contract contained a broad form arbitration clause. Paragraph 14 provided: “Any controversy or claim arising out of, or relating to, this contract shall be determined by arbitration in accordance with the International Arbitration Rules of the American Arbitration Association. The place of arbitration shall be Erie County New York, the number of arbitrators shall be one, the language of the arbitration shall be English, and both parties agree to waive their right to a hearing; that is, both parties agree that the arbitration shall be done on the face of the documentary evidence and written briefs provided to the arbitrator by the parties, thus permitting the arbitrator to render an award as a result of a summary procedure. The losing party shall bear all cost, fees, expenses relating to said arbitration, including but not limited to attorneys’ fees.”
C. ABC’s Collection Efforts
According to ABC, Shanghai authorized ABC to retain an attorney to represent Shanghai in the bankruptcy proceeding and to defend Shanghai in the trustee’s efforts to secure reimbursement.
In January 2004, David Skinner (Skinner), an attorney, entered an appearance on Shanghai’s behalf in the bankruptcy proceeding. Skinner did not raise any objections pertaining to the bankruptcy court’s lack of personal jurisdiction over Shanghai, and did not raise any objections pertaining to the trustee’s alleged failure to “properly” serve Shanghai with a summons and complaint pursuant to the terms of the Hague Convention.
Skinner allegedly did not file any opposition to the trustee’s motion for summary judgment in the bankruptcy proceeding. On August 31. 2006, judgment was entered in favor of the trustee and against Shanghai in the amount of $143,750.
D. Shanghai’s Lawsuit Against ABC
In August 2008, Shanghai filed a complaint against ABC for negligence, breach of contract, and breach of fiduciary duty. Shanghai also sued Skinner for legal malpractice.
ABC filed a motion to compel arbitration based on paragraph 14 of the September 2003 contract and under California international commercial arbitration law. (Code Civ. Proc., § 1297.11.) ABC included a declaration of David Greenberg (Greenberg), its assistant vice-president, providing a chronological overview of the parties’ relationship and authenticating the written contract, including the broad form arbitration provision in paragraph 14.
All statutory references are to the Code of Civil Procedure, unless otherwise noted.
Shanghai opposed the motion to compel arbitration by arguing the arbitration provision in the September 2003 contract did not cover liability arising from the events alleged in the complaint: “ABC ignores the fact that the Contract pertains only to ABC’s retention as a collection agency for funds owed to Plaintiff by a third party. On its face, the Contract has no application to ABC’s separate services to Plaintiff to assist in the defense of a preference action filed against Shanghai in the bankruptcy court.” (Italics & boldface omitted.) Shanghai did not attach any opposing declarations.
Shanghai also opposed arbitration because Skinner was not a party to the contract and could not be compelled to arbitrate: “Plaintiff is not required to prosecute its claims in two separate forums and risk obtaining potentially inconsistent rulings on common issues of law or fact in contravention of CCP § 12181.2(c).”
The trial court heard and denied the motion to compel. According to the court, the September 2003 contract “doesn’t encompass a contractual duty on the part of ABC to provide [Shanghai] with advice regarding the need for legal counsel to defend [Shanghai] in an adversarial proceeding in bankruptcy court that appears to have been an independent act taken on by ABC.... [¶]... [¶] It appears that ABC’s role in assisting [Shanghai] in the defense of the bankruptcy preference action was outside the terms and scope of the original collection contract. Thus, the arbitration clause within the [September 2003] contract is not applicable to ABC’s actions in assisting with [Shanghai’s] defense in the bankruptcy matter....”
ABC has appealed from the order denying its motion to compel arbitration.
II
Discussion
This appeal hinges upon the interpretation of the arbitration clause in the September 2003 contract between Shanghai and ABC, which contained a broad arbitration provision under which the parties agreed to arbitrate “[a]ny controversy or claim arising out of, or relating to” the contract. ABC contends that the arbitration clause encompasses the underlying dispute. Shanghai contends that it does not because the contract “related only to efforts by ABC to collect debts owed to Shanghai.”
As we explain below, Shanghai, as the party opposing arbitration, has failed to meet its burden to show that the broad arbitration clause is not susceptible to an interpretation covering the instant dispute.
A. The Broad Arbitration Clause in Paragraph 14 of the September 2003 Contract Requires the Parties to Arbitrate Any and All Issues of Controversy Arising Out of the Contract
The Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) governs arbitration agreements, like the arbitration clause at issue here, affecting interstate and foreign commerce. (Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 380 (Cronus).)
Under the FAA, courts apply state contract rules to determine whether there is an agreement to arbitrate. (Cronus, supra, 35 Cal.4th at p. 384.) Here, we look to the language of the arbitration clause in paragraph 14 to determine whether there is an agreement to arbitrate the underlying dispute. Where there is no conflicting extrinsic language regarding the terms of the arbitration clause or factual dispute about its language, we conduct a de novo review. We identify the nature of the particular controversy in the litigation and determine whether it falls within the scope of the contractual arbitration clause. (Buckhorn v. St. Jude Heritage Medical Group (2004) 121 Cal.App.4th 1401, 1406 (Buckhorn).)
Given the strong federal and state public policy in favor of arbitration, we resolve any reasonable doubts about the meaning of the arbitration clause in favor of arbitration. (Cronus, supra, 35 Cal.4th at p. 384.) Shanghai, as the party opposing the arbitration clause, has the burden to demonstrate the arbitration clause in the September 2003 contract cannot be reasonably interpreted to require arbitration of the controversy in question. (Buckhorn, supra, 121 Cal.App.4th at p. 1406.) “In other words, ‘an order to arbitrate a particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.’ [Citation.]” (Titolo v. Cano (2007) 157 Cal.App.4th 310, 316-317 (Titolo); see also Coast Plaza Doctors Hospital v. Blue Cross of California (2000) 83 Cal.App.4th 677, 684.)
Arbitration properly is denied for claims that parties did not agree to arbitrate. “Thus, the right to compel arbitration depends upon the contract between the parties, [citations], and a party can be compelled to submit a dispute to arbitration only where he has agreed in writing to do so.” (Marsch v. Williams (1994) 23 Cal.App.4th 250, 255 (Marsch). In Marsch, the appellate court refused to compel arbitration where the parties execute two successive agreements, only one of which contained an arbitration clause. The separate contractual relationships at issue in Marsch involved separate enterprises and separate commercial risks, and were not closely connected in purpose. “Where... the parties have separate contractual relationships, which involve separate enterprises and most importantly separate commercial risks, an arbitration clause which governs one contractual relationship cannot be imposed in the other relationship without undermining the parties’ reasonable expectations.” (Id. at p. 256.)
The arbitration clause in paragraph 14 of the September 2003 contract is characterized as a “broad” arbitration clause. “[T]he decision as to whether a contractual arbitration clause covers a particular dispute rests substantially on whether the clause in question is ‘broad’ or ‘narrow.’ [Citations.] A ‘broad’ clause includes those using language such as ‘any claim arising from or related to this agreement’ [citation]....” (Bono v. David (2007) 147 Cal.App.4th 1055, 1067, original italics (Bono).)
Paragraph 14 adopts nearly verbatim language in providing for the arbitration of “[a]ny controversy or claim arising out of, or relating to, this contract....” Without question, it is a standard broad form clause. (See, e.g., Titolo, supra, 157 Cal.App.4th at p. 317 [“‘any dispute as to medical malpractice’”]; EFund Capital Partners v. Pless (2007) 150 Cal.App.4th 1311, 1317 [“‘Any dispute or other disagreement arising from or out of this Consulting Agreement’”]; Larkin v. Williams, Woolley, Cogswell, Nakazawa & Russell (1999) 76 Cal.App.4th 227, 229 [“Any controversy or claim arising out of or relating to any provision of this Agreement or the breach thereof shall be settled by arbitration”]; Berman v. Dean Witter & Co., Inc. (1975) 44 Cal.App.3d 999, 1003 (Berman) [“‘any controversy... arising out of or relating to this contract’”]; cf. Simula, Inc. v. Autoliv, Inc. (9th Cir. 1999) 175 F.3d 716, 720, original italics (Simula) [“All disputes arising in connection with this Agreement”].)
We interpret the broad arbitration clause in paragraph 14 of the 2003 contract to cover any legal liabilities between Shanghai and ABC that “have their roots in the relationship between the parties which was created by the contract. [Citations.]” (Berman, supra,44 Cal.App.3d at p. 1003; see also Simula, supra, 175 F.3d at p. 721 [the broad form language “reaches every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract”].)
B. The Parties Did Not Enter into Two Separate and Unrelated Contracts
Shanghai does not challenge this interpretation of the broad arbitration clause in the September 2003 contract. Rather Shanghai contends that the September 2003 contract has no application to the present dispute because it was written and was “specifically limited to efforts to collect a specific debt.” (Italics added.) Shanghai further contends that the parties then entered into a “second contract, unrelated to [the September 2003] contract.” Shanghai asserts that this new contract, which Shanghai now calls the “Defense Agreement,” was created in January 2004, “to defend claims against Shanghai.” (Original italics.) Shanghai urges us to defer to the trial court’s “factual determination that the allegations in the subject complaint were unrelated to the [September 2003] contract....”
Shanghai’s “two contract” theory suffers from several fatal flaws. First, Shanghai’s opposition to the motion to compel says nothing about a second contract. Shanghai attached no declaration to its opposition to authenticate the terms or conditions of such a second contract. Instead, Shanghai’s opposition focused solely upon the meaning of the terms in the September 2003 contract, as authenticated in the declaration attached to ABC’s motion to compel. If there is a factual dispute lurking in the record on this appeal, it is very well disguised, and we have been unable to find it.
By contrast, Shanghai’s complaint specifically alleged that Shanghai entered into a written contract with ABC “[i]n or about January 2004” to “assist in the defense of the Preference Action, including without limitation hiring competent legal counsel to represent Plaintiff in the Bankruptcy Court and to act as its debt collection agent.” Later in the same complaint, Shanghai inconsistently alleged that this January 2004 contract was an oral contract. But Shanghai never referred to either of these allegations in its opposition to the motion to compel.
Second, even had Shanghai met its burden of proof to establish the existence of a second, oral contract, Shanghai has failed to establish that such a subsequent agreement involved a separate, independent commercial proceeding. Unlike in Marsch, any such successive contractual relationships are interdependent and so closely connected in purpose that “no unreasonable intrusion on the parties’ expectations occurs when all their disputes are subjected to an arbitration provision which appears in one of several interdependent documents.” (Marsch, supra, 23 Cal.App.4th at p. 256, citing Pioneer Take Out Corp. v. Bhavsar (1989) 209 Cal.App.3d 1353, 1355.)
Far from being “specifically limited” to affirmative actions by ABC to collect on Shanghai’s debt, the September 2003 contract contemplated the possibility of a counterclaim by the debtor in any legal action, and called for “separate compensation arrangements” to cover attorney fees incurred on Shanghai’s behalf in such an eventuality. The September 2003 contract required ABC to “protect creditor’s interests,” and to report to Shanghai “any development involved in collecting the account in a timely manner.”
Indeed, the Greenberg declaration in support of ABC’s motion to compel expressly averred that ABC retained an attorney to defend Shanghai pursuant to paragraph 1 of the September 2003 contract, authorizing ABC to select an attorney “to represent us in this matter.” Greenberg declared, “Consistent with Shanghai Freeman’s instruction and provisions in their written agreement (See, e.g., Ex. A at [¶] 1), ABC selected an attorney, David Skinner, with whom it had previous dealings, to defend Shanghai Freeman in the bankruptcy trustee’s adversary proceeding.” (Italics added.)
Shanghai filed no counter declarations to refute ABC’s assertion it retained Skinner pursuant to the September 2003 contract. And Shanghai’s efforts to severely restrict the arbitration clause to affirmative recoveries from the debtors rather than defense of the preference action run afoul of the rules for interpreting broad arbitration clauses.
In Buckhorn, supra, 121 Cal.App.4th 1401, we rejected a plaintiff’s attempt to impose a temporal standard between events occurring while an arbitration clause was in effect and events occurring at a later date. In Buckhorn, the plaintiff, a doctor, signed an employment contract with a medical group providing for arbitration “‘[i]n the event that a dispute arises between the parties concerning the enforcement or the interpretation of any provisions of this Agreement....’” (Id. at p. 1407.) The plaintiff argued the arbitration clause did not apply to his additional disputes against the medical group for defamation based on events occurring after his termination. We disagreed, holding that the plaintiff’s temporal test “misconstrues the applicable standard. The issue turns on whether the tort claims are ‘rooted’ in the contractual relationship between the parties, not when they occurred. For example, [the plaintiff]’s claims for intentional and negligent interference with prospective economic advantage were based on an expectation of future income from his patients. But [the plaintiff]’s patients consulted him in his capacity as an employee of the Medical Group and therefore the employment agreement would inform the extent of any economic interest. Because [the plaintiff] failed to demonstrate his tort claims were ‘wholly independent’ of the employment agreement, and any doubts must be resolved in favor of arbitration [citation], we conclude all of [plaintiff]’s claims must be submitted to arbitration.” (Id. at pp. 1407-1408.)
Here too, as in Buckhorn, we construe ABC’s efforts to retain Skinner to represent Shanghai in the bankruptcy proceeding as “rooted in” and arising from the September 2003 contract. Because Shanghai has failed to demonstrate its claims arising from Skinner’s failure to oppose the trustee’s motion for summary judgment in the bankruptcy proceeding were wholly independent of the September 2003 contract, and because any doubts must be resolved in favor of arbitration, we conclude all Shanghai’s claims against ABC must be submitted to arbitration. (See Buckhorn, supra, 121 Cal.App.4th at pp. 1407-1408.)
C. Federal Law and California Law Enforce International Commercial Arbitration Clauses Despite the Presence of Interrelated Third Parties Who Are Not Subject to the Arbitration Agreement
As an alternative reason to avoid arbitration, Shanghai argues that there is a “strong possibility” of inconsistent rulings should its lawsuit be fractured into two separate parts: the first, an arbitration in New York on its breach of contract claims against ABC, and the second, a legal malpractice action in California on its claims against Skinner, the attorney whom ABC retained to represent Shanghai in the bankruptcy proceeding. According to Shanghai, the “risk of such inconsistent rulings is an independent basis for refusing to compel arbitration.” “The only practical and sensible way to avoid duplicative proceedings created by the presence of David Skinner as a party to this case is to eliminate the possibility of conflicting rulings in different forums on such common and central issues.”
Shanghai relies on section 1281.2, subdivision (c), which gives trial courts the discretion to stay arbitration proceedings if there are common issues of law or fact involving third parties who did not sign the arbitration agreement. The statute is “an evenhanded law that allows the trial court to stay arbitration proceedings while the concurrent lawsuit proceeds or stay the lawsuit while arbitration proceeds to avoid conflicting rulings on common issues of fact and law amongst interrelated parties.” (Cronus, supra, 35 Cal.4th at p. 393, original italics.)
Section 1281.2, subdivision (c), provides in relevant part: “If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies.”
There are several deficiencies with Shanghai’s emphasis on section 1281.2, subdivision (c). First, the statute is discretionary, not mandatory. The trial court never purported to exercise this discretion. It denied arbitration based on its legal misinterpretation of paragraph 14 in the September 2003 contract between Shanghai and ABC, not because of its concern over conflicting rulings.
Second, the FAA contains no analogous provision to section 1281.2, subdivision (c). “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.’ [Citation.] However, the United States Supreme Court has expressly held that the FAA does not preempt the California statute, section 1281.2, subdivision (c)..., ‘where the parties have agreed that their arbitration agreement will be governed by the law of California.’ [Citation.]... 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.” The FAA does not preempt the California statute where the parties have agreed that California law will govern their arbitration agreement. (Best Interiors, Inc. v. Millie and Severson, Inc. (2008) 161 Cal.App.4th 1320, 1325-1326; see also Cronus, supra, 35 Cal.4th at p. 380.)
In this case, the parties’ contract does not contain a California choice-of-law clause. Moreover, even if it did, a special body of California law governs the arbitration of international commercial disputes. In 1988, the California Legislature adopted title 9.3 of the Code of Civil Procedure (§ 1297.11 et. seq.) to facilitate agreements to arbitrate international commercial disputes in California. (Stats. 1988, ch. 23, § 1, eff. Mar. 7, 1988.) Title 9.3 supersedes the discretionary arbitration stay in section 1281.2 upon which Shanghai relies. Section 1297.17 provides: “[T]his title supersedes Section 1280 to 1284.2, inclusive, with respect to international commercial arbitration and conciliation.” And section 1297.81 empowers any party to an international commercial arbitration agreement to apply for an order to compel arbitration.
Section 1297.81 provides as follows: “When a party to an international commercial arbitration agreement as defined in this title commences judicial proceedings seeking relief with respect to a matter covered by the agreement to arbitrate, any other party to the agreement may apply to the superior court for an order to stay the proceedings and to compel arbitration.”
Shanghai responds that title 9.3 does not apply to the September 2003 contract because the place of arbitration is in New York, not California. According to Shanghai, title 9.3 “only applies to California arbitrations, because California statutes and California courts have no particular interest in promoting or regulating arbitrations to be held in other states.” Shanghai, relying on section 1297.12, says title 9.3 “‘is designed to encourage parties to international commercial dealings to resolve their disputes in California....’” (Original italics.) But if this is true and California has “no particular interest” in this arbitration, then the general provisions of the FAA should apply, where there is no discretionary stay.
Section 1297.12 provides as follows: “This title, except Article 2 (commencing with Section 1297.81) of Chapter 2 and Article 3 (commencing with Section 1297.91) of Chapter 2, applies only if the place of arbitration or conciliation is in the State of California.”
III
Disposition
The order denying the motion to compel arbitration is reversed with directions to grant the petition compelling arbitration under the September 2003 contract. ABC is entitled to costs on appeal.
WE CONCUR: RYLAARSDAM, ACTING P. J., O’LEARY, J.