“Just ‘Cause I Said It, Don’t Mean That I Meant It.” Not When it Comes to Construction Contracts

“Just ’cause I said it, don’t mean that I meant it.  People say crazy things.” – Adele, Rumour Has It.

When You Say Yes bookMaybe in Adele’s world, but not in the world of construction contracts.

In HM DG, Inc. v. Amini, Case No. B242540 (September 20, 2013), general contractor HM DG, Inc. (“HMDG”) sued homeowners Farzad Etemad Amini and Pouneh Beizai in the Superior Court after they weren’t paid.

One problem.

The construction contract had an arbitration clause:

In the event a dispute shall arise between the parties to this contract, it is hereby agreed that the dispute shall be referred to [one of the following choices: (1) designate a specific USA&M office or alternate service by agreement of the parties; (2) provide a method of selecting the arbitrator and suits of the hearing, such as `from the county wherein the manufacturing plant is located’; or for multi-jurisdictional disputes (3) insert `a USA&M office to be designated by USA&M National Headquarters’] for arbitration in accordance with the applicable United States Arbitration and Mediation Rules of Arbitration. The arbitrator’s decision shall be final and legally binding and judgment may be entered thereon.

Each party shall be responsible for its share of the arbitration fees in accordance with the applicable Rules of Arbitration. In the event a party fails to proceed with arbitration, unsuccessfully challenges the arbitrator’s award, or fails to comply with the arbitrator’s award, the other party is entitled to costs of suit, including a reasonable attorney’s fee for having to compel arbitration or defend or enforce the award.

After HMDG filed suit, the homeowners demanded that HMDG arbitrate rather than litigate its dispute pursuant to the arbitration provision.  HMDG refused, and the homeowners petitioned the court to compel HMDG to arbitrate.

But, at the hearing, the trial court denied the homeowner’s petition, finding that the arbitration clause was invalid because it failed to specify who the parties were to arbitrate before or how an arbitrator or arbitrators were to be selected.

The Court of Appeals for the Second District, however, reversed. While acknowledging that the arbitration provision failed to specify who the parties were to arbitrate before or how an arbitrator or arbitrators were to be selected, the Court of Appeals noted that Code of Civil Procedure section 1281.6 addresses such situations.

Section 1281.6, explained the Court, provides that:

If the arbitration agreement provides a method of appointing an arbitrator, that method shall be followed. If the arbitration agreement does not provide a method for appointing the arbitrator, the parties to the agreement who seek arbitration against whom arbitration is sought may agree on a method of appointing an arbitrator and that method shall be followed.  In the absence of an agreed method, or of the agreed method fails or for any reason cannot be followed, or when an arbitrator appointed fails to act and his or successor has not been appointed, the court, on petition of a party to the arbitration agreement, shall appoint the arbitrator. (emphasis added)

And, because Section 1281.6 provides a procedure in cases in which an arbitration agreement does not specify who the parties are to arbitrate before or how an arbitrator or arbitrators are to be selected, the arbitration provision was not invalid and the trial court should have, as provided under Section 1281.6,  appointed an arbitrator.

Although this case was clear cut, courts in general are reluctant to step in and change dispute resolution procedures agreed to by parties, both because they don’t want to disturb the agreement of the parties, but as well (I think) due to a sense of judicial deference to other dispute resolution bodies.

2 Responses to ““Just ‘Cause I Said It, Don’t Mean That I Meant It.” Not When it Comes to Construction Contracts”

  1. Dave Ross

    I was recently involved in a case between a business owner and a GC contracting out of proper license (individual was license holder, but contracting as a corporation). Owner sought to try the matter in Santa Clara Co. Superior Court, where the license issue could be explored. But the (possibly invalid) contract contained an arbitration clause, which the judge upheld and ordered the parties out of her court to arbitration.

    This may be a beneficial (if unintended) side-effect of an arbitration clause for unlicensed contractors! I wonder how an appeals court would have ruled on this conflict between competing public policies – promoting ADR and dealing firmly with unlicensed contracting?

    (BTW, the parties arbitrated, the GC lost and filed BK before the award could be converted to a judgment).

    Reply
    • Garret Murai

      Thanks Dave. There was an interesting case decided a couple of years ago, Templo Calvario Spanish Assembly of God v. Gardner Construction Corporation, 198 Cal.App.4th 509 (2011), in which the court analyzed the intersection between unlicensed contractors and the validity of the agreements they enter into, including agreements which include an arbitration clause.

      In that case, the construction contract included an arbitration provision and the parties proceeded to arbitration. During arbitration, the arbitrator found that the contractor was unlicensed and ordered the contractor disgorge all profits made on the project pursuant to Business and Professions Code section 7031. The unlicensed contractor then challenged the award, arguing that because it was not a licensed contractor, it could not enter into a legally binding construction contract, and therefore the arbitration provision contained in the contract and the resulting arbitration award were both invalid.

      The Court of Appeals basically said nope, it wasn’t going to allow the unlicensed contractor to use its own malfeasance as a shield against liability, and held that the unlicensed contractor could enter into a legally binding contract.

      Reply

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