Daily Blast July 12, 2017

Attached is an arbitration case issued today regarding “whether the provisions of the Federal Arbitration Act apply to a motion to compel arbitration in a California court, where the arbitration agreement is governed by the FAA (because it involves interstate commerce), but the agreement has no choice-of-law provision, and no provision stating the FAA’s procedural provisions govern the arbitration.” (Slip opn. p. 2.) The Court of Appeal, Second Appellate District, Division Eight, in Los Angeles Unified School District v. Safety National Casualty Corporation (July 12, 2017, B275597) ___ Cal.App.5th ___, held that “California procedure applies in these circumstances, and the trial court did not abuse its discretion when it denied an insurer’s motion to compel arbitration with its insured, based on the possibility of conflicting rulings in pending litigation with third parties.” (Ibid.)

Plaintiff Los Angeles Unified School District (“plaintiff”) sued 27 insurance companies that had issued policies of primary or excess liability insurance to plaintiff. Plaintiff alleged the insurers breached their insurance contracts and tortiously breached the covenant of good faith and fair dealing by refusing to provide coverage for third-party claims. One of the defendant insurers, Safety National Casualty Corporation (“defendant”), moved to compel arbitration based on the policy’s arbitration clause. (Slip opn., pp. 2-3.) The trial court found that the insurance transaction involved interstate commerce. (Id. at p. 4.) Relying on Valencia v. Smyth (2010) 185 Cal.App.4th 153, the trial court concluded “the FAA’s substantive provisions applied, but its procedural provisions did not because the contract did not contain a clause expressly incorporating those provisions.” (Id. at pp. 4-5.) Defendant appealed.

The Court of Appeal affirmed the trial court’s order denying defendant’s motion to compel arbitration. (Slip opn., p. 17.) The court determined that there was “no agreement to abide by state rules, and no agreement to abide by FAA procedural rules.” The agreement was completely silent. Thus, the court applied the principles discussed in Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 384 (Cronus). (Id. at p. 8.)  “Section 1281.2(c) does not contravene the letter or the spirit of the FAA.” (Id. at p. 12.) California procedure typically applies in California court and the FAA ordinarily does not. Thus, when the parties do not designate which procedural provisions should apply, California procedures will apply. (Ibid.)

The court further concluded that the trial court did not abuse its discretion in denying arbitration under Code of Civil Procedure section 1281.2, subdivision (c). (Slip opn. p. 12.) There was a possibility of conflicting rulings on common issues of law or fact if the arbitration agreement proceeded concurrently with plaintiff’s case against the insurers. Therefore, allowing the arbitration to proceed would risk potentially inconsistent results with the court’s ultimate findings in the instant litigation. (Slip opn., pp. 15-17.)

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