Arbitration,  California Procedure

A Dilemma for Some Defendants Who Seek to Arbitrate

It’s a long-held rule in California that a defendant sued on a contract may recover attorney fees pursuant to a provision in the contract even if the defendant prevails on a theory that he was not a party to the contract or that the contract is nonexistent, inapplicable, invalid or unenforceable. The rule exists in order to further the purpose of Civil Code section 1717, which is to make unilateral fee provisions reciprocal. If a defendant could not recover fees after successfully defending on these grounds, then the ability to recover fees would be limited to a prevailing plaintiff, which would frustrate the the public policy of mutuality underlying the statute.

Consider now whether a similar rule should apply to arbitration provisions. Public policy in favor of arbitration appears evident in the scheme for compelling arbitration (Code Civ. Proc., §§ 1281 ff.) and in the fact that the legislature made an order denying a petition to compel arbitration appealable. (Code Civ. Proc., §1294, subd. (a).) Should a defendant be able to compel arbitration pursuant to a contractual arbitration provision in a contract alleged by plaintiff even if the defendant denies the existence of that contract?

The court of appeal says “no” in Brodke v. Alphatec Spine Inc., case no G038591 (4th Dist. Mar. 20, 2008). The defendants refused to affirmatively allege the existence of an agreement to arbitrate, pointing instead only to the fact that plaintiffs alleged the existence of four contracts and that defendants would admit to them only for purposes of the arbitration petition. Not enough, says the court.

Both the plain language of the statute and the function of an arbitration petition compel the response, says the court. Code of Civil Procedure section 1282.1 requires the party petitioning to compel arbitration to allege “the existence of a written agreement to arbitrate a controversy.” The court also notes that a petition to compel arbitration is the functional equivalent of a suit in equity to compel specific performance, thus requiring affirmative allegations.

The defendants cited case law allowing a party to petition to compel arbitration while at the same time denying the validity of the agreement containing an arbitration, but the court notes that a party contesting validity does not contest the actual existence of the agreement.

The defendant also contended that being forced to acknowledge the existence of the contract would deprive it of applicable defenses. Here’s the defendant’s contention and the court’s response:

Defendants next protest that if they “concede the existence and validity of the contracts for all purposes in order to compel arbitration” they will be forced to “relinquish[] potentially valid defenses.” Their argument is unavailing. Defendants do not identify the defenses they would “relinquish” if they are forced to litigate this dispute in court. All defenses remain available to them, including their claim that the contracts do not exist.

I think the court has this mixed up. The dilemma faced by defendants in this situation is that by admitting to the existence of the contract, the admission works as a judicial estoppel that precludes them from contesting the existence of the contracts during arbitration. The court’s response does not address this. Instead, it says that the defendants do not lose the right to assert any defenses in court.

To my mind, the court did not adequately address the defendants’ dilemma — which I think is a legitimate concern.

I suppose it’s possible that given the flexibility afforded to an arbitrator, a defendant who successfully petitions to compel arbitration could try to convince the arbitrator that the admission in the petition should not estop the defendant from denying of the existence of the contract. But that is largesse from the arbitrator I would rather not have to count on.