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Alleged Ambiguities Not Enough to Defeat Arbitration Provision in California Construction Contract

The recent decision in HM DG, Inc. v. Amini, 219 Cal. App.4th 1100 (2d Dist. 2013) reinforces the difficulties California contractors face in trying to avoid arbitration provisions in construction contracts.

Key Facts of the Case

In 2010, a husband and wife entered into an agreement with HMDG for a high-end remodel of their home. The agreement contained an arbitration clause, which required the parties to submit any disputes related to the agreement to arbitration. The arbitration clause did not specify a particular arbitrator and, in fact, provided multiple methods for selecting an arbitrator. All parties executed the agreement without requesting any changes to the arbitration clause.

In 2011, a dispute arose between HMDG and the homeowners. The homeowners requested substantial changes to the scope of the project, and HMDG argued that the homeowners had not made timely payments. HMDG made a proposal to resolve the dispute, and neither party formally demanded arbitration. However, the homeowners refused the proposal, and HMDG served a stop work order and recorded a mechanic's lien on the homeowners' property.

By the end of 2011, HMDG filed a complaint against the homeowners in Superior Court for, among other things, breach of contract and violation of California prompt payment statutes (Civil Code former section 3260.1). In short, HMDB sought to recover for the unpaid progress payments. In February 2012, the homeowners filed a petition to compel arbitration, based on the arbitration clause in their original agreement with HMDG. HMDG refused to negotiate a method for selecting an arbitrator.

In June 2012, the trial court denied the petition for arbitration, explaining that the defendants had not met their burden of proving that a valid arbitration agreement existed. The trial court came to this conclusion because the arbitration clause in the agreement did not "specify before what agency or person the matter will be arbitrated, or how the arbitrator will be selected." The trial court also concluded that, because alternatives were present in the arbitration clause, the parties had not mutually consented to arbitration.

Legal Issues: Validity of Arbitration Agreements

The Court addressed three legal questions this case. First, does an arbitration clause constitute a valid arbitration agreement when it provides multiple alternative methods for selecting an arbitrator? Second, does the presence of such alternative methods mean that there was no mutual consent between the parties to arbitrate? And third, is a demand for arbitration defective if it does not strictly conform to the terms of the arbitration clause?

Holding:

The Court of Appeals reversed the trial court's holding. The Court of Appeals addressed the first issue, holding that an arbitration agreement does not need to identify a specific arbitrator or a single process for choosing that arbitrator in order to be valid. Indeed, the Court explained that to hold otherwise would be contrary to a plain reading of California Code of Civil Procedure ยง1281.6. According to the Court, a plain reading of the statute makes clear "the validity of an arbitration agreement is not contingent upon the agreement identifying a specific arbitrator or specifying a particular method for appointing an arbitrator."

In addressing the second issue, the Court explained that the "absence of a specified method for appointing an arbitrator neither invalidates an arbitration agreement," as it held regarding the first issue, nor "negates the parties' clearly expressed intent to submit their disputes to arbitration." As such, the Court held that the existence of alternative methods or options for arbitration in an arbitration clause does not indicate that the parties did not mutually consent to arbitration.

Finally, the court reasoned that the defendants invoked the arbitration clause in their demand for arbitration made to HMDG, and in proposing additional points for the arbitration, the homeowners made the terms negotiable. In other words, the defendants did not attempt to compel arbitration distinct from that described in the arbitration clause. As such, the Court held that the defendants properly demanded arbitration under the terms of their arbitration clause.

What Contractors Can Take Away From The Case:

Arbitration provisions, particularly those drafted by sophisticated owners and/or developers, remain difficult for California contractors to escape.

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