A California appellate court determined that the goals of the Federal Arbitration Act (FAA) are not undermined by allowing courts to apply a California statute authorizing denial of arbitration where a party to the arbitration is subject to risk of conflicting rulings from a different forum.

In Best Interiors, Inc. v. Millie and Severson, Inc., No. B195253, 2008 WL 651018 (Cal. Ct. App. Mar. 12, 2008), Presbyterian Intercommunity Hospital (Presbyterian) contracted with general contractor Millie and Severson (M&S) to construct a healthcare facility in California. M&S subcontracted some of the work to Best Interiors (Best).

Upon completion of the work, Best brought a claim against M&S for an unpaid portion of the subcontract. Best also sued Presbyterian and two building inspectors on various allegations. M&S moved to arbitrate the dispute pursuant to the arbitration agreement in the subcontract.

The lower court denied M&S’s motion for arbitration. On appeal, M&S argued that the Federal Arbitration Act (FAA), not California law, governed its arbitration agreement with Best and that under the FAA, the lower court did not have authority to deny arbitration.

The Court noted that the FAA does not contain a provision authorizing courts to stay arbitration pending resolution of related litigation involving third parties that are not bound by the arbitration agreement. The Court further noted that in Volt Info. Sciences, Inc. v. Bd. of Trustees, 489 U.S. 468 (1989), the United States Supreme Court held that the FAA did not preempt California law because of a California choice of law provision in the parties’ contract.

M&S and Presbyterian agreed in the prime contract to a choice of law provision whereby the law of the place where the project is located would govern the contract. M&S and Best agreed in the subcontract to follow the dispute resolution process in the prime contract. Thus, the Court stated, that choice of law, California, applied to any disputes under the contracts. Further, the Court noted that under Volt, where parties have agreed to abide by state rules, enforcement of those rules is fully consistent with the goals of the FAA.

M&S also argued that even if California law did apply, the lower court erred because there was no possibility of conflicting rulings. The Court rejected this argument. Under California law, the lower court had discretion to refuse to enforce an arbitration agreement if a party to the agreement is also a party to a pending court case with a third party and there is a possibility of conflicting rulings.

The Court noted that the lower court clearly articulated the considerations that let it to conclude that the action should be litigated in a single forum. The main factual dispute involved M&S’s management of the contract work for Presbyterian. Best’s allegations against Presbyterian and the inspectors directly related to M&S’s management of the project. Thus, the Court determined that Best’s claims against M&S could not neatly be set aside and arbitrated without affecting the other claims.