Claiming Breach of Contract Does Not Necessarily Preclude Party from Opposing Enforcement of Contract’s Arbitration Agreement

According to a California appellate court, a party cannot carry the burden of showing a valid arbitration agreement by merely relying on the adverse party’s breach of contract claims and the estoppel doctrine.

In Michelle’s Diamond LLC v. Remington Financial Group, Inc., No. G040163, 2008 WL 4951032 (Cal. Ct. App. Nov. 20, 2008), Michelle’s Diamond LLC (MDL) sued Remington, alleging that Remington and other parties had engaged in a scheme to defraud MDL and others in various commercial loan transactions. MDL brought breach of contract and RICO claims against Remington. MDL also maintained that Remington acted in violation of an order by the California Department of Corporations to “cease and desist” offering these types of contracts. 

Remington sought to compel arbitration of MDL’s claims in accordance with an arbitration agreement contained in the loan contracts. The trial court denied the petition to compel. Remington appealed, alleging that MDL was estopped from resisting arbitration by claiming a breach of the contracts containing the arbitration agreement.

The Court affirmed the order denying the petition to compel arbitration, finding Remington’s estoppel argument unconvincing. Specifically, the Court observed that Remington asserted an illegality defense, and was “seek[ing] to specifically enforce the arbitration provisions in the agreements while at the same time challenging the validity of those same contracts.” Under those circumstances, the Court found Remington’s attempt to enforce the agreement within the contract unfair and inequitable.

Furthermore, the Court found Remington had not carried its affirmative burden of showing the existence of a valid arbitration agreement, but merely relied on MDL’s complaint and estoppel principles to show an agreement by implication. According to the Court, this was insufficient to warrant an order compelling arbitration.

Accordingly, the Court affirmed the order denying the petition to compel arbitration, allowing the matter to proceed before the trial court.