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Declaring that a party cannot use one clause of an agreement against a non-signatory, and at the same time "deny them the benefit of the arbitration clause that is contained in that same agreement," a California Appeals Court ordered all parties into arbitration.
In Diamond Environmental Services, LLC v. Valenta, No. D048414, 2007 WL 1113994 (Cal. Ct. App. Apr. 16, 2007), Diamond Environmental Services (DES) agreed to purchase portable restroom equipment from Portosan, LLC. The purchase agreement, signed by DES and Portosan, contained a broadly worded arbitration agreement.
At the same time, Portosan and its principals (including defendant Valenta) signed a non-competition agreement which, although it was referenced in the purchase agreement, contained no separate arbitration clause. When Portosan subsequently sold its business, and the new owners began directly competing with DES, the latter filed suit.
DES claimed that because its suit was based upon the noncompetition agreement, Valenta had no right to invoke the arbitration clause found in the purchase agreement, which he had not signed. Valenta argued that the two agreements should be construed together. The Court ultimately sided with Valenta.
In ordering all parties to arbitration, the Court found that the claims against Valenta were "intimately founded in and intertwined with" the underlying purchase agreement, making the doctrine of "equitable estoppel" applicable. Also, because the purchase agreement expressly incorporated by reference the non-competition agreement, the arbitration clause was clearly enforceable.
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