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California: Appeals Court Holds that FAA Not Violated Under California Governing Law (Web)

Hotels Nevada, LLC v. Bridge Banc, LLC (Court of Appeal, Second District, Division 5, California, July 8, 2005).  A California appellate court affirmed a decision denying the defendant’s petition to compel arbitration, holding that the Federal Arbitration Act (“FAA”) was not violated where in a contract in which the arbitration clause specified the application of California law, an arbitrator left to the court the decision of whether a contract was illegal
Plaintiff, Hotels Nevada, LLC, a California based corporation, entered into a loan with defendant, Bridge Banc, LLC, a Nevada based corporation.  The contact contained this arbitration clause:
Borrower and Lender agree that any controversy, claim or dispute arising out of or relating to this Loan Commitment or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this Loan Commitment to arbitrate (‘Dispute’), shall be determined by arbitration in Los Angeles, California, before a sole arbitrator, in accordance with the laws of the State of California for agreements made in or to be performed in California, ‘Disputes’ shall include, without limitation, those involving fees, costs, billing, claims of professional negligence, and breach of fiduciary duties.
The defendant petitioned the court to compel arbitration based on the FAA, claiming the legality of the contract was a decision for the arbitrator. 
Because interstate commerce is involved, the contract is subject to the FAA.  The purpose of this Act is to see that arbitration agreements are enforced with respect to parties’ intentions.  The court found that parties expressly stated their intention for California state law to govern the contract. 
California state law dictates that the trial court should determine the legality of a contract, and if the contract is illegal, the arbitration clause is not enforceable. Loving & Evans v. Blick, 204 P.2d 23 (Cal., 1949). 
The arbitrator followed California state law and deferred to the trial court to rule on the legality of the contract.  Because the arbitrator was expressly instructed to follow California law, and did follow California state law, the FAA was not violated.  Therefore, the defendant’s petition to compel arbitration was denied.    
This opinion can be found at: