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Clauses: California Appeals Court Rules that Contract's Mediation/Arbitration (Web)

California’s First District appeals court in Bono v. David, A112099, 2007 WL 519867 (Feb. 21, 2007)(also available at affirmed a trial court decision in denying a motion to compel mediation and arbitration of a defamation action.

The question involved the breadth of a mediation and arbitration procedure clause provided in a memorandum of understanding among buyers in a land deal, as well as construction of California Code of Civil Procedure §1281.2 in considering a motion to compel.

The appellate court affirmed the trial court’s ruling, which states that the defamation claim was “‘a stand-alone action’ which did not involve contractual interpretation.”

In March 2000, the parties and several others took title as tenants in common to property near Middletown, Calif., in Lake County. Everyone involved received a percentage interest in the property.

Six days before a deed was recorded, several tenants created and executed a two-page memorandum of understanding which explained, among other things, the tenants’ rights in the property, the purchase price, and the contribution each party has made for the property.

The agreement had an arbitration-mediation clause that provides for settlement of any controversy between the parties involving the memorandum’s construction or application through nonbinding mediation, before a disinterested third person that is chosen by a two-thirds majority vote of the tenants.

If the mediation–which contemplates the mediator’s “written determination”-- failed, then the dispute would be sent to binding arbitration under American Arbitration Association rules.

Richard Van Donk was designated to attempt to resolve disputes that arose between the parties in the appellate case, on their “Eleusis Project” property.

In the pleadings, Van Donk was described by defendant/appellant David as a master--of martial arts. He also was described by plaintiff/respondent Bono as her advocate, but also as her “go between” with David. Neither party, however, suggested that Van Donk was a formally appointed mediator as per the memorandum of understanding.

During the course of these efforts, David sent Van Donk an E-mail that stated that Bono was emotionally unstable. Despite Van Donk's settlement efforts, the process failed, and three suits were filed regarding the memorandum and the community project that was planned to be executed in the stipulated property.

In April 2004, several grantees filed an action against Bono for the property’s partition, and an accounting, in the Lake County Superior Court. The next month, Bono filed suit against a pair of her co-owners, the Behlendorfs, for a personal injury action due to a hiking accident that took place on a portion of the property which, the opinion notes, “might later revert to their sole ownership.”

In July 2004, Bono and entity known as the Eleusis Management, L.L.C., filed a declaratory relief action against the other tenants in common, seeking a declaration as to the rights and duties of the tenants in common under the memorandum.

The trial court declined to grant the defendants’ request for a continuance in the partition action. In response, the trial court stayed the action and ordered that the dispute be submitted for mediation and failing that, arbitration. The trial court framed the order differently than the memorandum’s arbitration-mediation clause, which strictly construed that the dispute resolution process is for disputes regarding the memorandum’s construction or application. The trial court's order broadened the scope by omitting the words “construction or application” of the memorandum, and maintaining it as “any controversy among parties.”

In November 2004, the partition action and the declaratory relief action were consolidated and sent to mediation. After mediation failed, a March 28, 2005, order sent the consolidated action to arbitration.

The defendants challenged the personal injury action by a demurrer, which was sustained. On Feb. 25, 2005, Bono filed an amended complaint alleging the same injury but on a different legal theory. The defendants demurred again, and it was sustained again, with leave to amend, in April 2005. Then, a demurrer to Bono's second amended personal injury claim was sustained without leave to amend in July 2005.

While the three suits proceeded between April 2004, and July 2005, Bono filed a pro se defamation complaint based on David’s alleged defamation statements in the March 2004, E-mail to Van Donk.

Attached to the complaint was a copy of the E-mail that contained David's descriptions of Bono as “unstable,” and “not capable of trust or honesty.” David demurred the complaint on May 27, 2005, saying that the E-mail was subject to the mediation privilege pursuant to Civil Code section 47(b), and was inadmissible. The trial court overruled the demurrer, because it couldn’t determine whether the E-mail was a “pre-litigation communication and/or a mediation communication as to which the mediation privilege would apply.”

David filed a September 2005, action, to consolidate the defamation matter with the partition and declaratory relief actions, to compel arbitration for all three cases, and to stay proceedings until the arbitration was completed.

David had produced supporting documents to prove that she was entitled to mediation and arbitration, since all three actions filed dealt with one controversy. She produced an additional memorandum with points and authorities for the defamation action only. In opposition, Bono argued that her defamation action did not “involve the ‘construction or application of any provision’ contained” in the memorandum.

On Oct. 21, 2005, the trial court denied the motion to compel arbitration of the defamation action, stating that it didn’t agree that “the alleged defamation arose from the contract or that the contract needs to be interpreted somehow in order to determine the defamation action.”

David’s issue on appeal was whether Bono's defamation action was covered in the arbitration clause of the memorandum of agreement’s language.

According to California state public policy, arbitration is favored as a speedy and inexpensive means of dispute resolution and, therefore, arbitration is favored.

A California appeals court noted that “arbitration should be upheld 'unless it can be said with assurance that an arbitration clause is not susceptible to an interpretation covering the asserted dispute.’” Coast Plaza Doctors Hospital v. Blue Cross of California, 83 Cal.App.4th 686-687 (2000).

The Court of Appeal reviewed David's argument that the defamation action fell within the arbitration clause since the action was rooted in the contractual relationship between the parties based on Buckhorn v. St. Jude Heritage Medical Group, 121 Cal.App.4th 1401 (2004). In Buckhorn, the appellate court held that “tort claims were ‘rooted in the employment relationship created by [the] contract’” rather than being “wholly independent.”

But in a more recent case cited by Bono, Medical Staff of Doctors Medical Center in Modesto v. Kamil, 132 Cal.App.4th 679 (2005), the appeals court noted that even when assuming a specific dispute can be found rooted in the contractual relationship, it is necessary to interpret a contract to give effect to the parties’ mutual intent based on the language expressed.

In Kamil, the court held: “We construe the contract in the light of the circumstances under which it was made, including the subject.” Kamil, 132 Cal.App.4th at pp.682-684.

The Court of Appeals, in applying Kamil, concluded that the trial court was correct in holding that Bono's defamation action did not involve the application of any provision of the memorandum of understanding, since the mandatory mediation and arbitration clause was narrow, and applied only include disputes that involved the memorandum’s construction or application.

It affirmed the trial court’s denial to compel arbitration under the memorandum for the defamation claim.

–Julie John, CPR Intern