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Arbitration: California Appeals Court, Reversing a Denial to Compel, Finds that a Clause's Broad (Web)

In Efund Capital Partners v. Pless, et al., 2007 WL 1461952 (Cal.App. 2 Dist.)(May 21, 2007), a California appeals court reversed a lower court's denial of the defendants’ motion to compel arbitration, holding that the language in the arbitration clause was broad enough to cover the plaintiff's tort claims.

In January 2004, nominal defendant RAP Technologies Inc. was incorporated to develop the Loan Vibe software program, which was designed by defendant/appellant Robert Pless for use in the mortgage loan industry. Pless became RAP's chief executive officer and director. Pless and two other shareholders who were the other primary investors at the time of RAP's incorporation, defendant/appellants Frank Mayor and David Allegra, “held themselves out” as members of RAP's board of directors, according to the unanimous, three-judge appellate opinion.

In need of capital to develop the software program, the opinion states that Pless, Mayor, and Allegra formed a plan to fraudulently induce third parties to invest in RAP, and keep the earnings for themselves.

In April 2004, after being approached by Pless, plaintiff EFund Capital Partners, a private equity firm that finances and restructures companies, entered into a “strategic relationship agreement” with RAP.

The agreement outlined the parties' obligations to each other: EFund was to provide RAP with capital and restructuring services, and in return receive an equity interest in RAP as well as a copy of the Loan Vibe software program including codes and trade secrets. EFund invested more than $500,000 in RAP.

The agreement also included an arbitration clause: “Any dispute or other disagreement arising from or out of this Consulting Agreement shall be submitted to arbitration under the rules of the American Arbitration Association. . . .” The agreement’s interpretation and enforcement was governed by California law.

On Nov. 7, 2005, EFund learned that Pless had misappropriated funds from RAP. Around Nov. 11, 2005, Pless was terminated as chief executive officer and director of RAP by the board, which by this time had a majority of Efund directors.

On or about Nov. 30, 2005, Frank Mayor agreed to pay Pless $8,000 for Pless' personal obligations while Pless was to divert payments from RAP's clients to AIM, an internet web hosting business managed by Mayor. EFund's amended complaint included causes of action for fraud, conspiracy to defraud, negligent misrepresentation and fiduciary duty breach.

The appeals court addressed the issue of whether the arbitration clause in the strategic relationship agreement covered the dispute in the amended complaint. It looked at the clause language, as well as California's public policy of strongly favoring arbitration. It noted that the two Ninth U.S. Circuit Court of Appeals decisions relied upon by the trial court--Tracer Research Corp. v. National Environmental Services Co., 42 F.3d 1292 (9th Cir. 1994) and Mediterranean Enterprises Inc. v. Ssangyong Corp., 708 F.2d 1458 (9th Cir. 1983)--as a “distinctly minority analysis.” The opinion notes that the general California rule is “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’.” (Citations omitted.)

The Court of Appeal reviewed using contract interpretation rules. It states that a contract provision “will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable. But language in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract.” (Citations omitted.)

Furthermore, the appeals panel notes that “[w]hen the contractual language is clear, there is no need to consider extrinsic evidence of the parties' intentions; the clear language of the agreement governs.”

The Court of Appeal focused on the clause words “any dispute,” and “arising from or out of,” to distinguish this case from the Ninth Circuit cases above. The court held that the arbitration clause in this case is “materially broader” than in the cases cited by the trial court; writing for the panel, Second District, Division Five Presiding Justice Paul Turner states that the agreement to arbitrate “any dispute” is “plain, clear, and very broad.”

The Court relies on three cases--Berman v. Dean Witter & Co. Inc., 44 Cal. App.3d 999 (Cal. 2nd Dist. 1975); Izzi v. Mesquite Country Club, 186 Cal.App.3d 1309 (Cal. 4th Dist. 1986); Coast Plaza Doctors Hosp. v. Blue Cross of Calif., 83 Cal.App.4th 677 (Cal. 2nd Dist. 2000)--to support its holding that EFund's tort claims are not beyond the scope of the strategic relationship agreement. The three cases involved similar dispute-coverage language by the respective arbitration clauses (e.g., “any controversy between the parties arising out of or relating to” Berman).

Due to the broad language of the arbitration clause at issue, the appeals court notes that “under both federal and state law, we are obligated to liberally construe arbitration clauses.”

In concluding that “‘any dispute or other disagreement’ necessarily extends to the present controversy,” the Court of Appeal reversed the trial court's ruling denying the defendants’ motion to compel arbitration.

Furthermore, after the disposition of the issue at hand, the Court of Appeal remanded the case so that the plaintiff's other two issues--the arbitration agreement could not be enforced by nonsignatory defendants and the defendants had waived their right to invoke the arbitration clause by their delay in demanding arbitration--could be ruled upon by the lower court, which had not addressed the issues since it had denied defendants’ motion to compel arbitration.

--Carol Bahan, CPR Intern