For most general contractors, subcontractors, consultants and design professionals, arbitration clauses in construction contracts are common and familiar provisions that typically require all disputes under these agreements to be submitted to arbitration (rather than filed in court). In many instances, arbitration is preferred to litigation, court hearings and trials in that arbitration is usually cheaper than litigation, provides greater procedural flexibility to the parties, results in a faster resolution of the dispute, and allows for greater privacy and confidentiality for the parties. Alternatively, some parties prefer traditional litigation wherein rulings are subject to appeal and disputes are adjudicated in an open and transparent courtroom where judges are mindful that their rulings will be made a matter of public record. Therefore, despite the presence of written agreements to arbitrate, parties sometimes refuse to arbitrate their controversy and, instead, proceed to directly file an action in state court.
California Code of Civil Procedure Section 1281.2 provides procedures for enforcing arbitration agreements and reads: "On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists. . . ." To satisfy Section 1281.2, courts previously required the petitioner to not only show that the parties entered into a written agreement to arbitrate the controversy, but also that the petition demonstrate that it made a demand to arbitrate that was refused by the respondent.
In Hyundai Amco America, Inc. v. S3H, Inc. (2014) 232 Cal.App.4th 572, the Court of Appeal recently streamlined the procedure by which the petitioning party may compel arbitration after a civil lawsuit has already been filed. In
Hyundai, S3H entered into a subcontractor services agreement with Hyundai Amco to provide mechanical system design and construction services for the mechanical systems to be installed in the United States headquarters building of Hyundai Motor America, Inc. The agreement included an arbitration provision and a California choice-of-law provision. During construction and after Hyundai Amco provided S3H with more than $4.7 million in progress payments, S3H told Hyundai Amco it was dissolving its business and was abandoning its obligations under the agreement. S3H further advised Hyundai Amco that while S3H's sub-subcontractors had been paid for work through February 2013, S3H had no intention of paying these contractors for their work in March 2013.
On May 21, 2013, Hyundai Amco wrote S3H asserting that S3H had breached its obligations under the agreement and demanded that S3H cure the dispute. Thereafter, with no apparent further communication between Hyundai Amco and S3H, Hyundai Amco filed a complaint in the Orange County Superior Court against S3H asserting causes of action for breach of contract, conversion, fraud by concealment, fraud by intentional misrepresentation, fraudulent transfer, constructive trust, and equitable subrogation.
S3H filed a motion to compel arbitration under Section 1281.2 that was denied by the trial court. The trial court concluded that because S3H had failed to allege it made a demand to arbitrate that was refused by Hyundai Amco, it had failed to meet its burden of proof. S3H appealed and the Court of Appeal reversed the trial court. Citing to the specific language in Section 1281.2, the Court of Appeal noted that "[t]he statute does not include a requirement that the petitioning party have made a demand for arbitration, only that the other party has refused to arbitrate." (Emphasis added) The Court reasoned that "Hyundai Amco's filing of a lawsuit rather than commencing arbitration proceedings as required by the agreement affirmatively establishes Hyundai Amco's refusal to arbitrate the controversy." So long as the lawsuit filed relates to the parties' performance under the agreement, the filing of the lawsuit, itself, is sufficient to show a party's refusal to arbitrate the controversy under Section 1281.2 and justifies granting the motion to compel arbitration.
In light of the Hyundai decision, petitioners seeking to compel arbitration in state court actions will not need to prove that they made a demand for arbitration (barring the existence of this express requirement in the agreement) and can satisfy Section 1281.2's burden of proof that the respondent refuses to arbitrate the controversy by summarily directing the court to take notice that the filing of the lawsuit alone affirmatively establishes such refusal. This ruling is likely to result in an increase in the number of successful motions to compel arbitration in a variety of cases (including construction cases) while giving pause to parties that are considering filing actions directly in state court to seek relief under agreements containing arbitration provisions.