Re: Fichera v. Pius Construction, Inc.
Case No. 17 CE CG 04158
Hearing Date: February 28th, 2018 (Dept. 502)
Motion: Defendants’ Petition to Compel Arbitration

Tentative Ruling:

To deny defendants’ petition to compel arbitration, and their request for their attorney’s fees and costs incurred in bringing the petition. (Code Civ. Proc. § 1281.2.)

Explanation:

Defendants move to compel arbitration under Code of Civil Procedure section 1281.2. Section 1281.2 states,

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, unless it determines that:

(a) The right to compel arbitration has been waived by the petitioner; or

(b) Grounds exist for the revocation of the agreement.

(c) A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. (Cal. Civ. Proc. Code § 1281.2.)

“[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable. Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence. If the party opposing the petition raises a defense to enforcement – either fraud in the execution voiding the agreement, or a statutory defense of waiver or revocation (see § 1281.2, subds. (a), (b)) – that party bears the burden of producing evidence of, and proving by a preponderance of the evidence, any fact necessary to the defense.” (Rosenthal v. Great Western Fin. Securities Corp. (1996)14 Cal. 4th 394, 413.)

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Here, defendants have submitted a copy of the signed construction contract, which includes an arbitration clause. The agreement was signed by both plaintiffs, as well as by defendant Diana K. Pius, on behalf of Pius Construction, Inc. Thus, defendants have adequately established that there was an agreement to arbitrate all disputes related to or arising out of the construction contract. Also, the plaintiffs’ claims in the present case clearly arise out of the formation and performance of the contract, so the arbitration clause covers the plaintiffs’ claims.

However, plaintiffs argue in opposition1 that the arbitration clause is invalid and unenforceable because it does not comply with the requirements of Business and Professions Code section 7191, which sets forth various requirements for arbitration clauses in residential construction contracts for properties with four or fewer units.

Under Business and Professions Code section 7191, subdivision (a), “If a contract for work on residential property with four or fewer units contains a provision for arbitration of a dispute between the principals in the transaction, the provision shall be clearly titled ‘ARBITRATION OF DISPUTES.’” (Bus. & Prof. Code § 7191, subd. (a).)

Also, under section 7191, subdivision (b),

Immediately before the line or space provided for the parties to indicate their assent or nonassent to the arbitration provision described in subdivision (a), and immediately following that arbitration provision, the following shall appear:

“NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE BUSINESS AND PROFESSIONS CODE OR OTHER APPLICABLE LAWS. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.” “WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION TO NEUTRAL ARBITRATION.” (Bus. & Prof. Code § 7191, subd. (b).)

In addition, under subdivision (c), “A provision for arbitration of a dispute between a principal in a contract for work on a residential property with four or fewer

1 Defendants have objected that the plaintiffs’ opposition was filed more than ten days after service of the petition, and thus the petition’s allegations should be deemed to be true and the petition should be granted. (Code Civ. Proc. § 1290.) However, while plaintiffs filed their response more than 10 days after service of the petition, the petition was served by mail, so the time to file the response was extended by five days. Also, defendants have waived any objection to the delay in filing the response by arguing the merits of the opposition.

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units that does not comply with this section may not be enforceable against any person other than the licensee.” (Bus. & Prof. Code, § 7191, subd. (c).)

“[T]he Legislature sought to ensure that an agreement to arbitrate disputes arising out of a contract for work on residential property of up to four units is obtained through a proper waiver of the right to a judicial forum. In furtherance of that goal, it adopted section 7191 to ‘[p]rohibit the use of a binding arbitration clause in a contract for work on a residential property unless the contract contains a specified disclosure that the binding arbitration clause results in a waiver of the right to a judicial resolution of a dispute concerning the contract.’” (Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 205, internal citations omitted.)

In Woolls, the Court of Appeal found that the arbitration clause in a construction contract for renovation and expansion of a single family residence did not comply with section 7191 because it was not clearly titled “Arbitration of Disputes”, the clause did not mention that the parties were giving up their right to a court or jury trial, and there was no separate space for the parties to initial to indicate that they were consenting to arbitration. (Id. at p. 207.) Instead, the parties simply signed the end of the agreement to indicate that they were agreeing to all of the terms of the contract. (Ibid.) “We conclude there was a total failure of the arbitration provisions to comply with section 7191.” (Ibid.) In addition, the court concluded that an arbitration clause that does not comply with the requirements of the statute is not enforceable against any person other than the contractor. (Id. at pp. 210 – 211.)

Here, the language of the arbitration clause in the construction contract clearly does not comply with the requirements of section 7191, subdivisions (a) and (b). The arbitration clause is not labeled “ARBITRATION OF DISPUTES”; instead it is labeled “BINDING ARBITRATION.” Also, the arbitration clause does not include the required notice language set forth in subdivision (b). There is also no place for the parties to initial the arbitration clause to indicate that they are consenting to have any dispute arbitrated rather than being tried in a court of law. Instead, the agreement has only the usual signature lines at the bottom of the document, indicating that the parties are consenting to the agreement as a whole. The court in Woolls concluded that the same types of defects in the arbitration clause rendered the agreement in that case unenforceable. (Id. at p. 215.) Likewise, the court here intends to find that the arbitration clause in the present case is unenforceable, as it does not comply with the mandatory requirements of section 7191.

In their reply, defendants do not attempt to dispute that the agreement does not comply with section 7191. However, they argue that section 7191 cannot bar enforcement of the agreement because it is preempted by the Federal Arbitration Act, 9 U.S.C. section 2.

“[T]he FAA applies to any ‘contract evidencing a transaction involving commerce’ which contains an arbitration clause. Section 2 of the FAA provides that arbitration provisions shall be enforced, ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ Thus, ‘a state court may, without violating section 2, refuse to enforce an arbitration clause on the basis of “generally applicable

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contract defenses, such as fraud, duress, or unconscionability.” Critically, however, a state court may not defeat an arbitration clause by applying state laws “applicable only to arbitration provisions.”’” (Woolls, supra, at p. 211, internal citations omitted.)

However, “[f]or the FAA to apply, a contract must involve interstate commerce.” (Id. at p. 212, citation omitted.) In Woolls, the court concluded that a contract to construct a single-family residence in California by a California contractor did not involve interstate commerce, particularly where the contractor had not provided any evidence that the transaction involved interstate commerce. (Id. at pp. 213-214.)

Moreover, where the parties’ agreement contains a broad choice-of-law provision that states that the agreement shall be construed and enforced under California law, even if the agreement does not specifically incorporate the procedures under the California Arbitration Act, the California Supreme Court has found that the CAA’s provisions regarding enforcement of arbitration are not preempted by the FAA. (Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376.) “Our opinion does not preclude parties to an arbitration agreement to expressly designate that any arbitration proceeding should move forward under the FAA’s procedural provisions rather than under state procedural law. We simply hold that the language of the arbitration clause in this case, calling for the application of the FAA ‘if it would be applicable,’ should not be read to preclude the application of 1281.2(c), because it does not conflict with the applicable provisions of the FAA and does not undermine or frustrate the FAA’s substantive policy favoring arbitration.” (Id. at p. 394, emphasis in original.)

Thus, under the California Supreme Court’s analysis in Cronus Investments, the key issue is whether the parties have expressly invoked the procedural rules of the FAA in their agreement, or whether they have instead chosen to incorporate the procedures of California law. (Ibid.)

In the present case, the parties expressly incorporated California procedures, including the California Arbitration Act, into their agreement. Article 8, paragraph 14 of the agreement states, “This Agreement shall be governed by and construed in accordance with the laws of file State of California.” Also, in the arbitration clause, the parties agreed that, “The arbitration shall comply with and be governed by the provisions of the California Arbitration Act, Sections 1280, et seq., of the California Code of Civil Procedure.” (Agreement, Article 10, third paragraph.) As a result, the parties expressly elected to have their agreement and any potential arbitration proceed under California law, not the FAA. Consequently, the FAA does not apply to the agreement, nor does it preempt the application of Business and Professions Code section 7191.

While defendants have submitted evidence that the contract involved interstate commerce because defendant used tools, materials, equipment, etc. that came from out-of-state, the fact remains that the parties expressly chose to have their contract enforced and interpreted under California law, not the FAA. Indeed, defendants’ argument that the FAA preempts the language of section 7191 because they used foreign materials and tools in the construction of the house would preempt section 7191 in nearly every case. It is hard to imagine any construction project in the modern era

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that does not use at least some materials or tools from other states or countries. In that sense, virtually every construction project involves interstate commerce. Defendants’ interpretation of the law regarding FAA preemption would render section 7191 a nullity, which would be an absurd result that would be contrary to the legislative intent to protect home owners from being forced into arbitration without full and proper disclosure of the implications of waiving their right to a court or jury trial. Defendants have not cited any authorities holding that section 7191 is preempted by the FAA, and such a result seems contrary to the holding of Cronus and Woolls. Also, defendants’ citation to Warren-Guthrie v. Health Net (2000) 84 Cal.App.4th 804 is misleading, since Warren-Guthrie was expressly disapproved by the California Supreme Court in Cronus Investments, supra, to the extent that Warren-Guthrie held that the FAA preempted Code of Civil Procedure, section 1281.2, subdivision (c).) (Cronus, supra, 35 Cal.4th at fn. 8.)

Because the arbitration clause does not comply with the requirements of section 7191, the court cannot enforce the agreement, and it intends to deny the petition to compel the parties to attend arbitration. In addition, the court intends to deny defendants’ motion for attorney’s fees, as defendants have not prevailed on their petition to compel arbitration.

Pursuant to CRC 3.1312 and CCP §1019.5(a), no further written order is necessary. The minute order adopting this tentative ruling will serve as the order of the court and service by the clerk will constitute notice of the order.

Tentative Ruling
Issued By: DSB on 02/22/18
(Judge’s initials) (Date)