The Caa v. the Faa: the Dangerous Differences

• Publication year: 2021
• Author: By Paul Dubow

The CAA v. The FAA: The Dangerous Differences

By Paul Dubow

Paul Dubow began arbitrating cases in 1972 and was initially trained as a mediator in 1994. He became a full time neutral in December 2000, following his retirement after 26 years as director of litigation at Dean Witter Reynolds. He has arbitrated or mediated over 550 cases. pdubow2398@aol.com.

The California Arbitration Act (CAA, Code Civ. Proc., § 1280 et seq.) and the Federal Arbitration Act (FAA, 9 U.S.C. § 1 et seq.) are similar. Some differences come into play after arbitration commences. For example, the CAA has the same vacatur provisions as the FAA, but it also contains additional ones. And the CAA contains extensive arbitrator disclosure requirements, while the FAA does not deal with disclosure. If left unaddressed by the drafter, these and other differences could doom the enforceability of an otherwise valid arbitration agreement or an aspect of it. This article discusses some significant differences between the two statutory schemes, the traps they present to the unwary, and how to navigate around them.

The most prominent of these differences is caused by competing provisions in Code of Civil Procedure section 1281.2, subdivision (c), and section 3 of the FAA. It occurs when a dispute involves multiple parties, some of whom have not entered into any arbitration agreement, or multiple claims, some covered by the arbitration agreement and some not.

Section 1281.2, subdivision (c) does not require a court to grant a motion to compel arbitration where "[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 or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact." Subdivision (d) of the statute gives a court four options in such a case: (1) refuse to enforce the arbitration agreement and order joinder of all parties in a single action; (2) order joinder as to all or only certain issues; (3) order arbitration among the parties agreeing to arbitration and stay the pending court action; or (4) stay arbitration pending the outcome of the court action. In the interest of judicial economy, courts invariably invoke option 1 where the arbitration agreement does not cover all parties or option 2 where the agreement does not cover all issues. Employing either of these two options results in nonenforcement of an otherwise valid arbitration agreement.

Section 1281.2, subdivision (c), a procedural state rule, is not preempted by federal law if the parties have agreed to arbitrate in accordance with California law, even if the underlying transaction involves interstate commerce. (Volt Information Sciences v. Board of Trustees (1989) 489 U.S. 468; Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376.) It also applies if the dispute is heard in state court and the agreement is silent with respect to which arbitration law applies, notwithstanding

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that the parties may reside in different states. (L.A. Unified School Dist. v. Safety Nat. Casualty Co. (2017) 13 Cal.App.5th 471.)

A party attempting to avoid arbitration by invoking section 1281.2, subdivision (c) cannot be a person bound by the underlying agreement. A third party beneficiary or one whose obligations are founded in or intertwined with the underlying agreement cannot invoke section 1281.2, subdivision (c), even if such party is a nonsignatory. (RN Solution, Inc. v. Catholic Healthcare West (2008) 165 Cal.App.4th 1511; Rowe v. Exline (2007) 153 Cal.App.4th 1276.)

The FAA provides for a completely different procedure where parties or claims are not covered by the arbitration agreement. In such event, section 3 states that a court shall, upon application of a party, "stay the trial of the action until such arbitration has been held in accordance with the terms of the agreement." Thus, if the FAA applies, the court must stay the court proceeding in favor of the...