BOARD OF TRUSTEES OF LELAND STANFORD JUNIOR UNIVERSITY v. VOLT INFORMATION SCIENCES INC (1987)

The Board of Trustees of the Leland Stanford Junior University (Stanford) and Volt Information Sciences, Inc. (Volt) are parties to a written contract under which Volt was to construct a system of electrical conduits throughout the Stanford campus.   The contract contains an agreement to arbitrate any disputes arising therefrom.   It also contains this language:  “The Contract shall be governed by the law of the place where the Project is located.”

A dispute developed regarding compensation for additional work.   Volt submitted a claim which Stanford refused to pay;  whereupon Volt served on Stanford a formal demand for arbitration of its claim.   Approximately a week later Stanford filed suit in Superior Court.   The complaint alleged fraud and breach of contract, inter alia, against Volt and in addition sought indemnity from two companies involved in the design and management of the project.   Stanford did not have arbitration agreements with these two firms.

Volt then filed a petition to compel arbitration and stay prosecution of the lawsuit.   Stanford responded with a motion to stay the arbitration pursuant to the terms of Code of Civil Procedure section 1281.2, subdivision (c),¹ on the ground that a lawsuit was pending involving defendants not bound by the arbitration agreement.   The court denied Volt's petition and granted Stanford's motion under authority of section 1281.2.   Volt appeals from that ruling.

The parties agree that their contract involves interstate commerce, and that, generally, the Federal Arbitration Act (the FAA) governs contracts in interstate commerce.   There is no provision in the FAA corresponding to Code of Civil Procedure section 1281.2, subdivision (c) which would allow a court to stay arbitration when third parties not subject to arbitration are involved in the dispute;  thus it is apparent that were the federal rules to apply, Volt's petition to compel arbitration would have to be granted.   On the other hand, Stanford and Volt have agreed, as we interpret their choice of law provision, that the laws of California, of which section 1281.2 is certainly a part, are to govern their contract.   It is Stanford's position that enforcement of the arbitration agreement in accordance with the chosen California rules of procedure does not create a conflict with the federal act, since the purpose of the Act was to ensure that private agreements to arbitrate are enforceable contracts.   Moreover, application of the federal rules in this case would force the parties to arbitrate in a manner contrary to their agreement.   On balance it is this last point we find persuasive.   Accordingly we will affirm the trial court's ruling.

I

 We start with the well-established principle that the interpretation of a written instrument is a legal question unless the interpretation turns upon the credibility of extrinsic evidence.  (Estate of Dodge (1971) 6 Cal.3d 311, 318, 98 Cal.Rptr. 801, 491 P.2d 385.)   There was no extrinsic evidence here and thus no issue of fact.   Consequently we are not bound by the trial court's construction but rather must reach our own determination of the meaning of this provision.  (Rooney v. Vermont Investment Corp. (1973) 10 Cal.3d 351, 372, 110 Cal.Rptr. 353, 515 P.2d 297.)   In this case we agree with the trial judge that by choosing “the law of the place where the Project is located,” the parties chose to be governed by California law.

The quoted words are a standard choice of law provision contained in an American Institute of Architects document entitled “General Conditions of the Contract for Construction,” ² intended for use by contracting parties across the nation.   It is therefore not remarkable that the particular site of the project in question is not named.   We have no doubt that the word “place” was intended to mean the forum state.   Courts in other states faced with this identical language have reached the same conclusion we do here.   (Lane-Tahoe, Inc. v. Kindred Construction Company (1975) 91 Nev. 385, 536 P.2d 491, 493;  Eric A. Carlstrom Construction v. Independent Sch. Dist. (Minn.1977) 256 N.W.2d 479, 483;  Standard Co., etc. v. Elliott Const. Co., Inc. (La.1978) 363 So.2d 671.)   Likewise, in the California case of Garden Grove Community Church v. Pittsburgh-Des Moines Steel Co. (1983) 140 Cal.App.3d 251, 191 Cal.Rptr. 15, handed down the year before the Stanford-Volt agreement was forged, parties to a construction contract agreed to be governed by the law of the construction site, which the court took to mean California.

We do not find reasonable Volt's interpretation that the “place” where the project is located be construed to mean not only the state of California but also the nation of the United States of America.   The question whether the Federal Arbitration Act nonetheless applies by virtue of the fact that the contract is one in interstate commerce is another matter, to which we turn next.

II

Volt argues even if the choice of law provision is taken to mean that California law shall govern, the supremacy clause of the United States Constitution operates to preempt California law because the contract is in interstate commerce.   The parties' choice of law insofar as it results in direct conflict with federal law under the provisions of the FAA would thus be rendered void and the federal rule would prevail.

We cannot countenance such a result.   At the outset, it is by no means entirely clear that the parties cannot choose to arbitrate under the state rather than the federal statutory scheme.   The court in Garden Grove considered this question.  “The Federal Arbitration Act by its terms applies to all commercial agreements involving interstate commerce;  thus, on the face of it, it would appear federal law controls.   However, in this case the parties agreed by contract to be governed by the law of the construction site, California.   While California courts have held the Federal Arbitration Act (FAA) applies to California cases involving contracts of interstate commerce, we have not found any cases applying it where the parties committed to be governed by state law.   In the face of such a choice of laws provision, California law applies unless preempted by the FAA.”  (Garden Grove Community Church v. Pittsburgh-Des Moines Steel Co., supra, 140 Cal.App.3d at p. 262, 191 Cal.Rptr. 15.)

 State law is preempted only to the extent that it stands as an obstacle to the accomplishment of the aims of the federal enactment.  (Perez v. Campbell (1971) 402 U.S. 637, 644, 91 S.Ct. 1704, 1708, 29 L.Ed.2d 233;  Wasyl, Inc. v. First Boston Corp. (9th Cir.1987) 813 F.2d 1579.)   The FAA was intended to “revers[e] centuries of judicial hostility to arbitration agreements.”  (Scherk v. Alberto-Culver Company (1974) 417 U.S. 506, 510, 94 S.Ct. 2449, 2453, 41 L.Ed.2d 270.)   The purpose behind its passage was “to ensure judicial enforcement of privately made agreements to arbitrate․  The Act ․ does not mandate the arbitration of all claims, but merely the enforcement—upon the motion of one of the parties—of privately negotiated arbitration agreements․  [I]ts purpose was to place an arbitration agreement ‘upon the same footing as other contracts, where it belongs,’․”  (Dean Witter Reynolds, Inc. v. Byrd (1985) 470 U.S. 213, 219, 105 S.Ct. 1238, 1242, 84 L.Ed.2d 158.)

 Bearing this in mind there is little doubt that the FAA preempts state common law under which arbitration agreements are unenforceable.  (See, e.g., Episcopal Housing Corp. v. Federal Ins. Co. (1977) 269 S.C. 631, 239 S.E.2d 647.)   It is equally apparent that state statutes which bar the enforcement of arbitration agreements in particular areas of the law must give way to the federal policy.   Thus in two recent United States Supreme Court cases ³ California's Franchise Investment Law (Corp.Code, § 31512), and Labor Code section 229, respectively, both of which allow for a judicial forum notwithstanding a valid arbitration agreement, were held to be preempted by the FAA.

It does not follow, however, that the federal law has preclusive effect in a case where the parties have chosen in their agreement to abide by state rules.   In fact it would appear that the federal law mandates enforcement of such an agreement according to its terms, since the recognized aim of the Act was to make arbitration agreements “as enforceable as other contracts.”  (Prima Paint v. Flood & Conklin (1967) 388 U.S. 395, 404, fn. 12, 87 S.Ct. 1801, 1806, fn. 12, 18 L.Ed.2d 1270.)

 The thrust of the federal law is that arbitration is strictly a matter of contract.   In this California law is entirely in accord:  “Arbitration is ․ a matter of contract, and the parties may freely delineate the area of its application.”  (O'Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482, 490, 30 Cal.Rptr. 452, 381 P.2d 188.)   Since “[t]he ‘ “Act does not dictate that we should disregard parties' contractual agreements ․ outlining the boundaries of the areas intended to be arbitrable” ’ ” (Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 640, 223 Cal.Rptr. 838), it follows that the parties are at liberty to choose the terms under which they will arbitrate, and such a choice will not run afoul of the FAA.   Stated another way, the Act does not operate to require the parties to submit to arbitration any dispute which they have not agreed so to submit.  (AT & T Tech., Inc. v. Communications Workers (1986) 475 U.S. 643, ––––, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648.)

 If the parties here had expressly stated in their agreement that they wished to arbitrate only those disputes between themselves which did not involve third parties not bound by the arbitration agreement, this provision would presumably be enforceable.   In our view they accomplished the same thing by choosing to be governed by California law, thus incorporating the California rules of civil procedure governing arbitration agreements.

 Were the federal rules to be imposed in this case to override the parties' choice of law, the effect would be to force the parties to arbitrate where they agreed not to arbitrate.   This result is not only inimical to the policies underlying state and federal arbitration law as expressed above, it also violates basic principles of contract law.   Since contractual terms are rarely agreed to without reason, it is assumed that no part of an agreement is superfluous or without effect, but that each term was bargained for.  (Rest. Contracts 2d. § 203.)   Where a party is deprived of a benefit of his bargain by the operation of law, that party is excused from his duty to perform.   (Rest. Contracts, §§ 458, 463, 464;  6 Corbin, Contracts (1962) Discharge by Failure of Consideration Either Existing or Prospective, § 1255;  1 Witkin, Summary of Cal.Law (8th ed.) Contracts, Frustration of Purpose, § 612, Operation of Law, § 607.)   Thus even if we were to decide, which we do not, that federal law preempted here, Stanford would be entitled to raise this defense to further performance under the arbitration agreement.

III

Shortly before oral argument in this matter the case of Liddington v. The Energy Group, Inc. (1987) 192 Cal.App.3d 1520, 238 Cal.Rptr. 202 was decided by the First District.   That case involved a service contract in interstate commerce containing both an arbitration agreement and also a choice of law provision designating California to be the forum state.   The contract further provided that the parties “ ‘shall be deemed to have agreed to binding arbitration in the State of California․’ ”  (Id., at p. 1523, fn. 3, 238 Cal.Rptr. 202.)   When the Liddingtons were sued by a bank for default on a promissory note, they cross-complained against The Energy Group, assignee of the service contract, for failure to install energy systems financed by the bank.   The Energy Group then filed a petition to compel arbitration pursuant to the arbitration clause.   The trial court stayed arbitration pending resolution of the litigation, on the basis of Code of Civil Procedure section 1281.2, subdivision (c).   On appeal The Energy Group argued that Code of Civil Procedure section 1281.2 was preempted to the extent it was used to stay arbitration proceedings governed by the FAA.   The Court of Appeal agreed and reversed.

Despite the striking similarity between this case and ours, we conclude that the precise question before us was not decided in Liddington.   The analysis in Liddington approached the preemption issue from the standpoint whether the state law in question was a general principle applicable to all contracts, or a rule pertaining exclusively to arbitration contracts.   If it was the latter, it would be preempted by the rules contained in the FAA to the extent that they conflicted.   In reaching its decision that section 1281.2 fell into this category, the Liddington court relied upon a footnote in the United States Supreme Court case of Perry v. Thomas, supra, 482 U.S. ––––, ––––, 107 S.Ct. 2520, 2527, 96 L.Ed.2d 426, 437 decided only two weeks earlier.   In footnote nine in that case the court said this:  “Thus state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.   A state law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement․”

In Perry the court was faced on the one hand with a private agreement to arbitrate according to state law, and on the other with a state law expressly providing for a judicial forum in spite of the arbitration agreement.   State policy was therefore directly at loggerheads with the purposes behind the FAA, and the federal law prevailed to enforce the private agreement.   In our case the issue is not whether the state law is one directly affecting the enforceability of arbitration agreements, but rather whether the federal rules can be applied to compel parties to arbitrate contrary to the choice of law in their agreement.   Neither Perry nor Liddington addresses this question.

Nor do we find the cases of Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 or Dean Witter Reynolds, Inc. v. Byrd (1985) 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158, relied upon by Volt, to be on point here.   Both of these cases arose in the context of competing claims in federal and state courts.   Neither concerned the enforceability of a contractual choice of law provision.

IV

As an additional ground for appeal Volt contends that even if California law were to apply, section 1281.2, subdivision (c) cannot be construed to authorize a stay under the circumstances presented here.   Volt argues that application of the statute where Stanford has brought the separate action as a “reactive” response to the demand for arbitration, would amount to giving license to a party to avoid its obligations under an arbitration agreement by simply filing a lawsuit against the party seeking arbitration and joining others not part of the agreement.

As Volt concedes, the language of section 1281.2 is sufficiently broad to encompass the present procedural posture.   Moreover the statute does not provide for a stay in every case in which the moving party has filed a separate lawsuit, but rather gives the court discretion to make such a ruling in an appropriate case.

It is well known that a court of review will not reverse a discretionary ruling in the absence of a clear abuse of discretion. (Barajas v. USA Petroleum Corp. (1986) 184 Cal.App.3d 974, 989, 229 Cal.Rptr. 513.)

The guidelines for the exercise of discretion here are set forth in the statute itself. The court may grant the stay if it determines that there is a pending court action involving 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.”

Volt claims there is no evidence establishing common issues of law or fact since its demand for arbitration concerned a claim for payment of additional compensation against Stanford alone.   In the body of the demand, however, Volt has stated that the changes and additional work it was required to perform were due to a “defective and unsuitable” design and “improper contract administration.”   Volt does not dispute that the two companies named by Stanford in its complaint were instrumental in the design and management of the project.

 Stanford has not merely asserted ancillary claims against unnamed Does in its lawsuit, as was the case in Bos Material Handling, Inc. v. Crown Controls Corp. (1982) 137 Cal.App.3d 99, 186 Cal.Rptr. 740. In that case the court found this was insufficient to show a third party claim which would create “a possibility of conflicting rulings on a common issue of law or fact.” (Code Civ.Proc., § 1281.2, subd. (c).)  Rather Stanford has named two parties both closely involved in the management and design of the project, who conceivably could play a significant role in the present dispute.   The possibility of conflicting rulings is readily apparent.   Under the circumstances we need go no further than to say we find no abuse of discretion.

The order of the trial court is affirmed.

I respectfully dissent.   I find that the majority's analysis is flawed because it is based upon an erroneous premise, namely that the parties chose California arbitration law over federal law by agreeing that the contract would be “․ governed by the law of the place where the Project is located.”

Analytically, it makes no difference in this case whether California and the United States or California alone is the “place.” There can be no conflict between federal and state law because a state law is void to the extent it conflicts with federal law under the Supremacy Clause of the United States Constitution and all the states in our republic are bound by the same federal law.  (U.S. Const., art. 6, cl. 2;  Maryland v. Louisiana (1981) 451 U.S. 725, 746–747, 101 S.Ct. 2114, 2128–2129, 68 L.Ed.2d 576, 595–596;  Perez v. Campbell (1971) 402 U.S. 637, 649, 91 S.Ct. 1704, 1711, 29 L.Ed.2d 233, 242.)   The Supremacy Clause of the United States Constitution provides: “The Constitution, and the Laws of the United States which shall be made in Pursuance thereof ․ shall be the supreme Law of the Land;  and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”  (U.S. Const., art. 6, cl. 2.)

California's Constitution as well as the U.S. Constitution establishes that federal law is paramount:  “The State of California is an inseparable part of the United States of America, and the United States Constitution is the supreme law of the land.”  (Cal. Const., art. 3, § 1.)   Furthermore, the California Supreme Court has held that the California courts have a nondiscretionary duty to enforce federal law where they have concurrent jurisdiction.  (Gerry of California v. Superior Court (1948) 32 Cal.2d 119, 122, 194 P.2d 689;  Brown v. Pitchess (1975) 13 Cal.3d 518, 523, 119 Cal.Rptr. 204, 531 P.2d 772.)   Thus, under California law, federal law governs matters cognizable in California courts upon which the United States has definitively spoken.

Thus, the parties' choice-of-law provision, even assuming arguendo that it must be interpreted as an agreement to have California law govern, does not invariably lead to the conclusion that federal law is inapplicable.   To the contrary, where federal law is supreme, California law mandates that federal law controls.

The federal Arbitration Act requires state and federal courts to enforce any arbitration agreement contained in a contract “evidencing a transaction involving commerce” “․ save upon such grounds as exist at law or in equity for the revocation of any contract.”  (See 9 U.S.C., § 2;  see Perry v. Thomas (1987) 482 U.S. ––––, –––– – ––––, 107 S.Ct. 2520, 2525–2527, 96 L.Ed.2d 426, 435–437;  Dean Witter Reynolds Inc. v. Byrd (1985) 470 U.S. 213, 215–217, 220–221, 105 S.Ct. 1238, 1239–1241, 1242–1243, 84 L.Ed.2d 158, 161–163, 165;  Southland Corp. v. Keating (1984) 465 U.S. 1, 10–16, 104 S.Ct. 852, 858–861, 79 L.Ed.2d 1, 12–16.)   To the extent California law permits a court to deny or stay arbitration in the face of an unqualified agreement to arbitrate, that law is preempted by the federal Arbitration Act where a contract “evidencing a transaction involving commerce” is concerned.   (Liddington v. The Energy Group, Inc. (1987) 192 Cal.App.3d 1520, 1525–1529, 238 Cal.Rptr. 202;  see Perez v. Campbell, supra, 402 U.S. at pp. 644, 649, 91 S.Ct. at pp. 1708, 1711, 29 L.Ed.2d at pp. 239, 244;  cf. Perry v. Thomas, supra;  Southland Corp. v. Keating, supra.)

While I agree with the majority that the federal Arbitration Act does not preclude parties from contractually limiting the scope of their arbitration agreement (see Seaboard Coast Line R. Co. v. Trailer Train Co. (11th Cir.1982) 690 F.2d 1343, 1348, 1352;  Davis v. Chevy Chase Financial Ltd. (D.C.Cir.1981) 667 F.2d 160, 165;  Alabama Ed. Ass'n v. Alabama Prof. Staff Organ. (5th Cir.1981) 655 F.2d 607;  Lounge-A–Round v. GCM Mills, Inc. (1980) 109 Cal.App.3d 190, 195, 166 Cal.Rptr. 920;  cf. United Steelworkers v. Warrior & Gulf Co. (1960) 363 U.S. 574, 80 S.Ct. 1347, 4 L.Ed.2d 1409), the mere choice of California law is not a selection of California law over federal law and does not in any way limit an otherwise unqualified agreement to arbitrate.

The majority concedes that Volt's petition to compel arbitration would have to be granted if the federal law applied.   I think there is no doubt that it does.

I would reverse and remand.

FOOTNOTES

1.   “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a 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:  ․ [¶] (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․  [¶] If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party as set forth under subdivision (c) herein, the court ․ (4) may stay arbitration pending the outcome of the court action or special proceeding.”

2.   AIA document A201, § 7.1.1.

3.   Southland Corp. v. Keating 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) and Perry v. Thomas (1987) 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426.

BRAUER, Associate Justice.

AGLIANO, P.J., concurs.