In this two-part blog post, we discuss two recent decisions in California that provide real-world examples and further explain the law in the area of arbitration clauses in real estate disputes.
In previous post, we discussed the Court of Appeal’s decision stating that arbitration clauses in residential lease agreements are invalid when applying California state law on the grounds that the clauses violate state public policy.
In this blog post, we will look at Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, in which the Court of Appeal analyzed an arbitration clause contained in a real estate purchase and sales contract.
California and Federal Arbitration Act
In Victrola 89, LLC, a couple offered to buy a property using the CAR form (California Association of Realtor’s Standard Purchase and Sales Contract Form). The form eventually became part of the couple’s purchase and sales contract with the sellers. Over a year after the purchase, the buyers sued the seller and related parties for deceiving buyer about the initial condition of the property and repairs of the property’s defects.
California Arbitration Act
The defendants moved the trial court to compel arbitration and to stay the court action. Defendants argued that they had the right to compel arbitration per the Federal Arbitration Act (FAA). The trial court found that state law, the California Arbitration Act (CAA), not the FAA, applied. The trial court denied the motion under state law.
Federal Arbitration Act
The Court of Appeal, however, overruled the trial court, finding that Federal law applied. The Court of Appeal held that the CAR form’s language stating that “enforcement of this agreement to arbitrate shall be governed by the Federal Arbitration Act” required the trial court to consider the seller’s motion to compel under the FAA.
Why does it matter whether state law (CAA) or federal law (FAA) applies?
California law provides judges the discretion to decline to compel arbitration under certain circumstances provided under Section 1281.2 of the Code of Civil Procedure. Among them, subsection c of Section 1281.2 provides that if there are other defendants in the lawsuit not bound by the arbitration agreement and the applicable law agreed to in the arbitration agreement, the parties may end up with “conflicting rulings on a common issue of law or fact.”
In Victrola 89, LLC, this was the very provision that the trial court cited in denying the defendants’ motion to compel. The trial court found that “because the other defendants named in Victrola’s complaint had not agreed to arbitrate, there was ‘a possibility of conflicting rulings on a common issue of law or fact regarding the [Defendants’] liability ….”
By contrast, federal law favors arbitration proceedings, even if it will potentially result in inconsistent decisions. Thus, the choice of law was important for the defendants in this case, who wanted to arbitrate the dispute.
At Schorr Law, our real estate lawyers in Los Angeles is experienced in resolving real estate disputes and routinely handles litigation in court and arbitration settings. To inquire about your matter, please contact us today at email@example.com or at (310) 954-1877.