A California appellate court has upheld an order denying a motion to compel arbitration due to the possibility of conflicting rules, finding that, when a contract is silent on choice of law, California procedural rules, not the FAA, apply.
In the lawsuit, plaintiff Los Angeles Unified School District sued its insurer, defendant Safety National Casualty Corporation, based on its refusal to provide coverage in connection with third party claims related to abuse perpetrated by two teachers at Miramonte Elementary School. Plaintiff is simultaneously suing numerous other insurers for denials of coverage related to the Miramonte litigation. Defendant filed a motion to compel arbitration. The court trial court denied this motion under California Code of Civil Procedure section 1281.2(c), under which a court may refuse to enforce an arbitration agreement if it finds that a party to an arbitration agreement is also a party to pending litigation “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.”
On appeal, defendant argued that the FAA’s procedural provisions should apply, because the arbitration agreement said nothing about choice of law. Of particular importance were FAA sections 3 and 4, which require a court to compel arbitration of arbitrable issues regardless of the existence of related ongoing litigation. Defendant also argued that section 1281.2(c) did not apply because the other lawsuits against insurers did not arise out of the “same transaction or series of related transactions,” and there was insufficient evidence of the possibility of inconsistent rulings. The appellate court rejected all of these arguments. First, it found that, when an agreement to arbitrate is silent as to the application of the procedural provisions of the FAA, California procedures apply unless these procedures would defeat the rights granted by or contravene the policy goals of the FAA. The court found that the application of section 1281.2(c) would not do either. Second, the court found that plaintiff’s claims against defendant and against other insurers arose from a series of related transactions—plaintiff’s right to insurance coverage arising out of the Miramonte litigation. Third, the court found that there was a possibility of conflicting rulings on the question, central to coverage under several relevant policies, of whether the Miramonte litigation constituted a single occurrence, which was enough to justify the trial court’s refusal to compel arbitration under section 1281.2(c).