Law360: Arbitrating Malpractice Claims: Support from California Case

Courts in California continue to rely on the equitable and third party beneficiary principles discussed in JSM Tuscany, LLC v. Superior Court[1] and Crowley Maritime Corp. v. Boston Old Colony Ins. Co.[2], as the basis for extending a contractual obligation to arbitrate to nonsignatories of an arbitration agreement. The Southern District of California’s decision in City of Riverside v. Mitsubishi Heavy Industries, LTD[3], is just one recent example of courts’ willingness to find exceptions to the general rule in California that one must be a party to an agreement to arbitrate in order to be bound by it or to bind others.

While none of the above cases involves an arbitration provision in a professional services agreement, they all offer useful guidance to attorneys and other professionals looking to compel arbitration of professional negligence against them, even where the plaintiff is not the party who signed the professional’s engagement agreement.

In Mitsubishi, the district court required arbitration of breach of contract and related state law claims that the City of Riverside (Riverside) alleged against three Mitsubishi entities (Mitsubishi), which designed, manufactured and delivered certain generators for the San Onofre Nuclear Generating Station (SONGS), of which Riverside is a co-owner. The generators were the subject of a purchase order between Mitsubishi and a subsidiary of Southern California Edison (Edison), the majority owner of SONGS. The purchase order included a mandatory arbitration clause among its dispute resolution provisions.

Ignoring the arbitration clause, Riverside filed a lawsuit against Mitsubishi. Riverside then opposed Mitsubishi’s application to stay proceedings pending arbitration, despite Riverside’s allegations that it had standing to sue under the purchase order signed by Edison’s subsidiary.

The district court acknowledged that its role was limited to determining whether a valid agreement to arbitrate existed and, if it did, whether it covered the dispute at issue. Finding that Riverside was seeking to benefit from the purchase order in asserting direct and third party beneficiary rights under that contract, the court ruled that equity obligated Riverside to abide by the purchase order’s requirement to arbitrate disputes relating to the purchase order. Recognizing that equity properly looks at both sides of a dispute, however, the court also ruled that Mitsubishi, having insisted on arbitration, would not be permitted to use other limiting terms in the purchase order as a basis to cut off Riverside’s ability to pursue its claims in arbitration.

This ruling in Mitsubishi effectively merged certain of several recognized exceptions available to bind nonsignatories to arbitration provisions. These exceptions include binding a nonsignatory under equitable estoppel principles where the claims at issue are inextricably intertwined with the obligations of the agreement containing the arbitration clause, as in JSM Tuscany, supra; and binding a nonsignatory where he or she has received the benefits of the agreement containing the arbitration provision, as in NORCAL Mutual Ins. Co. v. Newton[4]. Courts have similarly bound nonsignatories to arbitrate where an agent signed the agreement on the nonsignatory’s behalf as in Madden v. Kaiser Foundation Hospitals[5], and where there is a preexisting relationship between the signatory and nonsignatory that establishes the signatory’s implied authority to bind the nonsignatory, as discussed in Crowley Maritime Corp. v. Boston Old Colony Ins. Co., supra. As Mitsubishi in effect acknowledges, these types of factual scenarios all invoke the need for an equitable outcome.

These principles for binding nonsignatories to arbitrate all translate helpfully to attorney and other professional malpractice cases, particularly where a plaintiff’s allegations may relate to services provided under a professional’s engagement agreement, but the plaintiff itself is not a signatory. Given the California Supreme Court’s decision in Bily v. Arthur Young & Company[6], that generally limits standing to sue for professional negligence to clients, a plaintiff filing suit against its former attorney is likely to allege that it was either a client or an intended third-party beneficiary (or sometimes both) of the services at issue. Either way, such allegations open the door to a motion to compel arbitration, and the equitable and third party beneficiary principles of Mitsubishi and the other cases noted above may well pave the way for that motion to compel to succeed.

About the author: Susan Allison is a litigation partner in the Los Angeles office of Jeffer, Mangels, Butler and Mitchell LLP, who specializes in the defense of professional negligence claims against attorneys, accountants, actuarial consultants and other professional service providers. Contact Susan at SAllison@jmbm.com or 310.785.5303.

 


 

[1]  193 Cal.App.4th 1222 (2011).
[2]  158 CalApp.4th 1061 (2008).
[3]  2014 U.S. Dist. LEXIS 33836 (S.D. Cal. March 14, 2014).
[4] 88 Cal.App.4th 64, 81-84 (2000).
[5] 17 Cal.3d 699, 706-709 (1976).
[6] 3 Cal.4th 370 (1992).