Valid Arbitration Clause

If an arbitration agreement is not specific as to how to appoint an arbitrator, is it valid? The case of HM DG, Inc. v. Amini dealt with this issue.

 

Farzad Amini and Pouneh Beizai ("Amini") entered into a home improvement contract with HM DG, Inc. ("HM"). As oftentimes happens, Amini was not happy with the quality of HM's work. This lead to HM filing a lawsuit for breach of contract. Amini demanded arbitration based on the contract's arbitration clause.

 

However, the trial court denied the petition for arbitration because it saw no valid arbitration agreement. The court explained that Amini did not prove there was a valid arbitration agreement and that the arbitration clause in the home improvement contract did not specify an agency for the arbitration or how the arbitrator was to be selected, thereby showing that there was no legal agreement until a future agreement was reached; in other words, the arbitration clause was not valid. Additionally, the court indicated there was no mutual consent to the arbitration agreement, also making it invalid. In addition, the trial court awarded HM attorney fees for opposing the petition.

 

Upon appeal, the court reviewed Code of Civil Procedures section 1281.6, which reads in part:

 

"If the arbitration agreement provides a method of appointing an arbitrator, that method shall be followed. If the arbitration agreement does not provide a method for appointing an arbitrator, the parties to the agreement who seek arbitration and against whom arbitration is sought may agree on a method of appointing an arbitrator and that method shall be followed. In the absence of an agreed method, or if the agreed method fails or for any reason cannot be followed, or when an arbitrator appointed fails to act and his or her successor has not been appointed, the court, on petition of a party to the arbitration agreement, shall appoint the arbitrator...." (emphasis added)

 

Accordingly, this makes it clear that the parties to a dispute need not agree upon a specific method for appointing an arbitrator in order to form a binding and valid arbitration agreement.

 

As to the issue of mutual consent, not only was the contract drafted by HM but a representative of HM signed the contract as well as Amini. The appellate court pointed out that contract formation requires mutual consent and neither party was disputing that a contract was formed; therefore there was mutual consent with respect to the contract and the arbitration clause.

 

Ultimately, the order denying the petition to compel arbitration was reversed. The award to HM for attorneys fees for opposing the petition was vacated. The case was remanded back to the trial court and Amini could recover their fees for the appeal.

 

So, now we know that it is not necessary for an arbitration agreement to indicate an agency for arbitration or the manner in which an arbitrator is chosen. However, we believe that the less room for interpretation within any contract clause is always best and recommend that the method of determining the agency and arbitrator be included in all arbitration agreements, in order to save time and possible conflicts, if nothing else.