Oh, And An Attempt At Incorporation By Reference Failed To Create An Arbitration Agreement.
Lennar Corporation v. General Security Indemnity Company of Arizona, G053418 (4/3 9/28/17) (Fybel, Aronson, Ikola) (unpublished) involved a dispute between a developer, Lennar, and its excess insurer, General Security, arising after a "drywall product manufactured in China and used in Lennar houses began releasing gases, causing bodily injury to occupants, and property damage to wiring, pipes, and other materials in the houses." Yech. The excess insurer sought to compel arbitration, failed, and appealed.
The appeal was unsuccessful.
First, the Court of appeal held that General Security failed to prove the existence of a valid arbitration agreement between it and Lennar. General Security's insurance policy "followed form to" another insurer's policy that did contain an arbitration clause. A "following form" policy incorporates the terms and conditions of another carrier's policy. Unfortunately for General Security, however, the Court held that the incorporation by reference was not effective, because there was no specific reference to the fact that the other policy included an arbitration provision, and the arbitration provision in the other policy, which required arbitration in London pursuant to English arbitration rules, was not one to be reasonably expected.
The Court also held that the provisions of CCP 1281.2, allowing a Court to not enforce an arbitration agreement when pending litigation with a third party creates the possibility of conflicting rulings, applied here, so that the trial court could properly deny the motion to compel arbitration.
Interestingly, the Court agreed that the Federal Arbitration Act applied, because interstate commerce was involved. When the FAA governs arbitration procedures, then it preempts CCP 1281.2. However, here, the agreement did not provide that the FAA or the CAA governed procedure in state court, and thus the Court concluded that where the agreement is silent about procedure, then the CAA governs procedure in state court.
COMMENT: Where the FAA rather than the CAA governs procedure, it is more likely that courts will grant a motion to compel arbitration. If the parties want the procedural aspects of the FAA to apply in state court in California, they should so specify, because otherwise the procedural aspects of the FAA may not apply. Of course, specifying that the FAA governs procedural aspects would not have made a difference here if, in fact, the incorporation by reference failed to create an arbitration agreement.
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