Defendant Seeking To Compel Arbitration Had Argued That Claim To Be Submitted To Arbitration Accrued Before Rule Changed.
This case presents a somewhat unusual situation, in that the Court of Appeal had to construe an arbitration agreement that was not directly between the parties. Instead, the parties independently agreed to participate in an industry arbitration program offered by a nonprofit organization, Arbitration Forums, Inc. (AF), which, however, was not a party to the lawsuit. State Farm General Insurance Company v. Watts Regulator Co., B271236 (2/8 11/30/17) (Grimes, Rubin, Flier).
After damage was allegedly caused by a defect in a supply line manufactured by Watts, State Farm paid an insurance claim and filed a subrogation lawsuit against Watts. Because Watts and State Farm were part of the industry AF arbitration program, Watts sought to compel arbitration. The trial court denied the motion, because AF had changed its rules so as to exclude product liability claims from arbitration. Watts appealed, arguing it had a vested right to arbitrate, because AF had changed its rules after the claim accrued. Therefore Watts argued it should be able to arbitrate under the agreement and rules in effect with AF before January 1, 2015.
The Court of Appeal, however, rejected the retroactivity argument. The parties agreed to arbitrate under terms and rules set by a third party, AF, the third party informed the parties of the rule change, and the parties continued with the program.
NOTE: The Court distinguishes the situation in the case from that in which an employer and an employee enter directly into a dispute resolution agreement, and the employer unilaterally changes the rules after a claim accrues. In that employment context, where the parties have directly contracted with one another, retroactivity does apply. Changing the contract unilaterally could be a breach of the covenant of good faith and fair dealing between the parties.
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