When Arbitration Becomes Impossible: When are parties excused from an agreement to arbitrate? (Part 2)

When Arbitration Becomes Impossible: When are parties excused from an agreement to arbitrate?

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By Jeffrey I. Ehrlich
Advocate January 2006 | Download .pdf

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Arbitration and the defense of impossibility

Once a court grants a motion to compel arbitration, the case enters what has been called “the twilight zone of abatement,” in which the court maintains “merely a vestigial jurisdiction over matters submitted to arbitration.” (Brock v. Kaiser Foundation Hospitals (1992) 10 Cal.App.4th 1790, 1796 [13 Cal.Rptr.2d 678].) This vestigial jurisdiction generally “consists solely of making the determination, upon conclusion of the arbitration proceedings, of whether there was an award on the merits … or not….” (Id.)

But this vestigial jurisdiction also extends to the power to deal with a situation where a case that has been ordered to arbitration cannot proceed. This article explores the remedies available to court and the parties when there is a contention that it has become “impossible” to arbitrate the case. In many cases, the consumer, who has been forced into arbitration in the first place, will seek to avoid arbitration entirely and have the case return to court. The defendant will typically try to have the court salvage the situation, by ordering the case to proceed to arbitration but in a different manner than in the prior order compelling arbitration, often before a different arbitrator.

Arbitration is a creature of contract. “[A]rbitration is simply a matter of contract between the parties; it is a way to resolve those disputes–but only those disputes–that the parties have agreed to submit to arbitration.” (Ajida Technologies, Inc. v. Roos Instruments, Inc. (2001) 87 Cal.App.4th 534, 541-542 [104 Cal.Rptr.2d 686].) “[W]e accept appellant’s basic premise that a party cannot be compelled to arbitrate without its consent. It is beyond cavil that arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” (Id., citations omitted.)

Stating the point differently, but to the same effect, the Court in Zakarian v. Bekov (2002) 98 Cal.App.4th 316, 322 [119 Cal.Rptr.2d 623], explained, “The heart of the arbitration process is the agreement of the parties to forgo resort to the courts and elect the alternative process of arbitration to resolve specified disputes. Arbitration is consensual in nature. The fundamental assumption of arbitration is that it may be invoked as an alternative to the settlement of disputes by means other than the judicial process solely because all parties have chosen to arbitrate them. [Citations omitted.].”

Arbitration agreements in California are “valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (Code Civ. Proc., § 1281.) That is, California recognizes and approves of such agreements, but they are not given special consideration; rather, they are evaluated under the same standards as any other contract which a – party seeks to avoid. (Armendariz, 24 Cal.4th at 126-127, Bolter v. Superior Court (2001) 87 Cal.App.4th 900, 906 [104 Cal.Rptr.2d 888].)

Since arbitration agreements are treated like any other contract, they are subject to the same defenses applicable to all contract disputes. (Fittante v. Palm Springs Motors, Inc. (2003) 105 Cal.App.4th 708, 713-714 [129 Cal.Rptr.2d 659].) Most commonly, the defenses asserted to enforcement of arbitration agreements are fraud, duress, or unconscionability. (Id.) But impossibility of performance would also be a valid defense, just as it would to any contract.

The relevant cases on the defense of impossibility of performance were decided by the California Supreme Court more than 80 years ago, but the principles still apply. The leading case is H. Hackfeld & Co. v. Castle (1921) 186 Cal. 53, 57-58 [198 P. 1041], which involved a dispute between the buyer and seller of Hawaiian honey. Their contract provided that shipment would be on a particular route – from Hawaii to the Isthmus of Tehuantepec in Mexico, there connecting to railroads that connected to Atlantic ports, so the honey could be shipped to Hamburg, Germany. Political unrest in Mexico caused the Tehuantepec route to be discontinued. Some honey was shipped via San Francisco and accepted by the buyer, but the buyer refused to accept the bulk of the shipment. The seller sued, and lost, and the California Supreme Court affirmed.

The Court rejected the suggestion that the instruction that the honey was to be shipped via the Tehuantepec route was merely an advisory shipping instruction. The Court explained that, “ . . . the mere presence of the provision in the contract would alone indicate prima facie that the provision was part of the contract itself . . . .” (186 Cal. at 57.) The Court held that the provision was material to the contract, “so that the contract could not be performed according to its terms except by shipment by that route.” (Id.) The Court then determined that the continued existence of the route was a condition of the contract, and that the impossibility of performance in accordance with the contract’s terms operated to excuse the promisor’s performance. (Id.)

The Court relied on 3 Williston on Contracts, section 1948, which explained the rule, citing a host of cases applying the rule that impossibility of performance in similar circumstances excuses performance. Hence, a contract to manufacture goods in a particular factor is discharged if the factory is destroyed; a contract to do work on a specific building is discharged if the building is destroyed; a contract to ship goods via a particular ship is discharged if the ship is destroyed, etc. (Id. at 58.) The Court also relied on English cases to the same effect.

More recent decisions recognize that when performance in accordance with the contract’s terms is impossible, the contract obligation is discharged. (See, e.g., Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 153 [135 Cal.Rptr. 802]; Ellison v. City of San Buenaventura (1975) 48 Cal.App.3d 952, 962 [122 Cal.Rptr. 167].)

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Appellate lawyer, Jeffrey EhrlichCalifornia appeals lawyer, Jeffrey I. Ehrlich, is the principal of the Ehrlich Law Firm with Los Angeles County law offices. He is certified as an appellate specialist by the California Bar’s Committee on Legal Specialization, and is the editor-in-chief of the Consumer Attorneys of Southern California’s Advocate magazine.

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