Metropolitan News-Enterprise


Monday, June 15, 2009


Page 1


Amendment to Arbitration Rules Not Retroactive, Court Holds




An amendment to the American Arbitration Association’s rules, allowing arbitrators to determine their own jurisdiction, cannot be applied where the arbitration agreement was entered into before the amendment was adopted, the Fourth District Court of Appeal has ruled.

Div. Three Thursday affirmed an Orange Superior Court judge’s ruling vacating an arbitration award in favor of Tone Yee Investments in its dispute with La Quinta Homes, LLC. The parties were investors in Gilbert Street Developers, LLC, which was formed in 1998 to develop property in Garden Grove.

A dispute between the parties arose last year because Tone Yee wanted to accept a $13.3 million offer for the property and La Quinta did not. Tone Yee invoked a provision in the parties’ agreement allowing either party to either buy out the other or force the other to buy it out.

Tone Yee scheduled the matter for arbitration, without a court order compelling La Quinta to arbitrate. La Quinta objected to the proceedings by letter, contending that the agreement did not compel arbitration of disputes under the buy-out clause, and that the arbitrators could not determine their own jurisdiction.

The letter noted that the amendment to AAA rule 8, which allows arbitrators to determine their own jurisdiction, was enacted in 2000, two years after the parties agreed to form Gilbert Street. That provision is now in rule 7, the appellate panel pointed out in a footnote.

The arbitrators, in a proceeding in which La Quinta did not participate, ruled that the amendment to rule 8 could be applied in light of rule 1, which says that the rules can be amended, and rule 43, which allows an arbitrator to award any relief that is “just and equitable and within the scope of the agreement of the parties.”

 After ruling that they had jurisdiction, the arbitrators heard evidence and ruled in favor of Tone Yee on all issues. Tone Yee’s petition to confirm the award was denied, however, and the award was vacated in a judgment by Judge Gregory Munoz.

The trial judge was correct, Presiding Justice David Sills wrote for the Court of Appeal.

Sills acknowledged that incorporation of AAA rules into an arbitration agreement by reference is permitted. But the cases holding so, he noted, occurred after rule 8 was amended.

Those cases, he said, “represent the outer limits of the use of incorporation by reference of some body of rules incorporated by reference to confer upon arbitrators the power to decide their own jurisdiction.”

He elaborated:

“At least in those cases, the parties could go look up the AAA rules to which they were agreeing beforehand, and see that, yes, they were conferring on arbitrators the power to decide if a dispute was arbitrable in the first place. To go beyond the incorporation of an existent rule and allow for the incorporation of a rule that might not even come into existence in the future, however, contravenes the clear and unmistakable rule. We decline to take the next step....”

The case is Gilbert Street Developers, LLC v. La Quinta Homes, LLC, 09 S.O.S. 3593.


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