Judge: Daniel S. Murphy, Case: 23STCV00641, Date: 2023-05-26 Tentative Ruling

Case Number: 23STCV00641    Hearing Date: May 26, 2023    Dept: 32

BACKGROUND

            On January 12, 2023, Plaintiffs Jay Paul Deratany and Curtis Smith initiated this action against Defendants AG Builders & Development Corporation (AG Builders), Jose Rivas (Rivas), and Jon Brouse (Brouse), asserting various claims arising from defective construction performed on Plaintiffs’ home. The complaint alleges causes of action for: (1) breach of contract; (2) fraud; (3) accounting; (4) negligence; (5) fraudulent inducement; (6) ultra vires; and (7) intentional infliction of emotional distress.

According to the allegations, Plaintiffs hired Brouse, an architect, to design and implement the remodeling plan, as well as recommend an appropriate builder and contractor. (Compl. ¶ 2.) Brouse recommended Rivas and his company, AG Builders, promising that Rivas had the skill and qualifications to perform the job. (Id., ¶ 5.) In reality, Rivas was not qualified and failed to properly complete the construction.

On April 24, 2023, Rivas and AG Builders filed the instant motion to compel arbitration. Plaintiffs filed their opposition on May 4, 2023. Defendants replied on May 18, 2023.  

LEGAL STANDARD

The California Arbitration Act (CAA) states that “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” (Code Civ. Proc, § 1281.2.) “The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.)

DISCUSSION

I. Evidence of Agreement

            “The moving party ‘can meet its initial burden by attaching to the motion or petition a copy of the arbitration agreement purporting to bear the opposing party's signature.’” (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165, quoting Bannister v. Marinidence Opco, LLC (2021) 64 Cal.App.5th 541, 543-44.)

            Plaintiffs allege that they entered into a contract with Rivas and AG Builders on February 26, 2021 with regards to the construction. (Compl. ¶ 8.) This contract contains an arbitration clause stating, “All claims, disputes and matters in question arising out of or relating to this Contract, or the breach thereof, shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect unless the parties mutually agree otherwise . . . .” (Melkonian Decl., Ex. 1, § XVIII.) Plaintiffs and Rivas hand-signed the agreement on February 26, 2021. (Id. at p. 14.)

II. Illegality

            Plaintiffs argue that the contract is void because Rivas and AG Builders were unlicensed contractors at the time they entered the contract and performed the services. (Deratany Decl., Ex. A-F.) Plaintiffs point out that an arbitration clause is unenforceable if it is contained within an illegal contract. (See Duffens v. Valenti (2008) 161 Cal.App.4th 434, 450; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 29.) However, the records do not show that Rivas and AG Builders were unlicensed at the time of the contract in February 2021. (See Deratany Decl., Ex. A-F.) On December 16, 2020, the licensing board withdrew a prior revocation and reinstated AG Builder’s licensure status. (Rivas Reply Decl. ¶ 5.) AG Builder’s license was then revoked again in September 23, 2021. (Id., ¶ 6.) However, the license was active on February 26, 2021, the date of the contract. (Id., ¶ 7.)  

            Furthermore, Plaintiffs are equitably estopped from arguing that the contract is unenforceable when Plaintiffs themselves seek to enforce the contract against Rivas and AG Builders. (See Compl. ¶¶ 38-40.) “[I]f a plaintiff relies on the terms of an agreement to assert his or her claims . . . the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement.” (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220.) Plaintiffs cannot “have it both ways” by seeking to hold Rivas and AG Builders liable on the contract while absolving themselves of the contract’s arbitration provision on the grounds that the contract is illegal. (See ibid.)

III. Fraud

            Plaintiffs also argue that an arbitration clause is unenforceable where there is fraud in the execution of the agreement. (See Duffens, supra, 161 Cal.App.4th at p. 448.) However, California law distinguishes between fraud in the execution and fraudulent inducement. (Id. at p. 449.) Fraud in the execution results in a void contract because “the promisor is deceived as to the nature of his act, and actually does not know what he is signing, or does not intend to enter into a contract at all . . . .” (Ibid.) By contrast, fraudulent inducement occurs when “the promisor knows what he is signing but his consent is induced by fraud . . . .” (Ibid.) In such a case, “mutual assent is present and a contract is formed,” and a party must rescind the contract in order to escape its provisions. (Ibid.) “[C]laims for fraud in the inducement are arbitrable.” (Brawerman v. Loeb & Loeb LLP (2022) 81 Cal.App.5th 1106, 1131.) “[P]arties to a predispute arbitration agreement are presumed to have intended arbitration of controversies, including allegations of fraud in the inducement of the contract generally, that may allow rescission or reformation of the contract or part of it.” (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 417.)  

            The situation Plaintiffs describe is one of fraudulent inducement. Plaintiffs essentially claim that, had they been aware of Rivas and AG Builder’s lack of qualifications, they would not have entered into the agreement. However, Plaintiffs still knew what contract they were signing, and they were aware that it contained an arbitration clause. Having signed the agreement, Plaintiffs are “presumed to have intended arbitration of controversies, including allegations of fraud in the inducement of the contract generally . . . .” (See Rosenthal, supra, 14 Cal.4th at p. 417.) Furthermore, as discussed above, AG Builders was in fact licensed at the time of the contract and therefore did not defraud Plaintiff by lying about its licensure status.   

IV. Scope of Agreement

            Lastly, Plaintiffs argue that only the breach of contract claim is covered by the arbitration clause. According to Plaintiffs, “[i]t cannot seriously be argued that the parties intended a contractual arbitration clause to cover non-contract claims.” (Opp. at p. 6.) However, parties may freely agree to arbitrate any number of claims, including tort claims. The fact that the arbitration clause is contained in a contract does not limit its application to that contract. “There is no requirement that the cause of action arising out of a contractual dispute must be itself contractual.” (Rice v. Downs (2016) 248 Cal.App.4th 175, 186.)

Here, the arbitration clause covers “[a]ll claims, disputes and matters in question arising out of or relating to this Contract, or the breach thereof . . . .” (Melkonian Decl., Ex. 1, § XVIII.) “[C]ourts have held such arbitration agreements sufficiently broad to include torts, as well as contractual, liabilities so long as the tort claims ‘have their roots in the relationship between the parties which was created by the contract.’” (Rice, supra, 248 Cal.App.4th at p. 186, quoting Izzi v. Mesquite Country Club (1986) 186 Cal.App.3d 1309, 1315-16.) Plaintiffs’ claims arise out of or relate to the contract even if they are torts, because all of Plaintiffs’ alleged harm stems from Rivas and AG Builder’s alleged failure to properly complete the remodel. These injuries are rooted in the relationship between Plaintiffs and Rivas/AG Builders, which was created by the contract. Therefore, the arbitration clause covers all of the claims at issue.

In sum, Defendants have proven by a preponderance of the evidence that the parties agreed to arbitrate the claims at issue. Plaintiffs have not demonstrated that the contract is unenforceable due to illegality or fraud. Therefore, the arbitration clause must be enforced.

CONCLUSION

            The motion to compel arbitration filed by Rivas and AG Builders is GRANTED.