Legal Memorandum: Refusal to Compel Arbitration in CA

Issue: Under California law, when may a court refuse to compel arbitration?

           A court may refuse to compel arbitration where

(c) [a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. . . .

Cal. Civ. Proc. Code § 1281.2(c) (1982). 

In C.V. Starr & Co. v. Boston Reinsurance Corp., 190 Cal. App. 3d 1637, 236 Cal. Rptr. 167 (1987), the court considered a dispute between two groups of excess coverage reinsurers.  C. V. Starr, the excess coverage manager, had allocated responsibility for payment of a $24.9 million settlement equally between the two groups.  Two of the companies disputed this distribution and brought a petition to compel arbitration.*FN1  The court noted that the potential for conflicting rulings was readily apparent if one allocation were made through arbitration (binding only the reinsurers involved) and a second through court action.  190 Cal. App. 3d at 1641, 236 Cal. Rptr. at 170.  Depending on the respective allocations, C.V. Starr would be either over- or under-indemnified.  Id. 

The court rejected the petitioners’ argument that the court action should have been stayed pending arbitration and the arbitration award used in […]