Arbitration provisions are a commonplace fixture in contracts for complex services as they provide certainty that any disputes will be heard by a neutral with relevant subject matter experience in an expeditious manner. Such provisions may be particularly important to companies with widespread operations as they offer the further benefit of fixing a venue, thus avoiding the risk of an out-of-town company getting “hometowned” in litigation. Generally speaking, parties understand that broadly worded arbitration provisions should be enforced.
However, under California law, there exists a significant exception to the general rule of enforceability that may blindside the unaware. Specifically, arbitration provisions governed by the California Arbitration Act are subject to a provision of the act that permits a court, in its discretion, to require litigation of an otherwise arbitrable dispute where litigation has commenced and nonarbitrable third-party claims and defenses are at issue. This rule creates a surprising escape hatch for a party to an otherwise ironclad arbitration agreement.
The Litigation Exception To Arbitration
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