Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_13-cv-01724/USCOURTS-casd-3_13-cv-01724-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

CITY OF RIVERSIDE, a California

charter city and municipal corporation,

Plaintiff,

CASE NO. 13-CV-1724-BEN (KSC)

ORDER GRANTING MOTION TO

STAY PROCEEDINGS PENDING

ARBITRATION

[Docket No. 5]

vs.

MITSUBISHI HEAVY

INDUSTRIES, LTD, a Japanese

corporation; MITSUBISHI

NUCLEAR ENERGY SYSTEMS,

INC., a Delaware corporation;

MITSUBISHI HEAVY INDUSTRIES

AMERICA, INC., a Delaware

corporation; and DOES 1 through 25,

inclusive,

Defendants.

Before this Court is a Motion to Stay Proceedings Pending Arbitration brought

by Defendants Mitsubishi Heavy Industries, Ltd. (MHI), Mitsubishi Nuclear Energy

Systems, Inc. (MNES), and Mitsubishi Heavy Industries America, Inc. (MHIA). 

(Docket No. 5). For the reasons stated below, the Motion to Stay is GRANTED. 

I. Background

The San Onofre Nuclear Generating Station (“SONGS”) is located near San

Clemente, California. The majority owner is Southern California Edison (Edison). The

City of Riverside (Riverside) and Plaintiff San Diego Gas & Electric Company

(SDG&E) are minority co-owners.

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On or about September 28, 2004, MHIA and a subsidiary of Edison, Edison

Material Supply LLC (EMS), entered into a Purchase Order whereby MHIA was to

design, fabricate, and deliver four replacement steam generators (RSGs) for SONGS. 

MHIA allegedly assigned its contract rights to MNES in 2007, and MHI is alleged to

have provided a parent guaranty. (First Am. Compl. (FAC) ¶ 55). Riverside alleges

that the Second Amended Operating Agreement states that Edison is the “Operating

Agent” for the other owners of SONGS, and that Edison is responsible for operation,

maintenance, and the making of capital improvements. (Id. ¶ 11). Riverside further

alleges that the Purchase Order defines Edison as Southern California Edison Company,

acting either for itself or as an operating agent for any co-owner participating in the

project. (Id. ¶ 24). It claims that EMS was acting as an agent of Edison and the

SONGS co-owners. (Id.) Riverside claims that it is a disclosed principal, that EMS

acted as agent for Edison and Riverside, and that Riverside has direct rights under the

purchase order. (Id. ¶¶ 55, 77). In the alternative, it claims to be a third-party

beneficiary. (Id. ¶¶ 64, 77).

The Purchase Order incorporates by reference a set of General Terms and

Conditions which includes a “Dispute Resolution” provision. “Dispute” is broadly

defined to include “any dispute, controversy or claim between or among Supplier and

EMS or Edison arising from or relating to the Purchase Order or the performance of the

Work.” (Croutch Decl., Ex. B § 1.22). The provision provides for an informal

procedure for resolving disputes, and mandates binding arbitration if the parties cannot

reach an informal resolution. (Id.) The informal procedure includes giving written

notice, providing a written response, and meeting to exchange information and attempt

to resolve the dispute. (Id. § 1.22.1). The provision also states that:

If the Dispute has not been resolved through negotiation within ninety (90) days after the date of the notice of Dispute received pursuant to Section 1.22.1, the Dispute shall be finally settled and resolved by arbitration in accordance with the ICC Rules, subject to such modifications of the ICC Rules as are set forth in this Section 1.22.2. 

(Id. § 1.22.2.1). The Terms and Conditions state that: “The procedures specified in this

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Section 1.22 shall be the sole, exclusive procedures for the resolution of Disputes . . .

.” (Id. § 1.22.5).

A disagreement has now arisen with regard to the RSGs which were provided

pursuant to the Purchase Order. Edison and EMS initiated dispute resolution

proceedings under the Purchase Order and the Terms and Conditions (collectively, “the

Contract”) by providing a written notice of dispute. The written notice specifically

invoked the Contract and stated that notice was provided “individually and in its

capacity as Operating Agent of [SONGS]” (Croutch Decl., Ex. C, at 1). Edison and

EMS requested arbitration on October 16, 2013. (Notice of Filing of Request for

Arbitration). Riverside has not sent a written notice of dispute or demanded arbitration. 

Riverside filed suit in San Diego Superior Court on July 18, 2013. (Notice of

Removal, Ex. A). Defendants removed the action on July 24, 2013. Riverside filed a

First Amended Complaint on September 4, 2013, alleging eight causes of action based

on the Contract and the provision of the RSGs, including recission, breach of contract,

breach of express warranty, breach of implied warranty, concealment, intentional

misrepresentation, negligent misrepresentation, and negligence. (FAC). Defendants

now ask this Court to stay proceedings pending arbitration. This Court held a hearing

on March 10, 2014.

II. Legal Standard

The parties agree that the contract at issue is subject to the Federal Arbitration

Act (FAA). The FAA states that agreements to arbitrate are “valid, irrevocable and

enforceable.” 9 U.S.C. § 2. Section 3 provides that where an issue involved in a suit

or proceeding is referable to arbitration under an agreement in writing, the district court

“shall on application of one of the parties stay the trial of the action until such

arbitration has been had in accordance with the terms of the agreement . . .” 9 U.S.C.

§ 3. The language is mandatory, and district courts are required to order arbitration on

issues as to which an arbitration agreement has been signed. Kilgore v. KeyBank, N.A.,

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718 F.3d 1052, 1058 (9th Cir. 2013) (citing Dean Witter Reynolds, Inc. v. Byrd, 470

U.S. 213, 218 (1985)). The role of the district court is “limited to determining (1)

whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement

encompasses the dispute at issue.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.

3d 1126, 1130 (9th Cir. 2000). 

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.” Tracer Research Corp.

v. Nat’l Envtl. Servs. Co., 42 F.3d 1292, 1294 (9th Cir. 1994) (citation omitted). A

court must therefore determine whether there is an agreement to arbitrate before

ordering arbitration. Wagner v. Stratton Oakmont, Inc., 83 F.3d 1046, 1048 (9th Cir.

1996). State law applies to determine which contracts are binding and enforceable

under the FAA, if that law governs the validity, revocability, and enforceability of

contracts generally. Arthur Anderson LLP v. Carlisle, 556 U.S. 624, 630-31 (2009).

Where a written arbitration provision is made enforceable against a third party under

state contract law, the FAA’s terms are fulfilled. Id. at 631.

As the claims for relief are state law claims, a federal court exercising diversity

jurisdiction applies the law of the state in which it sits. Dees v. Billy, 357 Fed. App’x

813, 815 (9th Cir. 2009). In the absence of a controlling California Supreme Court

decision, federal courts look to intermediate appellate court decisions. Fourth Inv. LP

v. United States, 720 F.3d 1058, 1069 (9th Cir. 2013).

California state law states that one must generally be a party to an agreement to

be bound by it or invoke it. DMS Servs., LLC v. Super. Ct., 205 Cal. App. 4th 1346,

1352 (2d. Dist. 2012). However, there are limited exceptions to the rule which allow

nonsignatories to be compelled to arbitrate a dispute within the scope of the agreement,

including agency, estoppel, and third-party beneficiary. Id. at 1353. These exceptions

are generally based on the existence of a relationship between the nonsignatory and the

signatory, such as principal and agent, where a “sufficient identity of interest exists

between them.” Id. (internal quotation omitted).

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III. Discussion

Riverside opposes the Motion on the basis that it is not bound by the arbitration

clause and that if forced to arbitration, it may not be able to present its claims against

Defendants.

A. Riverside is Bound to the Arbitration Clause By Equitable Estoppel

Riverside contends that it should not be forced to arbitrate its dispute because it

is not a signatory to the contract, and is not bound by the arbitration provision. It is

undisputed that Riverside did not sign the contract. However, Defendants assert that

Riverside is nonetheless bound by the arbitration provision. Defendants emphasize that

Plaintiff’s claims are based upon the contract, and argue that Riverside is bound by the

Terms and Conditions based on its own allegations. (Mot. at 4-5, 7). 

California law recognizes that equitable estoppel can apply to permit a signatory

to an arbitration agreement to compel a nonsignatory to arbitrate claims which are

dependent upon, or inextricably intertwined with, the obligations imposed by an

agreement. JSM Tuscany, LLC v. Super. Ct., 193 Cal. App. 4th 1222, 1240-41 (2d Dist.

2011). When a plaintiff brings a claim which “relies on contract terms” against a

defendant, the plaintiff can be equitably estopped from repudiating the arbitration clause

contained in that agreement. Id. at 1239. When a plaintiff sues on a contract on the

basis that, even though the plaintiff is not a party, they are entitled to recover for its

breach, “the plaintiff should be equitably estopped from repudiating the contract’s

arbitration clause.” Id. (citations omitted). 

Similarly, California law allows a nonsignatory to be compelled to arbitration 

where: (1) the nonsignatory is a third-party beneficiary of the contract containing the

arbitration agreement; and (2) a “preexisting” relationship existed between the

nonsignatory and one of the parties to the arbitration agreement, making it equitable to

compel the nonsignatory to also be bound to arbitrate his or her claim. Crowley

Maritime Corp. v. Boston Old Colony Ins. Co., 158 Cal. App. 4th 1061, 1069-70 (1st

Dist. 2008) (citations omitted).

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The facts of this case demonstrate that equity requires that Riverside be estopped

from refusing to comply with the dispute resolution provision. Riverside clearly brings

claims based upon the Contract, including breach of contract. Riverside repeatedly

asserts that it can recover because it has direct rights, or is a third-party beneficiary. 

Riverside seeks to benefit from the Contract by recovering for causes of action arising

from the Contract. Equity requires that it abide by the agreement to use arbitration to

resolve Contract disputes. 

B. Equity Requires that Riverside be Compelled to Participate as a Full Party

Riverside expresses concern that Defendants will use the language of the

Contract to limit Riverside’s ability to prosecute its claims in arbitration. In particular,

it appears to be concerned that the definition of “Parties” in the arbitration provision

will be used to prevent Riverside from asserting its rights. Riverside appears to suggest

that the provision might be unconscionable if Riverside does not have what it considers

to be “full rights.” (Opp’n at 10). It is apparent from the hearing conducted on the

Motion that Defendants seek to hold Riverside to the arbitration provision, but will

attempt to prevent Riverside from presenting its own arguments in the arbitration. 

A court’s role in enforcing arbitration agreements is limited, and the rights of

parties and the procedures used in arbitration are generally left to the arbitrators. This

case presents the special instance, however, where one party’s interpretation of the

arbitration procedures would render enforcement of the arbitration provision inequitable

and unjust. 

Defendants ask this court to determine that equity requires Riverside to arbitrate

its claims. An appeal to the equity jurisdiction of a court is an appeal to the sound

discretion which guides the courts of equity. See Hecht v. Bowles, 321 U.S. 321, 329

(1944). The essence of equity jurisdiction has been the power to “do equity and to

mould each decree to the necessities of the particular case. Flexibility rather than

rigidity has distinguished it.” Id. A court cannot properly exercise an equitable power

without consideration of the equities on both sides of a dispute. Cortez v. Purolater Air

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Filtration Prod. Co., 23 Cal. 4th 163, 180 (2000). Equity will not compel Riverside to

arbitrate if the arbitration prevents Riverside from asserting its own claims. This Court

therefore cannot enforce this provision without taking the consequences into

consideration. 

Much as equity does not allow Riverside to benefit selectively from the Contract

by asserting claims without being bound by the Contract’s restrictions, Defendants

cannot selectively assert the benefit of the arbitration provision without allowing

Riverside to assert its rights. Were it otherwise, this Court could not stay the

proceedings and force Riverside to abide by the dispute resolution provision. The coowners are different entities with different interests and different claims for relief. It

would be inequitable to force Riverside to place its claims for relief entirely in the

hands of a party with which it may have a conflict of interest. For instance, the

possibility that Edison will be accused of contributory negligence may mean that

Edison’s interests are not aligned with Riverside’s interests. Defendants ask this Court

to enforce a contract which it interprets as preventing Riverside from asserting its rights

for itself in any forum. 

Equitable principles thus require that Riverside be allowed to participate fully in

the arbitration, and cannot be forced to litigate its claims through Edison or EMS.

C. Riverside Cannot Avoid Arbitration Based on the Language of the Provision

Riverside claims that the arbitration provision excludes Riverside because

sections of the Contract purportedly apply the arbitration provision to “the Parties,” and

the Purchase Order defines the Parties to mean “EMS (or Edison, upon assignment or

transfer of the Purchase Order to Edison by EMS) and the Supplier.” (Opp’n at 5). The

full contract is not before this Court, and some of the provisions cited by Riverside were

not provided. 

First, nothing cited by Riverside expressly excludes the possibility that a

disclosed principal or third-party beneficiary might also be bound by the agreement. 

Riverside cites no authority that prevents this Court from applying equitable estoppel 

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simply because the Contract refers to the signatories. 

Additionally, although Riverside cites section 1.22.1 for the notion that the

provision only applies to the “Parties,” the text does not unambiguously limit its scope. 

The text of that section has been provided, and discusses efforts by the Parties to resolve

“Disputes,” but never states that the only disputes covered are disputes between the

signatories or “Parties.” (Croutch Decl., Ex. B, at 9). The Court notes that the Terms

and Conditions containing the arbitration provision applies the “Dispute Resolution”

provision to “any Dispute.” (Id.) The Terms and Conditions define “Dispute” to

include disputes, etc. “between or among Supplier and EMS or Edison” and “Edison”

is defined to include Southern California Edison Company . . . either acting for itself

and/or as operating agent for any co-owner participating in the Project.” (Id. at 8). 

Riverside quotes this very definition in asserting its rights in the FAC. (FAC ¶ 24). As

discussed below, extending the arbitration provision to cover a dispute between

Riverside and Defendants does not prevent Riverside from asserting the rights of

“Parties.”

Riverside also claims that the language of the contract is broader where the

parties intended the provision to apply more broadly. However, the example given does

not actually state that it is making a promise to EMS and all of the co-owners. Instead,

it is a general statement which does not specify to whom the promise is made. There

is no reason for this Court to infer from this that the arbitration provision must be

interpreted more narrowly.

D. This Court Need Not Address the Agency Theory

Defendants also argue that Riverside is required to comply with the dispute

resolution provision because EMS entered into the contract as Riverside’s agent.

Riverside itself alleges in its pleadings that EMS entered into the contract as its agent,

that Riverside was a disclosed principal, and that Riverside has “direct rights” under the

Purchase Order. Defendants cite to out-of-circuit case law in which a non-signatory

principal was compelled to arbitrate by an agreement executed by its agent. (Mot. at

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7). Defendants also state the general theory that a disclosed principal is a party to a

contract if made within the agent’s authority. (Id.) Defendants contend that although

the provision refers to “any dispute, controversy or claim between or among Supplier

and EMS or Edison,” EMS was acting as the agent for Riverside, and a dispute between

Riverside and Supplier would be covered. (Id. at 8 n.2). 

Riverside contends that the fact that EMS is Riverside’s agent is insufficient to

bind it to arbitration. It claims that most California decisions address situations in

which a nonsignatory attempts to invoke the contract, or a signatory attempts to invoke

the contract against the agent who signed the contract. (Id.) It contends that California

law does not support compelling a nonsignatory to arbitration where the nonsignatory

did not sign the agreement, and there is no showing that the nonsignatory knew about

the arbitration provision. (Id.) Riverside also points out that a principal has been

compelled to arbitration where its agent had explicit statutory authority to negotiate that

kind of contract for the principal, and the arbitration was directly related to the subject

matter about which the agent was authorized to act. (Id. at 8). Essentially, Riverside

contends that this lawsuit does not fit into any of the situations where California courts

have already determined that arbitration can be compelled under agency principles.

Review of the facts put forward by Riverside indicates that Riverside may be

bound to arbitrate by agency principles. No party has presented a case that considers

a fact situation similar to the one before this Court. However, it is established

California law that a disclosed principal may be held liable on a contract made solely

in the name of the agent. Bank of Am. Nat. Trust & Savings Ass’n v. Cryer, 6 Cal. 2d

485, 488 (1936). Riverside itself alleged that EMS entered into the Purchase Order as

its agent. (FAC ¶ 24). Agreeing to dispute resolution provisions is a normal incident

of carrying out one’s authority to enter into a supply contract. See Madden v. Kaiser

Found. Hosp., 17 Cal. 3d 699, 707 (1976) (rejecting argument that authority to agree

to arbitration must be specially conferred and stating that arbitration is a “‘proper and

usual’ practice for effecting the purpose’ of the agency; [the agent] merely agrees that

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disputes arising under the contract be resolved by a common, expeditious, and

judicially-favored method”). 

 However, the arbitration provision at issue in this case may be unusual. 

Defendants argued at the hearing that SDG&E and Riverside were not entitled to fully

participate in an arbitration hearing, and had to permit Edison alone to enforce their

rights. Although a standard arbitration clause might be a normal incident of entering

into contracts, the same cannot be said for a provision that requires parties to both give

up their right to litigate their claims in court and to rely on another party to enforce their

rights in arbitration. 

Defendants have not demonstrated that EMS was authorized to yield Riverside’s

right to enforce the contract on its own behalf. Review of the portions of the Operating

Agreement submitted by Defendants does not support the contention that EMS could

enter into such a provision as Riverside’s agent. (Reply, Croutch Decl., Ex. A). 

Nothing in the exhibit indicates that Riverside has agreed that its rights may only be

enforced through Edison or EMS. The fact that EMS may have been acting as

Riverside’s agent in entering the Contract does not indicate that the scope of the agency

granted to EMS also gave EMS an exclusive right to enforce the Contract. Additionally,

nothing in the exhibit indicated that Edison or EMS was authorized to surrender

Riverside’s rights to enforce its claims.

If the arbitration provision is a standard provision that allows the parties subject

to it to present their own claims, then Defendants have demonstrated that Riverside

should be subject to that provision under agency principles. If, however, the arbitration

provision requires Riverside to give up additional substantial rights, the Defendants

have not met their burden of demonstrating that EMS was able to bind Riverside to the

provision as Riverside’s agent.

The Court does not find it necessary to resolve this question. If it is a standard

clause, the outcome is the same as if Riverside is compelled to arbitrate as a full party

under an equitable estoppel theory. If Riverside cannot pursue its own claims under the

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arbitration clause, then it has not demonstrated that the agent had authority to enter into

such an extraordinary clause. In that case, the clause would not bind Riverside under

agency principles and Riverside would only be subject to the clause under equitable

estoppel. 

CONCLUSION

This Court will not intrude unnecessarily into the province of the arbitration

panel. This Court only determines that Riverside is compelled to arbitrate its claims,

and that Riverside must be allowed to assert its claims and argue its own case in

arbitration proceedings, and cannot be forced to act only through Edison or EMS. 

This Court therefore GRANTS the Motion to Stay. This case is STAYED

pending arbitration. This Court shall retain jurisdiction to enforce any arbitration

award. Defendants are ORDERED to file a status report with this Court 180 days after

this Order is filed, and every 180 days thereafter, until this matter is no longer stayed.

The parties are cautioned that should it appear that Riverside is marginalized or 

prevented from fully participating in the arbitration proceedings, this Court may either

dissolve the order staying litigation, or take such actions into account when considering

whether to affirm any arbitration award. 

IT IS SO ORDERED.

DATED: March 14, 2014

Hon. Roger T. Benitez

United States District Judge

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