Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-00417/USCOURTS-caed-2_07-cv-00417-0/pdf.json

Parties Involved:
Nick Pullen
Plaintiff
Victory Woodwork, Inc.
Defendant
Elizabeth Wendt
Plaintiff

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

NICK PULLEN AND ELIZABETH

WENDT,

NO. 2:07-CV-00417-WBS-GGH

Plaintiffs,

MEMORANDUM AND ORDER RE: 

v. MOTION TO STAY

VICTORY WOODWORK, INC., a 

Nevada corporation, and 

DOES 1-20, inclusive,

Defendants.

----oo0oo----

Plaintiffs brought this action against defendant

Victory Woodwork, Inc. (“Victory”) to recover damages for

negligence, breach of implied warranty, and breach of a third

party beneficiary contract stemming from construction work on

their house. Jurisdiction is based on the diversity of

citizenship. 28 U.S.C. § 1332. Defendant now moves to stay

these proceedings pending arbitration.

I. Factual and Procedural Background

On June 28, 2002, plaintiffs Nick Pullen and Elizabeth

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Wendt entered into a contract with Geney/Gassiot, Inc. (“Geney”)

for construction of their home located at 12693 Parsenn Road in

Truckee, California. (Mot. to Stay Ex. A (“Prime Contract”)). 

The Prime Contract contains an arbitration provision which

provides that:

Any Claim arising out of or related to the Contract . .

. shall, after a decision by the Architect or 30 days

after submission of the Claim to the Architect, be

subject to arbitration. Prior to arbitration, the

parties shall endeavor to resolve disputes by mediation

. . .

(Prime Contract § 4.6.1.)

The Prime Contract also contains various provisions by

which Geney may enter into subcontracts with other individuals

and entities, intended to benefit plaintiffs, for the purpose of

completing the contracted construction work. (Compl. ¶ 10; Prime

Contract Article 5.) The Prime Contract makes clear in this

context that “[t]he Contract Documents shall not be construed to

create a contractual relationship of any kind . . . between the

Owner and a Subcontractor or Sub-subcontractor . . . .” (Prime

Contract § 1.1.2.) The Prime Contract thus provides that:

[T]he Contract shall require each Subcontractor, to the

extent of the Work to be performed by the

Subcontractor, to be bound to the Contractor by terms

of the Contract Documents, and to assume toward the

Contractor all the obligations and responsibilities . .

. which the Contractor, by these Documents, assumes

towards the Owner . . . . Each subcontract agreement

shall . . . allow to the Subcontractor, unless

specifically provided otherwise in the subcontract

agreement, the benefit of all rights, remedies and

redress against the Contractor that the Contractor, by

the Contract Documents, has against the Owner.

(Prime Contract § 5.3.1.)

On July 9, 2002, Geney entered into one such

subcontract with defendant Victory to perform woodwork and

finishing work on plaintiffs’ house. (Mot. to Stay Ex. B

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(“Subcontract”)). The Subcontract incorporates the Prime

Contract by reference, and notes that the “[s]ubcontractor

agrees: to be bound to Contractor in the same manner and to the

same extent as Contractor is bound to Owner under the Contract

documents . . .” (Id. § 1.)

When plaintiffs first moved into the house built by

Geney, they noticed problems with the work performed by Victory. 

(Compl. ¶ 13.) Plaintiffs (through Geney) notified Victory, who

inspected the work and promised to correct the defects. (Id. ¶

14.) Although defendants undertook to correct the supposedly

faulty work, they failed to adequately address the problems to

plaintiffs’ satisfaction. (Id. ¶¶ 15-16.)

Consequentially, on January 26, 2007, plaintiffs filed

a complaint in with this court alleging three causes of action:

negligence, breach of implied warranty, and breach of a third

party beneficiary contract. (Compl. ¶ 17-27.) Jurisdiction is

based on diversity of citizenship, as plaintiffs are both

citizens of California and defendant Victory is a corporation

incorporated in the State of Nevada, and the amount in

controversy exceeds $75,000. (Id. ¶¶ 3-4, 16.) On May 15, 2007,

defendants filed this motion to stay pending arbitration, arguing

that the existence of an arbitration provision in the Prime

Contract, which is incorporated by reference into the

Subcontract, requires that plaintiffs arbitrate their dispute

with Victory. (Mot. to Stay 3.)

II. Discussion

The Federal Arbitration Act (FAA) provides that a party

may seek an order to compel arbitration from a district court

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“A party aggrieved by the alleged failure, neglect, or 1

refusal of another to arbitrate under a written agreement for

arbitration may petition any United States district court . . .

for an order directing that such arbitration proceed in the

manner provided for in such agreement. . . .” 9 U.S.C. § 4.

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where another party fails, neglects, or refuses to arbitrate. 9

U.S.C. §§ 2, 4. Section 4 “leaves no place for the exercise of 1

discretion by a district court, but instead mandates that

district courts shall direct the parties to proceed to

arbitration on issues as to which an arbitration agreement has

been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213,

218 (1985)(emphasis in original). “The court’s role under the

Act is therefore 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).

Although the FAA sets forth a policy favoring

arbitration, “a party cannot be required to submit to arbitration

in any dispute which he has not agreed so to submit.” United

Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S.

574, 582 (1960); see also Three Valleys Mun. Water Dist. v. E.F.

Hutton & Co., Inc., 925 F.2d 1136, 1139 (9th Cir. 1991). Thus,

whether a party has submitted to arbitration is first and

foremost a matter of contractual interpretation that must hinge

on the intent of the parties. United Steelworkers, 393 U.S. at

582; Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 U.S. 614, 626 (1985).

In this case, defendant argues that the arbitration

agreement in the Prime Contract (which requires arbitration of

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disputes between the owners and the Geney) is incorporated into

the Subcontract between Geney and Victory, thereby requiring that

any disagreement between Victory and the owners to be arbitrated. 

The basis for Victory’s contention that the parties agreed to

arbitrate is the language of the two contracts. (Mot. to Stay

6.) The Prime Contract is clear that the “Contract Documents

shall not be construed to create a contractual relationship of

any kind . . . between the Owner and a Subcontractor . . .” 

(Prime Contract § 1.1.2) (emphasis added). Without any such

relationship, there is no basis for any sort of “agreement to

arbitrate,” the necessary predicate for this court to require the

parties to submit to arbitration. United Steelworkers, 393 U.S.

at 582.

The Subcontract does incorporate the Primary Contract,

including the arbitration provision therein. (Subcontract § 1.) 

The effect of that incorporation is made clear, however, by the

Primary Contract, which says that “[e]ach subcontract agreement

shall . . . allow to the Subcontractor . . . the benefits of all

rights, remedies and redress against the Contractor that the

Contractor . . . has against the Owner.” (Prime Contract § 5.3.1)

(emphasis added). Thus, while there exists an agreement

providing for arbitration of disputes between plaintiffs and

Geney, and an identical agreement allowing for arbitration of

disputes between Geney and Victory, at no point is Victory’s

right to demand arbitration extended to a dispute with

plaintiffs. Rather, the rights and benefits of the subcontractor

are purposefully and expressly limited to the Contractor (i.e.

Geney).

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However, despite the lack of any explicit agreement,

“nonsignatories of arbitration agreements may be bound by the

agreement under ordinary contract and agency principles,” such as

“1) incorporation by reference; 2) assumption; 3) agency; 4)

veil-piercing/alter ego; and 5) estoppel.” Comer v. Micor, Inc.,

436 F.3d 1098, 1101 (9th Cir. 2006) (citing Letizia v. Prudential

Bache Sec., Inc., 802 F.2d 1185 (9th Cir. 1986)). Under this

doctrine, “nonsignatories have been held to arbitration clauses

where the nonsignatory ‘knowingly exploits the agreement

containing the arbitration clause despite having never signed the

agreement.’” Id. (citing E.I. DuPont de Nemours & Co. v. Rhone

Poulenc Fiber & Resin Intermediates, 269 F.3d 187, 195 (3d Cir.

2001)). In this case, by asserting rights and benefits under the

Subcontract, plaintiffs are estopped from avoiding the

arbitration provision. (Reply to Mot. to Stay 5.) 

Plaintiffs seek damages directly relating to the work

Victory performed under the Subcontract, (Compl. ¶¶ 17-27), and

all three of plaintiffs’ causes of action rely on duties and

promises created explicitly in, and only in, the Subcontract. 

Specifically, plaintiffs’ first cause of action seeks to recover

in negligence. (Compl. ¶¶ 17-19.) The fundamental requirement

for a claim of negligence is that the defendant owes a legal duty

to plaintiff. See, e.g., Baptist v. Robinson, 143 Cal. App. 4th

151, 170 (2006). However, the duty to “perform their work with

due care,” (Compl. ¶ 17), does not arise out of thin air. The

only conceivable source of any such duty on behalf of defendants,

and indeed the only source argued by plaintiffs for these duties,

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Moreover, while it need not address the merits of 2

plaintiffs’ arguments for the purposes of this motion, the court

notes that the economic loss rule “requires a purchaser to

recover in contract for purely economic loss due to disappointed

expectations, unless he can demonstrate harm above and beyond a

broken contractual promise.” Robinson Helicopter Co., Inc. v.

Dana Corp., 34 Cal.4th 979, 988 (2004). In this case, all of

plaintiffs’ claims sound solely in the expectations created by

the Prime Contract. 

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is the Subcontract into which they entered. 

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Moreover, the second (breach of implied warranty) and

third (breach of third party contract) causes of action are

explicitly grounded in contract law. (Id. ¶¶ 20-27.) When a

nonsignatory seeks to enforce provisions of a contract to which

it was not a party, equitable estoppel must prevents that entity

from avoiding the obligations and burdens that also exist under

the contract. Cf. Comer, 436 F.3d at 1102 (finding that the

nonsignatory could not be compelled to arbitrate because he “did

not seek to enforce the terms of the . . . agreements, nor

otherwise to take advantage of them”). Accordingly, this court

will give effect to the arbitration provision in the Subcontract. 

IT IS THEREFORE ORDERED that defendant’s motion to stay

be, and the same hereby is, GRANTED.

The Clerk is ordered to administratively close this

case, subject to its being reopened upon the noticed motion of

either party.

IT IS SO ORDERED.

DATED: June 27, 2007

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