California Appeals Court Rules Formal Arbitration Demand Not Necessary When Other Party Refuses Arbitration by Filing SuitLast month, a California Appeals Court reversed an order by the trial court denying a petition to compel arbitration, ruling that the defendant had met its burden of proof under Code of Civil Procedure §1281.2 by showing the existence of a written agreement to arbitrate and that by filing suit, the plaintiff in effect refused arbitration.

In Hyundai Amco America, Inc. v. S3H, Inc., plaintiff Hyundai Amco was the general contractor for the development of the Hyundai U.S. headquarters. S3H was a subcontractor for design and construction services. S3H’s subcontract included an arbitration clause with a California choice-of-law provision.

Before the project was finished, S3H notified Hyundai Amco that it was dissolving its business and was leaving the project. Hyundai Amco filed suit for breach of contract, and S3H sought to compel arbitration pursuant to its subcontract with Hyundai Amco. A trial court denied S3H’s motion on the grounds that it had failed to allege that it had demanded arbitration and was refused by Hyundai Amco.

On appeal, the Fourth Appellate District reversed the trial court’s order, saying it had erred in its opinion that a motion to compel arbitration had to be denied based on the requirements of §1281.2.

The appeals court said that §1281.2 only requires that a party seeking to compel arbitration allege that a written agreement to arbitrate exists and that the other party has refused to arbitrate. The court said that there is no requirement under §1281.2 for a petitioning party to make a formal demand for arbitration, and that arbitration can be refused absent of a formal demand. By filing suit, Hyundai Amco effectively refused arbitration and the court found that S3H had met its burden under §1281.2.

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