Volt Inf. Sciences v. Stanford Univ., 489 U.S. 468 (1989)

Volt Information Sciences, Inc. v. Board of Trustees,

Leland Stanford Junior University
No. 87-1318

Argued November 30, 1988
Decided March 6, 1989
489 U.S. 468

APPEAL FROM THE COURT OF APPEAL OF CALIFORNIA, SIXTH

APPELLATE DISTRICT

Syllabus

A construction contract between appellant and appellee contained an agreement to arbitrate all disputes arising out of the contract and a choice-of-law clause providing that the contract would be governed by the law of "the place where the Project is located." When a dispute arose under the contract, appellant made a formal demand for arbitration. In response, appellee filed an action against appellant in the California Superior Court alleging fraud and breach of contract; in the same action, appellee sought indemnity from two other parties involved in the construction project, with whom it did not have arbitration agreements. The trial court denied appellant’s motion to compel arbitration and granted appellee’s motion to stay arbitration under Cal.Civ.Proc.Code Ann. § 1281.2(c), which allows such a stay pending resolution of related litigation between a party to the arbitration agreement and third parties not bound by it. The State Court of Appeal affirmed, holding that (1) by specifying that the contract would be governed by "the law of the place where the Project is located," the choice-of-law clause incorporated the California rules of arbitration, including § 1281.2(c), into the parties’ arbitration agreement, and (2) application of § 1281.2(c) was not preempted by the Federal Arbitration Act (FAA or Act), even though the contract involved interstate commerce.

Held:

1. The Court of Appeal’s conclusion that the parties intended the choice-of-law clause to incorporate the California arbitration rules into their arbitration agreement is a question of state law, which this Court will not set aside. Pp. 474-476.

(a) Appellant’s contention that the state court’s construction of the choice-of-law clause was in effect a finding that appellant had "waived" its federally guaranteed right to compel arbitration, a waiver whose validity must be judged by reference to federal, rather than state, law, fundamentally misconceives the nature of the rights created by the FAA. Section 4 of that Act does not confer an absolute right to compel arbitration, but only a right to obtain an order directing that "arbitration proceed in the manner provided for in [the parties’] agreement." (Emphasis added.) Here, the state court found that, by incorporating California arbitration rules into their agreement, the parties had agreed that arbitration would not proceed in situations within the scope of § 1281.2(c). This was not a finding that appellant had "waived" an FAA-guaranteed right to compel arbitration, but a finding that it had no such right in the first place, because the parties’ agreement did not require arbitration to proceed in this situation. Pp. 474-475.

(b) Also without merit is appellant’s argument that the state court’s construction of the choice-of-law clause must be set aside because it violates the settled federal rule that questions of arbitrability in contracts subject to the FAA must be resolved with a healthy regard for the federal policy favoring arbitration. See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25. There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate. Interpreting a choice-of-law clause to make applicable the California arbitration rules -- which are manifestly designed to encourage resort to the arbitral process -- does not offend Moses H. Cone’s rule of liberal construction. Pp. 475-476.

2. Application of § 1281.2(c) to stay arbitration under the parties’ contract is not preempted by the FAA. The FAA contains no express preemptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration. Moreover, since the FAA’s principal purpose is to ensure that private arbitration agreements are enforced according to their terms, it cannot be said that application of § 1281.2(c) here would undermine the Act’s goals and policies. Arbitration under the Act in a matter of consent, not coercion, and the parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, so too may they specify by contract the rules under which the arbitration will be conducted. Where, as here, the parties have agreed to abide by state arbitration rules, enforcing those rules according to the terms of the agreement is fully consistent with the FAA’s goals, even if the result is that arbitration is stayed when the Act would otherwise permit it to go forward. Pp. 476-479.

Affirmed.

REHNQUIST, C.J., delivered the opinion of the Court, in which WHITE, BLACKMUN, STEVENS, SCALIA, and KENNEDY, JJ., joined. BRENNAN, J., filed a dissenting opinion, in which MARSHALL, J., joined, post p. 479. O’CONNOR, J., took no part in the consideration or decision of the case.