The Court, Not the Arbitrator, Decides the Validity of an Agreement Containing an Arbitration Clause
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Sometimes the end of the arbitration is not the end of the dispute. A party prevailing in arbitration is not out of the woods, given that the underlying contract can still be challenged under traditional defenses to the formation of contract and a court, not an arbitrator, determines the enforceability of a contract under California law.
The case of Sheppard v. J-M Manufacturing Co., 2016 Cal. App. LEXIS 69 (Jan. 29, 2016), grapples with and clarifies the role of the courts in determining the fate of arbitration clauses in situations where the validity of the underlying contract is under attack. The California Court of Appeal made it clear that determining the validity of the contract is the forte of the courts and not an arbitrator.
The Underlying Case: A Conflict Arises
The underlying case arose when the law firm of Sheppard, Mullin, Richter & Hampton attempted to recoup attorney fees after being disqualified as counsel for J-M due to a conflict of interest. The conflict arose when the law firm represented defendant J-M without disclosing it represented a plaintiff in the matter, South Tahoe Public Utility District, in a separate matter. After disqualification, Sheppard Mullin filed suit in superior court, seeking to recoup unpaid fees. J-M cross-complained and sought, among other things, a disgorgement of fees previously paid.
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