California Case Requires Arbitration Despite Lack of Actual Controversy

By:  Lyndsey A. Torp and Sean M. Sherlock

For parties to litigate a contract dispute in a court of law, the parties’ disagreement must have ripened into an actual controversy presenting more than a mere academic difference of opinion.  But under a recent California Court of Appeal opinion, no actual controversy is required to compel arbitration over a disagreement.  Bunker Hill Park Limited v. U.S. Bank National Association, — Cal.Rptr.3d —, 2014 WL 6684796 (Cal.App. 2 Dist.).  To avoid being compelled to arbitrate purely academic disagreements, parties should draft their arbitration clauses to limit arbitrable disputes to those that have ripened into actual controversies.

In Bunker Hill Park Limited v. U.S. Bank National Association, the landlord under a 99-year ground lease filed a petition to compel its tenant to arbitrate whether the tenant’s subleases will terminate upon termination of the ground lease.  The superior court denied the landlord’s petition to arbitrate on the ground that the landlord sought an advisory opinion about a very distant future event.  The ground lease would not expire until 2077, and there was no reason to believe that it would terminate early.  The Court of Appeal reversed and remanded with directions to grant the petition, holding that although ripeness and the existence of a justiciable controversy – i.e., something more than an academic disagreement – is required for a lawsuit to proceed in the courts, it is not required in arbitration.

The Court of Appeal emphasized the strong public policy in favor of arbitration, and that courts take the arbitration statute at face value and decline to read additional unwritten procedural requirements into the statute.  The Court of Appeal held that unlike the judicial forum, there is no ripeness requirement in the arbitration statute.  Arbitration agreements are creatures of contract, and such agreements may limit the issues to be arbitrated.  Accordingly, the Court of Appeal looked to the parties’ contract to ascertain whether they agreed to arbitrate a particular disagreement, or restrict the arbitrator to resolve certain issues.  The arbitration clause was broadly worded, obligating them to arbitrate “[a]ny and all disputes, controversies or claims arising under or relating to the Ground Lease.”  No ripeness requirement could be found in this language, and the Court of Appeal refused to read an unwritten justiciability requirement into the parties’ arbitration agreement.

Thus, to avoid being compelled to arbitrate purely academic disagreements that may arise under leases, buy-sell agreements, financing agreements, and potentially other types of agreements, parties should draft arbitration clauses to limit arbitrable disputes to those that have ripened into actual controversies.