In re Kenwood Communications Corporation, Kenwood Americas Corporation, and Gary Cochran--Appeal from 150th Judicial District Court of Bexar County

MEMORANDUM OPINION
No. 04-02-00377-CV
IN RE KENWOOD COMMUNICATIONS CORPORATION,
Kenwood Americas Corporation, and Gary Cochran
Original Mandamus Proceeding (1)

Opinion by: Sarah B. Duncan, Justice

Sitting: Catherine Stone, Justice

Sarah B. Duncan, Justice

Sandee Bryan Marion, Justice

Delivered and Filed: March 12, 2003

PETITION FOR WRIT OF MANDAMUS CONDITIONALLY GRANTED

Kenwood Communications Corporation, Kenwood Americas Corporation, and Gary Cochran filed this original mandamus proceeding seeking to vacate the trial court's order denying their motion to compel arbitration of the claims filed against them by PR-900, L.L.C. We conditionally grant the writ of mandamus.

Factual and Procedural Background

PR-900, L.L.C., was formed to develop and market a wide area radio network in Texas. In late 1999 and early 2000, Sumner Bowen, on behalf of PR-900, negotiated with Kenwood Communications Corporation (KCC) to purchase newly-developed land mobile radios that were compatible with the platform PR-900 intended to use with its network. Gary Cochran, KCC's Mid-West Region Sales Manager, handled the negotiations for KCC. In January 2000, Cochran told Bowen that KCC anticipated the radios would be ready for sale in March 2000.

In anticipation of PR-900's purchase of its products, KCC sent PR-900 a credit application, a land mobile radio dealer application, and a Master Authorized Dealer Agreement (MDA) that included two addenda specifying the products PR-900 would be authorized to sell and the locations at which it would be authorized to sell. The MDA contains a broad arbitration clause and also states that the MDA "shall become effective only if first executed by Dealer within or outside the State of California and subsequently executed by Kenwood in the State of California."

Bowen signed the documents on behalf of PR-900 and forwarded them to Cochran. Cochran signed the two addenda to the MDA on February 11, 2000, and sent the documents to KCC headquarters in California. It is KCC's policy that it will not execute an MDA until staff at KCC headquarters in California reviews and approves the credit application and opens an account in the dealer's name. If the documents are in order and the credit application is approved, KCC opens a dealer account, affixes a KCC officer's stamped signature to the MDA, and files the fully executed MDA. KCC reviewed and approved PR-900's credit application and opened a dealer account in its name in February. However, due to an administrative oversight, the MDA was filed without KCC's stamped signature affixed to the contract. In April 2000, PR-900 submitted a purchase order for radios. KCC sent the radios to PR-900 in Texas pursuant to the MDA.

In April 2001, PR-900 sued KCC, its parent corporation Kenwood Americas Corporation, and Gary Cochran, alleging breach of contract, breach of express and implied warranties, negligence, and violations of the Texas Deceptive Trade Practices Act. PR-900 alleged KCC failed to timely produce a workable product, thus destroying its business opportunity. KCC, KAC, and Cochran moved to compel arbitration and for a stay of all proceedings pending arbitration. The facts were submitted to the trial court by affidavit and, after hearing argument, the court denied the motion without stating its reasons. On April 19, 2002, a written order denying the motion was signed. KCC, KAC, and Cochran filed this original mandamus proceeding, alleging the trial court abused its discretion by failing to compel arbitration and stay the proceedings pursuant to the Federal Arbitration Act, 9 U.S.C.A. 2.

Requirements for Granting a Writ of Mandamus

A writ of mandamus will issue only to correct a clear abuse of discretion or violation of a legal duty for which the remedy by appeal is inadequate. Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992). "When a trial court erroneously denies a party's motion to compel arbitration under the Federal Arbitration Act, the movant has no adequate remedy at law and is entitled to a writ of mandamus." In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001). With respect to factual issues, an abuse of discretion is shown if the trial court could reasonably have reached only one decision and failed to do so. Walker, 827 S.W.2d at 839-40. However, "a trial court has no discretion to determine what the law is or in applying the law to the facts." In re American Homestar of Lancaster, Inc., 50 S.W.3d 480, 483 (Tex. 2001). Therefore, the trial court's failure "to analyze or apply the law correctly will constitute an abuse of discretion." Walker, 827 S.W.2d at 840.

Applicability of the Federal Arbitration Act

The Federal Arbitration Act governs a written arbitration clause in "a contract evidencing a transaction involving commerce." 9 U.S.C.A. 2. This provision extends to any transaction affecting commerce and is coextensive with the reach of the Commerce Clause of the United States Constitution. Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265, 273-277 (1995). A contract "evidenc[es] a transaction involving commerce" if it in fact turns out to involve interstate commerce. Id. at 277-281. Arbitration will be compelled under the FAA if (1) there is a valid agreement to arbitrate between parties and (2) the dispute is within the scope of the arbitration agreement. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753-54 (Tex. 2001).

The arbitration agreement is contained in the MDA, and, pursuant to the MDA, KCC, a California corporation headquartered in California, was to sell land mobile radios to PR-900, a Nevada limited liability corporation doing business in Texas. PR-900's orders would be processed in California; and the radios would be shipped from KCC's California warehouse to Texas, where PR-900 would use them in its planned wide area radio network in Central and South Texas. Therefore, if the MDA was an effective contract between the parties, the arbitration clause is in a "contract evidencing a transaction involving commerce" and is governed by the FAA. The scope of the arbitration provision is not in issue in this case. Rather, PR-900 argues the MDA never became effective because execution of the MDA by KCC in California was a condition precedent to formation of a contract; and the condition was not met. PR-900 thus concludes there is no contract between the parties that contains an agreement to arbitrate. (2) KCC counters that the condition precedent was waived and the contract became effective. Whether KCC and PR-900 had a valid agreement to arbitrate is an issue of law for the court to decide. See Howsam v. Dean Witter Reynolds, Inc. -- U.S. --, 123 S. Ct. 588, 592 (2002). We decide this question by applying "ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). However, before doing so, we must determine whether Texas or California law applies.

What law governs

The MDA states the agreement "shall be governed and construed in all respects in accordance with the laws of the State of California, excluding California's conflicts of laws principles." Texas has adopted section 187 of the Restatement (Second) of Conflict of Laws. Therefore, Texas courts generally respect the parties' choice of law "if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue" or if the chosen law has a substantial relationship to the parties or the underlying transaction and does not conflict with a fundamental policy of a state with a materially greater interest. Restatement (Second) of Conflict of Laws 187 (1971); In re J.D. Edwards World Solutions Co., 87 S.W.3d 546, 549 (Tex. 2002).

The specific issue involved in this case - whether and how a condition precedent to formation of a contract may be waived - is one the parties could have explicitly resolved in the contract. See Restatement 187(1). Moreover, California has a substantial relationship to the transaction since Kenwood is headquartered in California and would have performed its obligations under the contract in California. See id. 187(2)(a). Finally, application of California law will not be contrary to any fundamental policy of the State of Texas, the only other state with a substantial relationship to the parties or the transaction. See id. 187 (2)(b). We therefore apply California law to determine whether the MDA became binding on the parties.

Application of California Law

PR-900 argues paragraph 19 of the MDA contains an express condition precedent to contract formation; and this condition precedent was not met. Paragraph 19 of the MDA states in relevant part:

This Agreement shall become effective only if first executed by Dealer within or outside the State of California and subsequently executed by Kenwood in the State of California.

KCC maintains the condition that it execute the contract in California was waived, and, because both parties intended to be bound and performed under the contract, the MDA is enforceable. We agree with KCC.

Under California law, a "condition precedent is one which is to be performed before some right dependent thereon accrues, or some act dependent thereon is performed." Cal. Civ. Code 1436 (2002). As a general rule, when the parties expressly make the creation of a contract subject to a condition precedent, no contract is formed unless the condition is met. See Taylor Bus Service,Inc. v. San Diego Bd. of Educ., 241 Cal. Rptr. 379, 387 (1987). However, a condition precedent to formation of a contract may be waived by the party for whose benefit the condition is inserted; when the condition is waived, a contract is formed. See Knarston v. Manhattan Life Ins. Co., 140 Cal. 57, 63, 73 P. 740, 741 (1903); California Raisin Growers' Ass'n v. Abbott, 160 Cal. 601, 606, 117 P. 767 (1911); Sabo v. Fasano, 201 Cal. Rptr. 270 (1984). Waiver of a condition precedent may be express or inferred from the circumstances. Knarston, 140 Cal. at 63, 73 P. at 741.

We agree with PR-900 that the quoted provision in paragraph 19 is a condition precedent to formation of a binding agreement. However, the undisputed evidence establishes the condition was included in the MDA by KCC to ensure that a potential dealer's credit application is approved by officials at KCC California corporate headquarters before KCC is bound to an MDA with that dealer. Because the condition was in the MDA solely for KCC's benefit, KCC could waive it. And the undisputed evidence establishes KCC waived the condition. KCC's California corporate headquarters received the documents executed by PR-900, approved PR-900's credit application, opened an account in its name, and then filed the MDA under the mistaken belief a signature stamp had been affixed to it. KCC treated the MDA as a fully executed contract, including processing orders PR-900 placed pursuant to the MDA. Consequently, the evidence establishes waiver of the condition, mutual assent, and intent to be bound by the MDA, including the arbitration provision. See Basura v. U.S. Home Corp., 120 Cal. Rptr. 2d 328, 335 (2002, review den., m. depublication den.) (3) (holding that, although builder failed to initial arbitration paragraph in twenty-eight of forty-eight form contracts that required parties' initials for arbitration provision to become effective, there was a valid agreement to arbitrate if evidence established builder's intent to be bound and the failure to initial contracts was simply clerical error); see also Cal. Civ. Code, 3388 (as a general rule, party who has not signed contract but who has performed or offered to perform under contract may enforce contract against party who has signed it). (4)

Under California l aw, the MDA, including the arbitration provision, is an enforceable contract between KCC and PR-900. Because the trial court failed to properly apply California law to the undisputed evidence, it abused its discretion in denying KCC's motion to compel arbitration.

Arbitration of Claims Against KAC and Cochran

KAC and Cochran, who are not parties to the MDA, also moved to compel arbitration under the doctrine of equitable estoppel.

Application of the doctrine of equitable estoppel is warranted when a party to a contract with an arbitration clause raises claims "of substantially interdependent and concerted misconduct" by both a party to the contract and nonparties. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir. 2000); MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999); see In re Koch Indus., Inc., 49 S.W.3d 439, 447 (Tex. App.-San Antonio 2001, orig. proceeding) (where claims against affiliated companies are inherently inseparable from claims against party to agreement, arbitration may be compelled); Rogers v. Peinado, 101 Cal. Rptr. 2d 817, 823 n.6 (2000) (recognizing equitable estoppel doctrine as stated in MS Dealer and Grigson), overruled on other grounds, Brennan v. Tremco, Inc., 25 Cal. 4th 310, 317, 20 P.3d 1086 (2001); 24 Hour Fitness, Inc. v. Superior Court, 78 Cal. Rptr. 2d 533, 539 (1998) (holding that plaintiff may be compelled to arbitrate claims against employees for acts taken as agents of corporation with which plaintiff had an arbitration agreement).

PR-900's claims against KAC, KCC's parent company, and Cochran, KCC's regional sales manager, are identical to and based upon the same facts as the claims made against KCC. The petition specifically alleges that PR-900's claims against Cochran are based on his actions as KCC's agent. Otherwise, all of the factual allegations refer to actions taken by the three defendants jointly. We agree that PR-900's claims against KAC and Cochran are inherently inseparable from its claims against KCC. Therefore, those claims are also required to be submitted to arbitration. "Otherwise the arbitration proceedings between [PR-900 and KCC] would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted." MS Dealer, 177 F.3d at 947. (5)

Conclusion

The trial court abused its discretion in denying relators' motion to compel arbitration of PR-900's claims against them. We therefore conditionally grant a writ of mandamus, order the trial court to vacate its April 19, 2002 order, and order the trial court to sign an order compelling arbitration of the claims between PR-900, L.L.C., Kenwood Communications Corporation, Kenwood Americas Corporation, and Gary Cochran and staying all proceedings pending the arbitration.

Sarah B. Duncan, Justice

Publish

1. This proceeding arises out of Cause No. 2001-CI-05587, styled PR-900, L.L.C. v. Kenwood Communications Corporation, et al., pending in the 150th Judicial District Court, Bexar County, Texas, in which the Honorable Janet Littlejohn is the presiding judge; and the caption on the challenged order indicates it is an order of that court. However, the Honorable Frank Montalvo, presiding judge of the 288th Judicial District Court, Bexar County, Texas, conducted the hearing and ruled on the motion that is the subject of this proceeding; and the order denying the motion was signed by the Honorable Phylis J. Speedlin, presiding judge of the 408th Judicial District Court, Bexar County, Texas.

2. PR-900 contends the parties' agreement was a less formal one consisting of earlier oral representations and a letter, which it contends did not include an agreement to arbitrate. Because we hold the MDA became effective and was binding on the parties, all previous writings and oral representations merged into the written contract. Paragraph 18 of the MDA states that "all prior or contemporaneous written or oral agreements between the parties pertaining in any manner to the subject matter of this Agreement expressly are superseded and canceled by this Agreement." See Cal. Civ. Code 1856 ("Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement.").

3. Notation of the California Supreme Court's denial of a petition for review to suggest approval by the higher court is disfavored. Cal. Style Manual 1:11 (4th Ed. 2000). However, because Basura is the most recent California court of appeals opinion we have found on this subject, we believe the denial of review and denial of request for depublication is relevant.

4. PR-900 relies on Marcus & Millichap Real Estate Inv. Brokerage Co. v. Hock Inv. Co., 80 Cal. Rptr. 2d 147 (1998), and Banner Entm't, Inc. v. Superior Court, 72 Cal. Rptr. 2d 598 (1998), for the proposition that an agreement to arbitrate that requires the signature of both parties to become effective is not effective in the absence of both parties' signature. However, in each of these cases, the party against whom enforcement of the agreement was sought had not signed the agreement; and there was no evidence of assent and intent to be bound on the part of the non-signing party. See Banner, 72 Cal. Rptr. 2d at 606 ("[I]t is not the presence or absence of a signature which is dispositive; it is the presence or absence of evidence of agreement to arbitrate which matters.")

5. We also note that PR-900 completely failed to respond to the argument in the petition for writ of mandamus that the claims against KAC and Cochran should also be arbitrated. KAC and Cochran point this out in their reply brief, stating, "PR-900 does not dispute ... if arbitration is proper as to one of the three Relators, it is proper as to all." PR-900 responded to the reply brief but failed to take issue with this statement.