Procedural Posture

Appellants challenged the decision of the Superior Court of San Mateo County (California), which denied appellants’ motion to compel arbitration because it had to decide whether the arbitration clause was fraudulently induced and because respondent two had not agreed to arbitration. Parties’ San Diego litigation lawyer appeal.

Overview

Respondents agreed to purchase and/or lease a computer system from appellants. Numerous problems arose with respect to the performance of the system and with the services provided by appellants. Respondents filed various causes of action against appellants. Although respondents claimed that the contract was fraudulently induced, they did not seek rescission of the contract. Appellants moved to compel arbitration. The trial court denied the motion. Appellants sought review. The court reversed in part, holding that there was no need to determine the validity of the agreement to arbitrate because mere allegations that the contract as a whole was induced by fraud would not avoid the effect of the arbitration clause with respect to respondent one. The allegation that appellants acted fraudulently in selling defective equipment was nothing more than an allegation of fraud in the inducement of the contract as a whole. Such an allegation could have no effect on the validity of the arbitration clause. However, the court affirmed in part, holding that respondent two was not subject to arbitration because it never entered into the earlier agreement that contained the arbitration clause.

Outcome

The court partially reversed the trial court’s denial of appellants’ motion to compel arbitration, holding that respondent one could not avoid the effect of the arbitration clause by alleging fraud in the inducement of the contract as a whole. However, the court affirmed the trial court’s finding that respondent two never agreed to arbitrate any issues.

Overview

HOLDINGS: [1]-A self-storage facility’s alternative indemnity agreement with its customer did not constitute insurance subject to regulation under the California Insurance Code; [2]-The rental of storage space was the principal object and purpose of the parties’ transaction, and the protection plan was incidental to that purpose; [3]-The legislature’s enactment of Article 16.3 of the Insurance Code enables self-storage facilities to act as agents for insurance companies with respect to the narrow category of insurance described in Article 16.3, but it does not prohibit the parties’ indemnification agreement set forth in the Protection Plan; [4]-Because the customer’s claims were premised on his contention that the protection plan was subject to regulation under the Insurance Code, his claims failed.

Outcome

Judgment of court of appeal affirmed.

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