GRP2 Uniforms v. Galls CA4/3
G059558
| Cal. Ct. App. | Jul 8, 2021Background
- Galls agreed to acquire two distribution businesses for an estimated $4 million, with a Post-Closing Statement to determine final adjustments based on contract terms and an incorporated "Balance Sheet Rules."
- Galls paid $3.2 million at signing and retained $800,000 pending the Post-Closing Statement, which Galls was to prepare within 90 days.
- The contract’s Dispute Resolution Subsection (DRS) permitted Sellers to object to the Post-Closing Statement only on the basis that it "contained arithmetic errors or was not prepared in accordance with" the contract and Balance Sheet Rules, and required submission of remaining disputes to an independent accounting/financial firm (Accountants) whose decision would allocate fees pro rata.
- Galls’ Post-Closing Statement asserted a $3.8 million Working Capital underage (primarily a $2 million inventory write-down) and sought repayment; Sellers objected and filed suit the same day.
- Sellers sued for reformation (mistake), fraud, breach of contract, UCL violations, and declaratory relief. The trial court compelled arbitration for the breach claim only and denied arbitration for the reformation, fraud, UCL, and declaratory relief claims; the Court of Appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper standard of review for interpreting the DRS | Sellers: trial court relied on contract text and extrinsic evidence; defer to factual findings | Galls: interpretation is a question of law; review de novo | Court: de novo review (no competent extrinsic evidence changed DRS meaning) |
| Whether the DRS is an arbitration agreement | Sellers: DRS is not a general arbitration clause; limited and does not use word "arbitration" | Galls: DRS manifests agreement to submit disputes to a neutral third-party decisionmaker | Court: DRS is an arbitration agreement in form (third-party decisionmaker, neutrality, binding decision) |
| Scope: whether non-accounting legal claims fall within the DRS | Sellers: DRS is narrow—limited to arithmetic/accounting errors and compliance with Balance Sheet Rules; legal claims (reformation, fraud, UCL, declaratory relief) are outside | Galls: DRS covers disputes affecting the Post-Closing Statement and thus these claims | Court: DRS is narrow and limited to accounting/arithmetic disputes; noncompelled legal claims are not covered |
| Burden to prove arbitrability of specific claims | Sellers: once arbitration clause shown, party opposing arbitration must prove claim is not covered | Galls: N/A (Galls bore initial burden to show clause exists) | Court: Galls met initial burden; Sellers met burden to show noncompelled claims fall outside narrow DRS |
Key Cases Cited
- Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal.App.4th 944 (Cal. Ct. App. 2003) (extrinsic evidence admissible only to show a meaning to which a contract is reasonably susceptible)
- Titolo v. Cano, 157 Cal.App.4th 310 (Cal. Ct. App. 2007) (petitioner bears burden to prove arbitration clause exists; then burden shifts to opposing party to show dispute not covered)
- Engalla v. Permanente Medical Group, Inc., 15 Cal.4th 951 (Cal. 1997) (standard for proving existence of arbitration agreement)
- Cheng-Canindin v. Renaissance Hotel Associates, 50 Cal.App.4th 676 (Cal. Ct. App. 1996) (attributes of an arbitration agreement: neutral third party, party choice, opportunity to be heard, binding decision)
- Bigler v. Harker School, 213 Cal.App.4th 727 (Cal. Ct. App. 2013) (broad arbitration clauses construed liberally where language is expansive)
- Bono v. David, 147 Cal.App.4th 1055 (Cal. Ct. App. 2007) (analysis of broad vs. narrow arbitration clauses)