Tag Archives: Contract

Second District Orders Published Serpa v. California Surety Investigations, Inc.

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Old crest of the club. (Photo credit: Wikipedia)

Today, the Second District ordered published Serpa v. California Surety Investigations, Inc., et al., No. B237363, __ Cal. App. 4th __ (filed Mar. 21, 2013, modified Apr. 19, 2013).  At the trial court level, the court denied defendants’  motion to compel arbitration, finding the agreement to arbitrate lacked mutuality.  Defendants argued that the requisite mutuality was provided by the bilateral arbitration provisions in the employee handbook, incorporated by reference into the arbitration agreement.  The trial court rejected this argument because defendant could change the handbook at its sole discretion and without notice.  The Second District reversed.

The motion to compel arbitration was based on three documents: (1) “Acknowledgment of Receipt of Arbitration and Agreement to Arbitrate”; (2) “Acknowledgment of Receipt of Employee Handbook”; and (3) a copy of the employee handbook.  Plaintiff contended the agreement to arbitrate is one-sided because it requires her to submit claims against her employer to arbitration but does not require her employer to arbitrate its claims against her: “I understand and agree that if my employment is terminated or my employment status is otherwise changed or any other dispute arises concerning my employment . . . , I will submit any such dispute exclusively to binding arbitration.”

The Court of Appeal agreed that if “that the full extent of the agreement, we would likely agree it lacked mutuality because it requires Serpa to submit to arbitration ‘any such disputes’ involving her employment without imposing a similar obligation on CSI.”

However, because the agreement incorporated the arbitration policy in the employee handbook, the Court concluded that this “salvages the agreement by establishing an unmistakable mutual obligation on the part of CSI and Serpa to arbitrate ‘any dispute’ arising out of her employment.”  Plaintiff argued that the while the arbitration policy in the handbook establishes a bilateral obligation to arbitrate, she insisted that the mutual obligation is illusory because, the employer is authorized to alter the terms of any policy contained in the handbook at its sole discretion and without notice.  The Court disagreed, reasoning that the right to alter the terms was limited by the covenant of good faith and fair dealing implied in every contract.

The implied covenant of good faith prevents one contracting party from “unfairly frustrating the other party‟s right to receive the benefits of the agreement actually made.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349; accord, American Express Bank, FSB v. Kayatta (2010) 190 Cal.App.4th 563, 570.) Thus, it has long been the rule that a provision in an agreement permitting one party to modify contract terms does not, standing alone, render a contract illusory because the party with that authority may not change the agreement in such a manner as to frustrate the purpose of the contract. (See Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 923 [“„where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing‟”]; see generally Asmus v. Pacific Bell (2000) 23 Cal.4th 1, 16 [employer‟s right to unilaterally modify employment agreement does not make agreement illusory]; Badie v. Bank of America (1998) 67 Cal.App.4th 779, 787-788 [contracting party with unilateral right to modify contract does not have “carte blanche to make any kind of change whatsoever”; unilateral right to modify, when limited by the implied covenant of good faith and fair dealing, requires the party holding the power to affect the other party‟s rights to exercise it in a manner consistent with the reasonable contemplation of the parties at the time of the contract].) Application of the implied covenant of good faith and fair dealing is no different in the arbitration context. In 24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199 (24 Hour Fitness), a former employee brought an action against the company, doing business as 24 Hour Nautilus, for sexual harassment and related torts. The employer moved to compel arbitration based on an arbitration policy in its employee handbook, which also contained a provision allowing the company to amend the handbook at its sole discretion. The 24 Hour Fitness court rejected the plaintiff‟s contention the unilateral right-to-amend provision made the arbitration agreement illusory and thus unconscionable. Observing the parties to an arbitration agreement, like any contract, are bound by the contract‟s implied covenant of good faith, the court explained, “Nautilus‟s discretionary power to modify the terms of the personnel handbook on [written] notice indisputably carries with it the duty to exercise that right fairly and in good faith. [Citation.] So construed, the modification provision does not render the contract illusory.” (Id. at p. 1214.)

Judges & Attorneys

Presiding Justice Perluss delivered the opinion for the court, with Associate Justices Woods and Jackson concurring.

Appeal from an order of the Superior Court of Los Angeles County, Judge Ruth Ann Kwan.

Paul, Plevin, Sullivan & Connaughton, Fred M. Plevin, Jeffrey P. Ames and Matthew R. Jedreski for Defendants and Appellants, California Surety Investigations, Inc., Two Jinn, Inc., Aladdin Bail Bonds and Peter Holdsworth.

Stevens, Carlberg & McMillan and Daniel P. Stevens for Plaintiff and Respondent Valerie Serpa.

By CHARLES H. JUNG

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Unclean Hands Bars Suit Between Construction Contractors Where Subcontractor Failed to Pay Labor Code Prevailing Wages

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Plaintiff construction subcontractor appealed from a trial court ruling that its suit against the construction contractor was barred by the doctrine of unclean hands.  B & K Custom Cabinets, Inc. v. B.K. Ball, Inc., No. C060766, 2010 WL 3508321 (Cal. Ct. App. 3d Dist. Sept. 9, 2010).  The subcontractor B & K sued contractor Ball seeking to enforce a stop notice and asserting causes of action for breach of contract and violation of the prompt payment laws, all designed to recover $155,534 allegedly due under the subcontract. Id. *6.  Ball claimed it owed no more than $87,987, but because it had knowledge of B & K’s prevailing wage violation, Ball could not pay even that amount without exposing itself to liability under Labor Code section 1775 unless B & K provided “an affidavit signed under penalty of perjury” attesting that B & K employees had been paid the prevailing wages.” Id. (citing Lab. Code § 1775(b)). Continue reading

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Ninth Circuit Holds That Contracts Expressly Acknowledging Independent Contractor Status “Simply Not Significant” Under California’s Test of Employment”

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In Narayan v. EGL, Inc., — F.3d —-, 2010 WL 2735708 (9th Cir. July 13, 2010), the Ninth Circuit decided whether, assuming the existence of an employer-employee relationship in California, the employer may avoid its obligations under the Labor Code by inserting a clause in an employer-drafted pre-printed form contract in which: (1) the employee acknowledges that he is an independent contractor and (2) agrees that the contract would be interpreted in accordance with the laws of another jurisdiction where such an agreement is generally enforceable.  Judge Ronald M. Whyte of the Northern District of California found that declarations in the underlying agreements stating that the drivers were independent contractors rather than employees compelled the holding that the plaintiffs were indeed independent contractors as a matter of law.  Id. at *2.  Consequently, the district court granted the employer’s motion for summary judgment.  The Ninth Circuit reversed.

EGL, the employer, is a global transportation, supply chain management and information services company incorporated under the laws of Texas and headquartered in Texas.  EGL’s services include, inter alia, “air and ocean freight forwarding, customs brokerage, [and] local pickup and delivery service.” Plaintiff drivers (the “Drivers”) were residents of California who were engaged to provide freight pick-up and delivery services for EGL in California. All three Drivers signed agreements with EGL for “Leased Equipment and Independent Contractor Services” (the “Agreements”). The Agreements provided that the “intention of the parties is to … create a vendor/vendee relationship between Contractor and [EGL],” and acknowledged that “[n]either Contractor nor any of its employees or agents shall be considered to be employees of” EGL. The terms of the Agreements provide, inter alia, that the Drivers “shall exercise independent discretion and judgment to determine the method, manner and means of performance of its contractual obligations,” although EGL retained the right to “issue reasonable and lawful instructions regarding the results to be accomplished.”  Id. at *1.

The Ninth Circuit noted the difficultly in overcoming the  Drivers’  prima facie case that the relationship was one of employer/employee. “This hurdle is particularly difficult for EGL to overcome in light of the second special consideration in this case, namely, the multi-faceted test that applies in resolving the issue whether the Drivers are employees.”  Id. at *4.

The Ninth Circuit described the multifactor approach to evaluating the:

indicia of an employment relationship, the most important of which is the “right to discharge at will, without cause.” Borello, 256 Cal.Rptr. 543, 769 P.2d at 404 (quoting Tieberg v. Unemployment Ins.App. Bd., 2 Cal.3d 943, 88 Cal.Rptr. 175, 471 P.2d 975, 979 (Cal.1970)). Borello endorsed other factors derived from the Restatement (Second) of Agency that may point to an employment relationship:  (a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.

Id. at *4.

The Court concluded that the “fact that the Drivers here had contracts ‘expressly acknowledging that they were independent contractors’ is simply not significant under California’s test of employment.” Id. at *8 (citing Borello, 256 Cal. Rptr. 543, 769 P.2d at 403 (“The label placed by the parties on their relationship is not dispositive, and subterfuges are not countenanced.”)).

The Court evaluated the various indicia of employment and concluded that:

Ultimately, under California’s multi-faceted test of employment, there existed at the very least sufficient indicia of an employment relationship between the plaintiff Drivers and EGL such that a reasonable jury could find the existence of such a relationship. Indeed, although it plays no role in our decision to deny summary judgment, it is not without significance that, applying comparable factors to those that we apply here, the Internal Revenue Service (at EGL’s request) and the Employment Development Department of California (at Narayan’s request) have determined that Narayan was an employee for federal tax purposes (applying federal law) and California Unemployment or Disability Insurance (applying California law), respectively.

Id. at *8.

UPDATE:

On August 5, 2010, the Ninth Circuit amended its holding, highlighted above.

By CHARLES H. JUNG

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