Steleco LLC et al. v. DPR Construction et al.

1 Various parties have moved to join DPR’s motion to dismiss the Complaint, and those joinders are granted.

2 c. The parties shall complete mediation under the AAA Construction Industry Mediation Rules (Article 13.4) before further substantive arbitration hearings if they have not already done so to a conclusion. The arbitrator may, in her discretion, set a mediation deadline. d. Owners’ 13th cause of action for disgorgement under Business and Professions Code section 7031 shall proceed in arbitration with all other Owner-DPR claims. The Court reserves de novo review under Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21.

3. All proceedings in this Court are STAYED pending the outcome of arbitration to mitigate the risk of inconsistent rulings (Code Civ. Proc., §§ 1281.2, 1281.4), except for (a) ministerial matters relating to mechanics lien releases or bonds that do not require adjudication of the underlying merits, and (b) any further proceedings the Court orders. KO Architects, Inc.’s anticipated motion for summary judgment may be filed and heard after the stay is lifted.

II.

Background

This action arises out of the construction of a four-story, mixed-use building with two levels of subterranean parking located at 425–429 University Avenue, Palo Alto, California (the “Project”). Kipling Post is the owner of the real property, and Steleco served as the “Agent for Owner.” Steleco contracted with DPR as construction manager and general contractor under a written contract dated January 15, 2019 (the “Prime Contract”). KO Architects (“KO Architects” or “KO”) was the project architect, retained directly by Kipling Post under a 2017 design agreement. HL was retained as structural and civil engineer, and CEL provided inspection and testing services. DPR retained more than 20 subcontractors, including TKE.

Article 13 of the Prime Contract contains a JAMS arbitration clause (§ 13.5), a multiparty-proceeding clause (§ 13.8), and a mechanic’s-lien carve-out (§ 13.9); Article 14.3 selects “the Law in effect at the location of the Project” as governing law. KO Architects (under a contract with Owners predating the Prime Contract) and Hohbach-Lewin have no arbitration provisions with anyone. CEL has both a contract with DPR and a separate contract

3 with Owners. TKE’s MSA contains a negotiated amendment at Section 17.2.4 stating that “litigation shall be utilized in lieu of arbitration,” with the express agreement that the amendment would have priority over conflicting language.

On November 1, 2022, Steleco filed a JAMS arbitration demand against DPR. Hon. Lynn Duryee (Ret.) is the arbitrator. Scheduling Order No. 1 found the original dispute arbitrable. In Scheduling Order No. 10, however, Arbitrator Duryee acknowledged that the court “may find that consolidation of the related actions is proper, even though the within matter has been in arbitration for 1.5 years” and directed Owners to file a motion to consolidate.

Beginning in 2022, eleven mechanic’s lien and payment lawsuits were filed by various subcontractors against Owners and DPR. Seven were consolidated by Order dated November 22, 2023 (Lead Case 22CV400012). On May 16, 2024, Owners filed this defect action (24CV439209), asserting sixteen causes of action against twenty-eight defendants. Owners seek consolidation of all related actions, including the arbitration. The motion to consolidate is heard concurrently with the present motions.

Among the causes of action in this case is a Thirteenth Cause of Action for disgorgement of all sums paid to DPR pursuant to Business and Professions Code section 7031, premised on Owners’ allegation that DPR’s License No. 953749 lapsed during construction. DPR represents that it obtained License No. 1083716 before suspension of License No. 953749, ensuring continuous licensure. The licensure dispute is contested on the present record.

III. Governing Law

Although the Federal Arbitration Act (“FAA”) governs the substantive enforceability of arbitration agreements that affect interstate commerce, California’s procedural rules (including Code of Civil Procedure section 1281.2) apply in California court unless the parties have expressly chosen the FAA’s procedural provisions. (Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 393–394 (Cronus); Valencia v. Smyth (2010) 185 Cal.App.4th 153, 177 (Valencia); Los Angeles Unified Sch. Dist. v. Safety Nat. Cas. Corp. (2017) 13

4 Cal.App.5th 471, 482–483 (LA Unified).) Article 14.3 of the Prime Contract provides only that “[t]he Law in effect at the location of the Project shall govern this Agreement,” in other words, California law. Nothing in the Prime Contract designates the FAA’s procedural sections as the procedural rules governing the arbitration. Under Cronus, Valencia, and LA Unified, section 1281.2 therefore applies. DPR’s supplemental brief candidly acknowledges this. (DPR Supplemental Brief, p. 17 [“the FAA’s procedural provisions do not apply in state court unless the parties expressly adopt them. The state’s procedural statutes (§§ 1281.2, 1290.2) apply by default”].) The Court finds no actual conflict between the FAA and section 1281.2 on these facts that would warrant displacing California’s procedural framework. Accordingly, the motion is decided under section 1281.2.

Under Code of Civil Procedure section 1281.2, the Court must order arbitration of a controversy if it determines that an agreement to arbitrate exists, unless it determines that (a) the right to compel arbitration has been waived; (b) grounds exist for revocation of the agreement; or (c) “[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.”

Where subdivision (c) applies, the Court has broad discretion. It may: (1) refuse to enforce the arbitration agreement and order intervention or joinder; (2) order intervention or joinder as to certain issues; (3) order arbitration among the parties who agreed to arbitrate and stay the pending court action pending arbitration; or (4) stay the arbitration pending the outcome of the court action. (Code Civ. Proc. § 1281.2; Mercury Ins. Group v. Superior Court (1998) 19 Cal.4th 332, 345–346 (Mercury Ins. Group).) An opponent of arbitration need only show that conflicting rulings are “possible,” not inevitable. (Lindemann v. Hume (2012) 204 Cal.App.4th 556, 567 [the issue under section 1281.2 subdivision (c), “is not whether inconsistent rulings are inevitable but whether they are possible if arbitration is ordered”].)

IV. Discussion

5 The Court asked seven supplemental questions in its Order for Supplemental Briefing, discussed in turn below.

A. Scope of Arbitrability for Non-Signatories (Question 1)

The Court asked: “The arbitration clause in the agreement between Steleco and DPR appears contractually limited to those two parties. On what legal basis, if any, should the Court compel arbitration of disputes involving subcontractors who are not signatories to that specific agreement?”

California recognizes several doctrines under which a non-signatory may be compelled to arbitrate: (a) incorporation by reference; (b) assumption; (c) agency; (d) alter ego; (e) equitable estoppel; and (f) third-party beneficiary. (Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 859 (Cohen); Jensen v. U-Haul Co. of California (2017) 18 Cal.App.5th 295, 306 (Jensen) [“[a] non-signatory plaintiff may be estopped from refusing to arbitrate when he or she asserts claims ‘dependent upon, or inextricable intertwined with,’ the underlying contractual obligations of the agreement containing the arbitration clause”].) The Court applies the foregoing principles to each category of party.

1. Steleco LLC

Steleco is a signatory to the Prime Contract and has affirmatively initiated and prosecuted the JAMS arbitration. Its claims against DPR are quintessential Article 13.5 disputes “arising out of” the Prime Contract. Steleco is bound to arbitrate. Accordingly, the motion is GRANTED as to Steleco.

2. Kipling Post LP

Kipling Post did not sign the Prime Contract. Owners argue that for that reason it cannot be compelled to arbitrate. The Court disagrees on this record. Kipling Post is the actual record owner of the Project and is named alongside Steleco as a co-claimant in the JAMS arbitration demand it filed in November 2022. It has prosecuted that arbitration, paid arbitration fees, taken discovery, and attended hearings for more than three years. By voluntarily invoking the arbitration forum, Kipling Post is properly compelled under the

6 doctrines of assumption and equitable estoppel. (Cohen, supra, 31 Cal.App.5th at p. 859 (assumption); Jensen, supra, 18 Cal.App.5th at p. 306 [estoppel where non-signatory’s claims are inextricably intertwined with the contract].) Kipling Post’s claims for breach of contract, defective workmanship, breach of implied warranty, and disgorgement against DPR are all dependent on the rights and duties created by the Prime Contract. Accordingly, the motion is GRANTED as to Kipling Post.

3. DPR Construction

DPR is a signatory to the Prime Contract and the moving party. The motion is GRANTED as to DPR. The Court reminds DPR of its concurrent obligation under Article 13.4 to participate in mediation under the AAA Construction Industry Mediation Rules. The parties shall mediate in good faith before further substantive arbitration hearings if they have not already done so to a conclusion.

4. The Subcontractors With “Standard” Flow-Down Provisions

The subcontracts produced on this record contain a flow-down clause that incorporates the Prime Contract’s dispute resolution procedures “as if fully set forth” and binds the subcontractor to participate in the same proceeding when the dispute involves Owner. As to those subcontractors, the flow-down clause is a written arbitration agreement directly binding the subcontractor. They are not “third parties” within the meaning of section 1281.2(c). (Thomas v. Westlake (2012) 204 Cal.App.4th 605, 612 [“[a]s used in section 1281.2, subdivision (c), the term ‘third party’ means a party to the action that is not bound by or entitled to enforce the arbitration agreement”].)

Accordingly, the motion is GRANTED as to subcontractors holding “standard” flowdown provisions whose claims are presently before the court and involve, or are alleged to involve, acts or omissions of the Owner or are tied to the Owner–DPR dispute. Based on the record presented, this includes (subject to verification of the operative subcontract for each): Pacific States Environmental Contractors, Inc.; Acco Engineered Systems, Inc.; Air Systems, Inc.; Schnabel Foundation Company; Freas Plastering Company, Inc.; Alcal Specialty

7 Contracting, Inc.; Alcal Glass Systems, Inc.; W. Bradley Electric, LLC; Pacific Steel Group, LLC; Academy Awning, Inc.; Alliance Roofing Company, Inc.; Anning-Johnson Company; Cornerstone Masonry, Inc.; Cosco Fire Protection, Inc.; George E. Masker, Inc.; Joseph J. Albanese, Inc.; Lee’s Imperial Welding, Inc.; Service Metal Products, Inc.; Superior Gunite; and Therma LLC.

5. Subcontractors With “Owner Disapproval” Language (Bigge Crane and Berkeley Cement)

At least two subcontractors (Bigge Crane and Rigging Co. and Berkeley Cement, Inc.) have a Section 17.1 clause or provision that contains an additional qualifier providing that, in disputes involving Owner, “Contractor and Subcontractor will participate together in the same dispute resolution proceeding unless Owner or Contractor disapproves Subcontractor’s participation.” Owners have expressly disapproved their participation in arbitration as to these two subcontractors. The clause is clear on its face and enforceable as it states.

Accordingly, the motion is DENIED as to Bigge Crane and Rigging Co. and Berkeley Cement, Inc. The state-court claims by and against those subcontractors will be stayed under section 1281.4 pending the conclusion of arbitration. Should further review reveal that any other subcontract contains comparable “disapproval” language not yet briefed to the Court, the parties may move for clarification. The Court directs DPR to lodge complete copies of all subcontracts on the record within fifteen (15) days, in light of the assertion in Owners’ supplemental brief that some subcontracts have been produced only as work authorizations.

6. TK Elevator Corporation

TKE’s subcontract is materially different from the others. The TKE Master Subcontract Agreement substitutes Section 17.2.4 with the express provision that “litigation shall be utilized in lieu of arbitration” and provides that this amendment “shall have the highest priority over any conflicting language” in the subcontract. DPR concedes the language but contends that Sections 17.1, 17.3, and 17.5 still apply where Owner is involved.

8 The Court declines to adopt DPR’s reading. The TKE amendment is by its terms a deliberate, negotiated departure from the standard arbitration regime, with an express priority clause. Reading Sections 17.1, 17.3, and 17.5 to override the amendment would render the negotiated amendment a nullity. Because TKE has expressly preserved its right to litigate as to its disputes with DPR, and has unambiguously objected to participating in arbitration, the Court will respect TKE’s contracted-for forum choice. Accordingly, the motion is DENIED as to TKE. The state-court claims by and against TKE shall be stayed under section 1281.4 pending the conclusion of the arbitration, to avoid inconsistent factual findings on overlapping issues.

7. KO Architects, Inc.

KO’s 2017 design contract with Kipling Post predates the Prime Contract by sixteen months and contains no arbitration clause. The Owners owed a contractual obligation under Article 13.8 of the Prime Contract to bring KO into the same dispute-resolution forum, but they did not. That contractual breach is between Owners and DPR; it does not retroactively impose an arbitration agreement on KO. DPR argues that KO is equitably estopped because KO’s cross-complaint expressly invokes Article 11.1.1 of the Prime Contract for indemnity.

Equitable estoppel is a colorable theory, but on this record the Court is not persuaded that KO’s status as a contractually identified “Design Professional” entitled to indemnity is sufficient to override the absence of any arbitration agreement, particularly where KO has consistently disclaimed any intention to participate in the arbitration and the Owner-KO relationship is governed by an earlier, separate contract with no arbitration clause. Accordingly, the motion is DENIED as to KO. Pursuant to section 1281.4, the statecourt claims by and against KO shall be stayed pending the conclusion of the arbitration.

KO’s indication that it intends to file a motion for summary judgment will be addressed when the stay is lifted.

8. Hohbach-Lewin and Consolidated Engineering Laboratories

On this record, both Hohbach-Lewin and CEL hold separate professional services agreements with the Owners that contain no arbitration clause. Both also hold contracts with DPR. DPR proffers that the DPR/Hohbach-Lewin and DPR/CEL contracts each contain a Section 23 incorporating the Prime Contract’s dispute resolution procedures whenever the Owner is “involved.” To the extent the claims by or against Hohbach-Lewin and CEL arise out of, or are inextricably intertwined with, their DPR contracts in disputes that involve Owner, those claims are arbitrable through the flow-down mechanism, on the same logic that governs the standard subcontractors above.

To the extent claims arise solely under the separate Owner-direct professional services agreements that contain no arbitration clause, those claims are not arbitrable. Accordingly, the Court tentatively GRANTS the motion as to Hohbach-Lewin and CEL on claims tied to their DPR contracts and DENIES the motion as to claims arising solely from their separate Owner-direct contracts; those latter claims shall be stayed under section 1281.4 pending arbitration. The parties may seek clarification at the case management conference upon a more complete showing of the operative agreements.

9. DPR Employees Amelia Kraus and Robert Skinner

Owners have named two DPR employees as defendants in the Defect Lawsuit. Where the claims against these individuals are derivative of DPR’s alleged breaches of the Prime Contract and are within the scope of their employment, the claims are inextricably intertwined with DPR’s arbitration agreement, and equitable estoppel principles permit them to invoke that agreement. Accordingly, the motion is GRANTED as to Kraus and Skinner.

B. Severability of Claims (Question 2)

10 The Court asked: “Can the Court legally compel a portion of the claims to arbitration while retaining jurisdiction over others for a civil trial?” Yes. Section 1281.2 expressly contemplates the partial arbitration outcome: when a controversy presents both arbitrable and non-arbitrable issues, the Court may order the arbitrable issues to arbitration and stay the remainder. Section 1281.4 makes that stay mandatory upon request. The Court may also elect to retain non-arbitrable claims while staying them pending the arbitral award, where doing so will mitigate inconsistent rulings.

Here, the arbitrable claims are: Owners’ breach of contract, warranty, negligence, indemnity, and contract-based declaratory relief claims against DPR (Counts 1, 5, 6, 7, 10, 12, 14); the section 7031 disgorgement claim against DPR (Count 13); and DPR subcontractor cross-claims tied to flow-down agreements. The non-arbitrable claims are Owners’ claims against KO Architects, HL, CEL (on the direct contract), and TKE. DPR’s mechanic’s-lien remedies are preserved by Article 13.9 of the Prime Contract; the underlying contract dispute giving rise to the lien remains arbitrable.

C. Risk of Contradictory Rulings (Question 3)

The Court asked: “In the event of a ‘split’ proceeding . . . what specific risks exist regarding inconsistent or contradictory rulings, and how should the Court mitigate those risks under relevant statutes (e.g., CCP § 1281.2)?” Here, the risks are real and substantial. Owners allege that the Project has both design and construction defects. The construction defendants will likely attribute responsibility to the design professionals, and the design professionals (KO, HL) will likely attribute responsibility to construction means and methods.

If the arbitrator finds that the construction work met applicable standards because the contractors followed defective design instructions, Owners will still need to prove the design-defect theory in court. A jury could disagree, leaving Owners without a recovery on either side. The reverse risk also exists: a court finding of acceptable design could be undermined by an arbitral finding that the construction work was sound but unspecified design defects caused the loss. Section 1281.2(c) was enacted precisely to address this scenario. (Mercury Ins.

Group, supra, 19 Cal.4th at pp. 345–346.)

11 In this case, the Court will attempt to mitigate the risk in two ways. First, the Court will compel arbitration of the subcontractor claims that are subject to valid arbitration agreements, so that the arbitrator can resolve the bulk of the construction-side disputes in a single forum. Second, the Court will stay the court action as to KO Architects, HL, CEL (on the Owners’ direct contract), and TKE pending the arbitral award. That order of events will allow the arbitrator’s findings on construction and causation to provide context for the design-side claims when they later proceed in this Court, without binding the design-side defendants in a forum to which they did not consent. The Court will then resolve any remaining design-side issues with the benefit of a developed factual record.

D. Validity of Subcontractor Stipulations (Question 4)

The Court asked: “The parties must provide an updated, definitive list of stipulating parties [and] brief the scope of an attorney's authority to stipulate to arbitration on behalf of a client and whether extrinsic evidence (such as the signatures of the principals) is required to validate these stipulations.” Under Blanton v. Womancare, Inc. (1985) 38 Cal.3d 396, 407 (Blanton), “it is established that an attorney does not have implied plenary authority to enter into contracts on behalf of his client. [Citations.]” Thus, actual authority is required to bind a client to arbitration.

The counsel-signed draft stipulation, standing alone, is insufficient. Nevertheless, the Court is satisfied here that subcontractors who have filed joinders to DPR’s motion or are represented by counsel who have joined the motion have ratified arbitration through litigation conduct. DPR is granted leave to cure the Blanton issue as to any other subcontractor within thirty (30) days by submitting joinders or principal-signed declarations of actual authority. The Court does not need to rely on the stipulations as to any subcontractor whose subcontract independently contains a flow-down arbitration provision, as the contract itself provides the necessary basis.

The Court accepts Owners’ chart at pages 13–15 of their supplemental brief as a working list of stipulating, joining, and non-consenting parties, subject to update upon DPR’s submission of any additional ratifying joinders or declarations.

12 E. Effect of Non-Consenting Parties (Question 5)

The Court asked: “At least one subcontractor (TK Elevator) has filed an objection. How does the presence of non-consenting subcontractors — whose separate contracts with DPR may require arbitration — affect the Court's discretion to compel arbitration in the global Steleco matter?” Here, TKE is not only “non-consenting”; it is contractually outside the arbitration framework. Section 17.2.4 of the TKE MSA, which TKE expressly negotiated, provides that “litigation shall be utilized in lieu of arbitration” and gives that amendment “the highest priority over any conflicting language.”

DPR’s argument that the standard Section 17.1 dispute provisions override TKE’s negotiated amendment is not consistent with ordinary principles of contract interpretation, which give effect to specific, bargained-for terms over general boilerplate. (See Civ. Code, § 3534.) TKE’s status reinforces the section 1281.2(c) discretion to keep at least some of the Project disputes in this Court. TKE is a Project participant whose work is implicated in Owners’ defect allegations; an arbitrator's findings on related construction issues could impact, but cannot bind, TKE.

The Court therefore (a) denies the motion to compel arbitration as to TKE, and (b) factors TKE’s continued presence in this Court into the section 1281.2(c) discretion to deny arbitration as to the design professionals as well.

F. FAA Preemption – Directed to DPR (Question 6)

The Court asked: “Is there an actual conflict between the Federal Arbitration Act and Code of Civil Procedure section 1281.2?” DPR’s supplemental brief directly answers “No.” (DPR Supplemental Brief, p. 17). The Court agrees. The Cronus line of authority is settled: section 1281.2(c) is procedural, and the FAA’s procedural provisions do not displace it in California court absent an express adoption in the parties’ agreement. As there is no such express adoption in the Prime Contract, section 1281.2(c) governs.

G. Lapse in Licensure (Question 7)

An alleged section 7031 violation does not invalidate an arbitration agreement at the threshold. (Templo Calvario Spanish Assembly of God v. Gardner Constr. Corp. (2011) 198

13 Cal.App.4th 509, 519 [“entering into a contract with a contractor who is later shown to be unlicensed at the time of execution of the contract does not automatically render the contract void”]; Bus. & Prof. Code § 7031(f) [contemplating “actions or arbitrations”].) Loving & Evans v. Blick (1949) 33 Cal.2d 603 and Lindenstadt v. Staff Builders, Inc. (1997) 55 Cal.App.4th 882 involved parties who were undisputedly unlicensed at all relevant times (in contrast to the contested record here). Owners’ concerns are protected by the standard of review under Ahdout, supra, 213 Cal.App.4th at pp. 38–39 (an arbitral award implicating section 7031 is subject to mandatory de novo judicial review). Accordingly, the disgorgement claim shall proceed in arbitration with full reservation of this Court’s de novo review of any award turning on DPR’s licensure.

V.

Conclusion

For the reasons set forth, the Court tentatively rules as follows: 1. DPR’s motion to dismiss is DENIED. Dismissal is not the appropriate remedy where, as here, the parties have an ongoing arbitration, and the threshold issue is not justiciability but rather the appropriate forum.

2. DPR’s motion to compel mediation and arbitration is GRANTED IN PART and DENIED IN PART. a. The motion is GRANTED as to: Steleco LLC; Kipling Post LP; DPR Construction; subcontractors holding the standard flow-down arbitration provision (as identified herein); Hohbach-Lewin, Inc.; Consolidated Engineering Laboratories on claims arising under their respective contracts with DPR; and DPR employees Amelia Kraus and Robert Skinner. b. The motion is DENIED as to: KO Architects, Inc.; TK Elevator Corporation; Bigge Crane and Rigging Co.; Berkeley Cement, Inc.; and as to claims arising solely under the Owner-direct professional services with Hohbach-Lewin and Consolidated Engineering Laboratories. c. The parties shall complete mediation under the AAA Construction Industry Mediation Rules (Article 13.4) before further substantive arbitration

14 hearings if they have not already done so to a conclusion. The arbitrator may, in her discretion, set a mediation deadline. d. Owners’ 13th cause of action for disgorgement under Business and Professions Code section 7031 shall proceed in arbitration with all other Owner-DPR claims. The Court reserves de novo review under Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21.

3. All proceedings in this Court are STAYED pending the outcome of arbitration to mitigate the risk of inconsistent rulings (Code Civ. Proc., §§ 1281.2, 1281.4), except for (a) ministerial matters relating to mechanics lien releases or bonds that do not require adjudication of the underlying merits, and (b) any further proceedings the Court orders. KO Architects, Inc.’s anticipated motion for summary judgment may be filed and heard after the stay is lifted.

The Court will prepare the order.

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