Dray v. Revah, 2017 WL 6523566 (Cal. Ct. App. 2017).
A loan agreement’s dispute resolution clause containing an arbitration provision was superseded by a later executed promissory note for the same underlying loan that did not also include an arbitration provision.
Defendant Haim Revah (“Revah”) and plaintiff Alain Dray (“Dray”) entered into a loan agreement (the “Loan Agreement”) that contained an arbitration provision. After Revah’s failure to perform any payment obligations under the Loan Agreement, the parties subsequently signed a promissory note (the “Promissory Note”) regarding the same loan, which did not contain an arbitration provision. Based on Revah’s commitment under the Promissory Note, Dray did not begin collection proceedings under the Loan Agreement. However, after Revah similarly failed to perform his payment obligations under the Promissory Note, Dray sued for breach of the Promissory Note. As a result, Revah then moved to compel arbitration. The trial court denied arbitration, finding that the terms of the Promissory Note, which did not contain an arbitration provision, superseded the original Loan Agreement, which did contain an arbitration provision. Revah then appealed the denial, which led to the instant case, in which the Court of Appeal ultimately affirmed the judgment of the trial court.
The Court of Appeal found that public policy favors contractual arbitration as a means of resolving disputes. However, it also found that such policy did not extend to those who are not parties to an arbitration agreement, and a party cannot be compelled to arbitrate a dispute that it has not agreed to resolve by arbitration. Moreover, on a petition to compel arbitration, the petitioner bears the burden of proving the existence of an agreement to arbitrate by a preponderance of the evidence.
In his attempt to support his argument that the arbitration provision from the Loan Agreement should not be superseded by the lack of an arbitration provision in the Promissory Note, Revah argued that the absence of an arbitration provision in the Promissory Note was not directly contradictory to the presence of the arbitration provision in the Loan Agreement. Rather, Revah argued, the dispute resolution mechanism was simply not addressed in the Promissory Note. Revah further argued that, as a result, there was no underlying inconsistency in the dispute resolution clauses of the two agreements and thus, the lack of an arbitration provision in the Promissory Note should not supersede the presence of the arbitration provision in the Loan Agreement. Revah claimed that, as a consequence, the parties should remain bound by the arbitration provision of the Loan Agreement, and he argued that the trial court was therefore wrong in its reliance on Frangipani v. Boecker, 64 Cal. App. 4th 860, 863 (1998), in which the court stated that where there is an inconsistency between two agreements, both of which are executed by all of the parties, the later contract supersedes the former.
The Court of Appeal found that this argument ignored the fact that practically every provision of the Loan Agreement and the Promissory Note differed, including the amount to be repaid, the timing of repayment, the term of the loan, the applicable interest rate and the terms regarding default, governing law, payment of expenses and waiver. As a result, the Court of Appeal agreed with the trial court’s conclusion that the terms of the Loan Agreement were entirely inconsistent with, and therefore superseded by, the terms of the Promissory Note. Finally, the Court of Appeal was not persuaded by Revah’s argument that the Promissory Note did not contain a merger or integration clause since the presence of a merger or integration clause in an agreement can be evidence of the parties’ intent that the contract represents their complete and final agreement, but the absence of such a clause is not necessarily an indication to the contrary.
