Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County, No. GIC789291 Richard E. L. Strauss, Judge.
IRION, J.
Sempra Energy Resources (Sempra), Michael Niggli and Dwain Boettcher (collectively, the Sempra parties) appeal from the trial court's order denying their motion to compel arbitration of the first amended cross-complaint filed by the California Department of Water Resources (DWR). DWR moves to dismiss the appeal and to impose sanctions
According to Sempra, the entity formerly known as Sempra Energy Resources is now known as Sempra Generation.
We conclude that the Sempra parties waived their right to elect arbitration by participating in this litigation since 2002, and DWR's filing of an amended cross-complaint did not nullify the Sempra parties' waiver. Accordingly, we affirm the trial court's order denying the motion to compel arbitration. We also deny DWR's motion to dismiss the appeal and to impose sanctions, concluding that dismissal and sanctions are not appropriate in the context of this appeal.
I
FACTUAL AND PROCEDURAL BACKGROUND
A. The Parties' Agreement
In May 2001, DWR and Sempra entered into an Energy Purchase Agreement (the Agreement) under which Sempra agreed to supply DWR with a specified amount of electricity during specific time periods over the course of 10 years at prices set forth in the Agreement.
Both respondents and appellants have submitted requests for judicial notice. The Sempra parties have opposed DWR's request. The Sempra parties' request is unopposed. We first address the Sempra parties' request. We hereby grant the Sempra parties' request to take judicial notice of exhibit A, which consists of a pleading filed by DWR in the Los Angeles County Superior Court. We reject the Sempra parties' request to take judicial notice of exhibit B, which is an order by a panel convened by the American Arbitration Association (AAA).
The Agreement recites that certain affiliates of Sempra "own and operate, or will own, lease and/or operate, the generating facilities" that are described in Appendix B to the Agreement (Appendix B). According to Appendix B, the generating facilities are (1) El Dorado, in Boulder City, Nevada; (2) Elk Hills, simple cycle, in Bakersfield, California; (3) Elk Hills, combined cycle, in Bakersfield, California; (4) Mesquite I, in Arlington, Arizona; (5) Mexicali, in Mexicali, Baja California, Mexico; (6) Mesquite II, in Arlington, Arizona; (7) Copper Mountain, in Boulder City, Nevada; and (8) Citracado, in Escondido, California. The Agreement refers to these facilities as "the Projects." Appendix B indicates that as of the date of the Agreement, only the El Dorado facility was already in service. For the other facilities, Appendix B identifies "Commercial Operation Target Date[s]" between April 2002 and June 2004.
The Agreement defines the term "Commercial Operation Target Date" as "with respect to each Project, the date on which [Sempra] anticipates that such project will commence Commercial Operation." In simplified terms, "Commercial Operation" means the date on which Sempra can "safely, reliably and lawfully" provide energy from the Project.
The Agreement makes several statements relating to whether Sempra is required to construct the Projects and whether the energy that Sempra provides to DWR must be sourced from the Projects. According to the Agreement, Sempra may provide the energy called for in the Agreement "from any Project, Market Source or combination of Projects and/or Market Sources." The Agreement states that Sempra will "make commercially reasonable efforts to achieve Commercial Operation of each Project on or before the Commercial Operation Target Date for such project in Appendix B," but that nothing in the Agreement "shall be construed as obligating [Sempra and its assignees] to commence or to continue efforts to achieve Commercial Operation of any Project," and that Sempra's obligations "[a]s to each Project" "are subject to commencement of Commercial Operation of the Project." The Agreement states that "[i]f a Project does not commence Commercial Operation on or before the Commercial Operation Target Date . . ., then [Sempra or its assignee] may reduce," in accordance with a specific formula, the amount of energy it is obligated to provide to DWR and may, at its option, provide that reduced amount of energy by "relying on supplies available from other Projects and/or Market Sources."
The term "Market Source" is defined in the Agreement as "any marketer, trader, seller or generator other than the Projects . . . from which [Sempra or an assignee] could obtain power supplies."
The Agreement contains a dispute resolution provision, stating that if the parties are unable to informally resolve a dispute, "either Party may refer the dispute to arbitration by a tribunal under the [Commercial Arbitration Rules of the AAA]."
Relevant to the issues in this appeal, the Agreement also provides: "Any waiver at any time by any Party of its rights with respect to a default under this Agreement, or any other matter under this Agreement, shall not be deemed a waiver with respect to any subsequent default of the same or any other matter" (the Agreement's no-waiver provision).
B. DWR's and the Sempra Parties' Litigation Against Each Other
In May 2002, Sempra filed a complaint for declaratory relief in the San Diego County Superior Court against DWR. Sempra alleged that a dispute had arisen between it and DWR because Sempra had decided that it would not be commercially reasonable for it to finish construction of the Elk Hills simple cycle generating facility identified in Appendix B. Sempra alleged that DWR had taken the position (1) that Sempra was obligated to proceed with construction of the Elk Hills simple cycle facility regardless of whether it would be commercially reasonable; (2) that DWR was entitled to suspend its performance of the Agreement unless Sempra proceeded with the Elk Hills simple cycle facility; and (3) that Sempra was obligated to put all of the Projects listed in Appendix B into operation regardless of whether they are commercially reasonable. Sempra sought a declaration "that, in accordance with the terms of the Agreement; (a) [Sempra] is entitled to provide electrical energy from any source, including Market Sources; (b) [Sempra] is not in breach of the Agreement; (c) [DWR] is obligated to take delivery and pay for deliveries under the Agreement; and (d) that [Sempra] has no obligation to complete any specific Project."
Sempra's complaint stated that in Appendix B to the Agreement, "Elk Hills was listed both in 'simple cycle' and 'combined cycle.' Simple cycle plants are more expensive to operate, less efficient and create more pollution than do combined cycle plants. It was originally contemplated the simple cycle would be built and operated for only six months, in or to meet peak power demands during the summer of 2002, and then would be partially dismantled in order that the more efficient combined cycle operations could be constructed." Sempra alleged that because of market conditions, it was no longer commercially reasonable to construct the simple cycle portion of the Elk Hills project.
DWR then filed a cross-complaint against Sempra (cross-complaint or original cross-complaint) and also named Niggli and Boettcher as cross-defendants. The cross-complaint alleged that Sempra had failed to use commercially reasonable efforts to achieve commercial operation of the Elk Hills simple cycle facility, and that in order to induce DWR to enter into the Agreement, the Sempra parties had made fraudulent misrepresentations. Those representations were allegedly (1) that Sempra intended to and was able to make the Elk Hills simple cycle facility operational in a timely manner, including obtaining the support of its codeveloper; (2) that Sempra would make commercially reasonable efforts to construct the Projects listed in Appendix B; (3) that the Projects would have the generating capacity set forth in Appendix B; and (4) that in fulfilling its contractual obligations, DWR would deliver electricity from the Projects and would rely on electricity from Market Sources only in specific limited circumstances.
DWR's cross-complaint identified Niggli as Sempra's president and Boettcher as its vice-president. Niggli and Boettcher executed the Agreement on behalf of Sempra.
The cross-complaint contained six causes of action. The first three causes of action were for (1) fraud, (2) negligent misrepresentation and (3) declaratory relief that the Agreement was unenforceable because it was induced by fraud. The fourth cause of action alleged that Sempra breached the Agreement by failing to achieve commercial operation of the Elk Hills simple cycle facility and breached the covenant of good faith and fair dealing. The fifth cause action sought declaratory relief that, if the Agreement was enforceable, "(a) [Sempra] may not freely substitute market energy for energy from new sources of generating capacity; (b) [Sempra] may not use market energy to cover shortfalls when those shortfalls result from [Sempra's] failure to make commercially reasonable efforts to cause any Project, including Elk Hills [simple cycle facility], to achieve commercial operation; and (c) due to [Sempra's] failure to make commercially reasonable efforts to cause Elk Hills [simple cycle facility] to achieve commercial operation, [Sempra] has no current right to sell [DWR] energy from Market Sources." The sixth cause of action sought an injunction against Sempra's practice of using electricity from Market Sources to provide the energy called for under the Agreement.
The body of the cross-complaint, but not the prayer for relief for the breach of contract cause of action, alleged that "[Sempra] has also repudiated any obligation to provide new generating capacity from the Projects, which is a material term of the [Agreement]. By repudiating that obligation, [Sempra] has in essence repudiated the very obligations that are at the heart of the [Agreement]."
The Sempra parties brought a motion for summary judgment on Sempra's complaint and DWR's cross-complaint. The trial court granted the motion, ruling that "(a) Sempra is entitled to provide electrical energy from any source, including market sources, (b) Sempra is not in breach of the Agreement as framed by the pleadings in this matter, (c) DWR is obligated to take delivery and pay for deliveries under the Agreement, and (d) Sempra has no obligation to complete any specific project."
DWR appealed, and we reversed the trial court's judgment. We ruled that summary judgment was improperly granted because the Agreement is ambiguous with respect to the issues raised in the cross-complaint, requiring the admission of extrinsic evidence regarding the parties' intent and creating triable issues of material fact.
The case was remitted to the trial court in August 2005. The Sempra parties then brought two dispositive motions: (1) a motion seeking summary adjudication of the cross-complaint's third cause of action for declaratory relief that the Agreement was void and unenforceable because it was induced by fraud, on the ground that DWR had allegedly ratified and affirmed the Agreement; and (2) a motion to determine the collateral estoppel effect of an arbitration award that was issued in April 2006.
C. DWR's Amended Cross-complaint
Before the trial court ruled on the dispositive motions, DWR brought a motion for leave to file an amended cross-complaint. The trial court granted the motion over the Sempra parties' objection.
Although DWR's appellate brief states that at the time this appeal was filed the trial court had not ruled on the Sempra parties' motion to determine the collateral estoppel effect of the arbitration award, the record contains an order dated December 14, 2006, which states it is a ruling on that motion. The trial court ruled that "the outcome of the Arbitration controls issues and facts that are separate from what the Court of Appeal left for a trier of fact to determine in this case."
DWR filed its first amended cross-complaint on January 5, 2007 (amended cross-complaint). The amended cross-complaint made several changes to the original cross-complaint.
First, DWR substantially expanded the breach of contract cause of action. In the original cross-complaint, the breach of contract cause of action was based solely on Sempra's alleged breach of its obligation to use commercially reasonable efforts to achieve commercial operation of the Elk Hills simple cycle facility. In the amended cross-complaint, DWR added the allegation that Sempra breached its obligation under the Agreement "to deliver power from the generating facilities listed in Appendix B to the [Agreement], including the Elk Hills [combined cycle facility], as well as a breach of [the Agreement's] Section 3.02(b)'s representations and warranties."
The allegation regarding the representations and warranties in Section 3.02 of the Agreement apparently refers to Sempra's representation in the Agreement, quoted in paragraph 87 of the amended cross-complaint, that its "performance of its obligations under the Agreement 'will not violate . . . any material indenture, agreement or other instrument to which [Sempra] is a party or by which it or any of its property is subject to or bound or be in conflict with or result in a breach of ' any such agreement." DWR alleged that in fact Sempra "did not have authority to commit power from the Elk Hills Project due to its agreements with" its codeveloper for that project. The theory that Sempra did not have approval from its codeveloper to sell DWR power from the Elk Hills Project is not a new concept in the amended cross-complaint. However, only in the amended cross-complaint is that theory expressly pled as a basis for the breach of contract cause of action rather than the fraud and misrepresentation causes of action.
Several allegations in other parts of the amended cross-complaint correspond to this new allegation in the breach of contract cause of action. The amended-cross-complaint alleges, for example, that Sempra "failed to deliver energy from the Projects contained in Appendix B following Commercial Operation of such Projects, including the Elk Hills [combined cycle facility] and [the Citracado facility], as required under the terms of the [Agreement]," and that "[s]ince 2002, none of the energy [Sempra] has provided under the [Agreement] has come from the two new generation resources located inside California, the Elk Hills [combined cycle facility] and the [Citracado facility], but [Sempra] continues to supply a significant amount of energy to [DWR] from market sources."
Second, the amended cross-complaint added the allegation that Sempra's alleged breach of contract "constitutes a repudiation of its obligations under the [Agreement]," and that therefore "[DWR] is entitled to rescission of the [Agreement]" and restitution. In contrast, the original cross-complaint sought only damages to remedy the alleged breach of contract.
Third, DWR deleted the original cross-complaint's third cause of action, which had sought a declaration that the Agreement was void as induced by fraud. Instead, DWR included rescission as one of the remedies for the amended cross-complaint's fraud and negligent misrepresentation causes of action. The amended cross-complaint also explicitly added restitution as an additional remedy for the fraud and negligent misrepresentation causes of action.
Fourth, the amended cross-complaint made revisions to its description of the alleged misrepresentations relating to the fraud and negligent misrepresentation causes of action. None of those revisions, however, dramatically depart from the allegations in the original cross-complaint, as the fraud and negligent misrepresentation claims still focused on the alleged misrepresentations (1) that Sempra would make commercially reasonable efforts to construct the projects listed in Appendix B, (2) and that Sempra would deliver energy from the Projects rather than from Market Sources.
Fifth, the amended cross-complaint deleted several items that were alleged as misrepresentations or omissions in the original cross-complaint. The central deleted allegations concerned (1) the dates on which the Projects would achieve commercial operation; (2) the approval needed from certain third parties, including Sempra's codeveloper, regarding expedited construction of the Elk Hills simple cycle facility; and (3) the generating capacity of each of the Projects.
Sixth, some of the language in the declaratory relief and injunctive relief causes of action (i.e., the former fifth and sixth causes of action) was changed from the original cross-complaint. However, both causes of action still focus on obtaining a declaration and injunction concerning the alleged impermissibility of Sempra supplying electricity from Market Sources rather than from the Projects listed in Appendix B.
D. The Sempra Parties' Motion to Compel Arbitration
On February 15, 2007, the Sempra parties filed a motion to compel arbitration of the amended cross-complaint. Among other things, the Sempra parties argued that although they had litigated the original cross-complaint rather than moving to compel it to arbitration, they did not waive their right to arbitrate the amended cross-complaint, because that pleading "asserts new theories and issues and seeks to expand Sempra's liability." The Sempra parties also pointed to the fact that DWR had, since 2002, initiated two arbitrations of disputes that arose under the Agreement, and that in connection with those arbitrations DWR had taken the position that participation in this litigation did not waive its right to arbitrate disputes that later arose under the Agreement. The Sempra parties argued that the same rule should apply to their right to arbitrate the issues raised in the amended cross-complaint.
The Sempra parties' moving papers specifically sought that the amended cross-complaint be ordered to arbitration, while the rest of the action was stayed, implying that they wanted to have the arbitration on the amended cross-complaint proceed, while the litigation of Sempra's declaratory relief complaint was stayed. Sempra had earlier taken this position before the trial court, when, in opposing DWR's motion to file an amended cross-complaint, it told the trial court that it would seek to have DWR's cross-complaint resolved through arbitration if DWR was permitted to file it, but that Sempra would want to obtain a court ruling on its own declaratory relief action. In a footnote in its reply brief for the motion to compel arbitration, Sempra took a different position, stating that it had "no objection to arbitration or stay of its complaint." At the hearing on the motion to compel arbitration, Sempra's position had evolved further, as it stated that "the entire case at this point should go to arbitration."
In opposition, DWR argued that "[t]here is nothing 'new' about the claims in the [amended cross-complaint]" because "[n]o new causes of action are alleged, and the fundamental theories are unchanged." It argued that the amended cross-complaint "simply removes stale allegations and updates factual allegations to conform DWR's fraud and breach claims to the evidence obtained since this case was originally filed in 2002." DWR argued that because Sempra had litigated DWR's claims in the trial court for five years, "Sempra has waived any right it may have previously held to seek arbitration." For one thing, DWR pointed out that "Sempra's complaint raises the very issues Sempra now seeks to arbitrate."
The trial court denied the motion to compel arbitration. Instead of explaining the basis for its decision, the trial court adopted the arguments in DWR's opposition briefing. The trial court stated, "The Court was not persuaded by Sempra's position and finds that Sempra has waived its right to arbitration on the claims and issues presented in this action, which encompass both the Complaint and the First Amended Cross-Complaint. The Court's ruling is based on [DWR's] opposition analysis and authority."
The Sempra parties filed an appeal from the trial court's ruling denying the motion to compel arbitration. (See Code Civ. Proc., § 1294, subd. (a); Mercury Ins. Group v. Superior Court (1998) 19 Cal.4th 332, 349.) DWR filed a motion to dismiss the appeal and to impose sanctions on the Sempra parties, arguing that the appeal is frivolous and taken solely for the purpose of delay. We ordered that the motion would be considered at the same time as the appeal.
E. The Arbitration Proceedings
The nature of the arbitration proceedings referred to in Sempra's motion to compel are relevant to the issues presented in this appeal, and we thus discuss them before turning to an analysis of the Sempra parties' appeal.
First, in February 2004, DWR filed a demand for arbitration against Sempra with the AAA. As stated in DWR's second amended demand for arbitration, DWR sought resolution of the following issues:
"(a) Sempra's failure to follow Annual and Monthly Energy Delivery Plans which comply with Sections 2.05(a) and (b) of the Agreement;
"(b) Sempra's failure to provide adequate Fuel Supply Plans as required by Section 2.03(a) of the Agreement;
"(c) Sempra's practice of providing 6 x 16 peak energy and non-6 x 16 off-peak energy instead of 7 x 24 energy as required by Appendix C to the Agreement;
"(d) Sempra's practice of delivering power to locations not allowed for in the Agreement;
"(e) Sempra's failure to take steps to prevent or alleviate transmission curtailments or interruptions, as required by Section 2.04(c) of the Agreement; and
"(f) Sempra's practice of overcharging and/or including improper categories of charges on its monthly invoices to DWR."
DWR's original demand for arbitration included only items (a) through (d).
Sempra filed a complaint seeking declaratory and injunctive relief in Los Angeles County Superior Court to obtain a ruling that DWR was barred from arbitrating the claims asserted in the demand for arbitration because DWR did not assert those claims in this action as part of its cross-complaint. The court denied the relief sought by Sempra, and the matter proceeded to arbitration. In April 2006, the arbitration panel issued a decision on the arbitration, which was confirmed in Los Angeles County Superior Court in August 2006.
In February 2006, DWR filed another demand for arbitration with the AAA against Sempra. That arbitration demand concerned Sempra's practice of scheduling the amount of electricity output at its Mexicali generation facility in a manner that allegedly led DWR to be charged for energy not actually produced, procured or delivered. DWR alleged that the challenged practice constituted a breach of the Agreement's provisions concerning the energy that DWR is obligated to purchase from Sempra. According to the parties, the second arbitration is still pending.
The arbitration panel in the first arbitration denied DWR's motion to amend its demand for arbitration to include the issues relating to the Mexicali facility that DWR later asserted in the second arbitration.
II
DISCUSSION
A. DWR's Motion to Dismiss the Appeal and to Impose Sanctions
As an initial matter, we address DWR's motion to dismiss the appeal and to impose sanctions on the Sempra parties for purportedly filing a frivolous appeal.
The fundamental premise of the motion is that we should dismiss the appeal because it is allegedly without merit. However, it is "the general rule that the merits of a case should not be considered on a motion to dismiss the appeal; it should be determined on the appeal itself." (Reed v. Norman (1957) 48 Cal.2d 338, 342.) Further, we generally will not make a decision on the merits of the appeal in the context of a motion to dismiss when we are required to review the record. (Gogerty v. Coachella Valley Junior College Dist. (1962) 57 Cal.2d 727, 729 ["On a motion to dismiss an appeal where it is necessary to review the record . . ., the motion will be denied"].) The Sempra parties' appeal concerns issues that are factually and legally complex, requiring a detailed review of the record and a lengthy consideration of applicable authority. Accordingly, this case is not appropriate for resolution through a motion to dismiss. We deny the motion.
We also find no support in the record to support DWR's position that sanctions should be imposed on the ground that the appeal is frivolous and brought solely for the purpose of delay. (See Code Civ. Proc., § 907.) Having reviewed the record and analyzed the issues, we conclude that this appeal concerns genuinely disputed legal issues, which require detailed analysis to resolve, and the Sempra parties have made good faith and well-reasoned arguments in support of their position.
Having denied the motion to dismiss, we now turn to the merits of the Sempra parties' appeal.
B. Standard of Review
The first step in analyzing the Sempra parties' appeal from the trial court's order denying the motion to compel arbitration is to determine the applicable standard of review.
The parties do not dispute that the Agreement's arbitration clause is broad enough to cover the dispute described in the amended cross-complaint. The only issue presented to the trial court, and the only issue before us on appeal, is whether the Sempra parties waived their right to compel arbitration of the amended cross-complaint by having participated in this litigation since 2002.
"Generally, the determination of waiver is a question of fact, and the trial court's finding, if supported by sufficient evidence, is binding on the appellate court. [Citations.] 'When, however, the facts are undisputed and only one inference may reasonably be drawn, the issue is one of law and the reviewing court is not bound by the trial court's ruling.' " (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196 (St. Agnes Medical Center).) Further, "[a]n appellate court will reverse a finding of waiver by the trial court . . . ' "in cases where the record before the trial court establishes a lack of waiver as a matter of law." ' " (Christensen v. Dewor Developments (1983) 33 Cal.3d 778, 781 (Christensen).) In this case, the relevant facts are undisputed. Accordingly, we will apply a de novo standard of review in determining whether the Sempra parties have waived their right to compel arbitration of the amended cross-complaint.
C. Applicable Legal Standards
Under Code of Civil Procedure section 1281.2, subdivision (a), "[d]etermination by a trial court that '[t]he right to compel arbitration has been waived by the petitioner' is one of three statutory grounds for withholding an order to arbitrate an otherwise arbitrable controversy." (Christensen, supra,33 Cal.3d at p. 781.) Federal law is in accord, as the Federal Arbitration Act states that arbitration clauses subject to its provisions are enforceable, "save upon such grounds as exist at law or in equity for the revocation of any contract" (9 U.S.C. § 2), including "generally applicable contract defenses, such as fraud, duress or unconscionability." (Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 687.) Also under federal law, "a party who resists arbitration on the ground of waiver bears a heavy burden [citations], and any doubts regarding a waiver allegation should be resolved in favor of arbitration." (St. Agnes Medical Center, supra,31 Cal.4th at p. 1195.) Similarly, under state law, "waivers are not to be lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof." (Ibid.)
In cases involving interstate commerce, the Federal Arbitration Act (9 U.S.C. § 1 et seq.) "generally preempts any contrary state law regarding the enforceability of arbitration agreements." (St. Agnes Medical Center, supra, 31 Cal.4th at p. 1194.) Here, the record reflects no ruling by the trial court as to whether the Agreement involves interstate commerce and the parties do not discuss the issue, but we note that the Agreement appears to involve interstate commerce because it concerns generating facilities in more than one state. Our Supreme Court has noted that with respect to the rules governing waiver of a contractual right to arbitrate "the federal and state rules applicable . . . are very similar." (Ibid.) Thus, in our analysis we cite both California and federal case law concerning waiver of arbitration provisions.
" 'In determining waiver, a court can consider "(1) whether the party's actions are inconsistent with the right to arbitrate; (2) whether 'the litigation machinery has been substantially invoked' and the parties 'were well into preparation of a lawsuit' before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) 'whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place'; and (6) whether the delay 'affected, misled, or prejudiced' the opposing party." ' " (St. Agnes Medical Center, supra, 31 Cal.4th at p. 1196.) However, these factors are merely guidelines that a court " 'can' " consider (ibid.), and not all of them will apply in each case. "Both state and federal law emphasize that no single test delineates the nature of the conduct that will constitute a waiver of arbitration." (Id. at p. 1195.)
D. Analysis of the Sempra Parties' Arguments
With this general background in mind, we turn to the specific facts of this case. Here, there is no dispute that the litigation between DWR and the Sempra parties has been pending since 2002, and in that time, the parties have engaged in a substantial amount of discovery, motion practice and an appeal. If the issue presented was whether the Sempra parties have waived their right to arbitrate the issues in the original cross-complaint and in Sempra's own declaratory relief complaint, we would easily rule that the Sempra parties have waived that right by extensively litigating those pleadings for the past six years in both the trial court and the appellate court. However, that is not the issue presented. Instead, we must decide whether the Sempra parties' indisputable waiver of their right to arbitrate the original cross-complaint and Sempra's own declaratory relief complaint means, under the circumstances, that they have also waived the right to arbitrate the amended cross-complaint.
The Sempra parties present several legal arguments in support of the claim that they should be permitted to arbitrate the amended cross-complaint, despite their participation in this litigation for over six years. We address each argument in turn.
1. Applicability of Authority Holding that an Amended Complaint Will, in Some Instances, Renew a Contractual Right to Arbitration
The first argument we address is the Sempra parties' contention that new issues raised by the amended cross-complaint gave rise to a new opportunity for the Sempra parties to seek arbitration of DWR's claims.
a. Authorities Cited by the Sempra Parties
In support of their argument, the Sempra parties rely on both California and federal case law stating that an amended pleading may, under certain circumstances, renew the right to compel arbitration despite an earlier waiver.
First, the Sempra parties rely on Keating v. Superior Court (1982) 31 Cal.3d 584 (Keating). In Keating, four franchisees of convenience stores instituted individual actions against the franchisor, and the franchisor answered, filed cross-complaints, and participated in discovery. (Id. at pp. 591-592.) A class action lawsuit was then filed asserting similar claims on behalf of approximately 800 franchisees. The four individual actions were eventually coordinated with the class action, and the four franchisees filed amended complaints, which were "[e]xtensively amended." (Id. at pp. 592, 606.) The franchisor moved to compel arbitration of all of the pending actions. (Id. at p. 606.) Our Supreme Court affirmed the trial court's ruling compelling arbitration. As to the four individual actions, the trial court held that even if the franchisor had earlier taken actions that could be considered a waiver of the right to arbitrate, the amendment of the complaints and the coordination with the class action sufficiently changed the proceedings to support a finding of no waiver. (Id. at p. 607.) Our Supreme Court explained:
"[A]ssuming a waiver had occurred as to the charging allegations in the original complaints, such waiver would not extend to issues newly raised. [Citation.] In seeking coordination and amendment of their complaints, franchisees considerably expanded the scope of their pleadings, raising several new causes of action, injecting new factual elements, and refocusing the direction of their claims. We do not suggest that an amendment to a complaint will, per se, nullify a previous, effective waiver of arbitration in every case. Here, however, franchisees directed a newly concerted attack, evidenced by the filing of amended complaints and the motion to coordinate. This sufficiently changed the proceedings, when viewed in their entirety, to permit the trial court to find a lack of waiver of the right to arbitrate the closely interrelated and interdependent claims." (Ibid., italics added.)
Based on Keating, the Sempra parties argue that they should be permitted to arbitrate the amended cross-complaint because that pleading " 'expanded' and 'refocus[ed] the direction' of the pleading, or 'sufficiently changed the proceedings, when viewed in their entirety.' " (See Keating, supra, 31 cal.3d at p. 607.)
Second, the Sempra parties rely on Gilmore v. Shearson/American Exp., Inc. (2d Cir. 1987) 811 F.2d 108 (Gilmore). In Gilmore, the defendant had earlier moved to compel arbitration, but then withdrew the motion, arguably waiving its right to compel arbitration. (Id. at p. 110.) The defendant later filed a new motion to compel arbitration, contending that plaintiff's filing of an amended complaint revived the right to move to compel arbitration. (Ibid.) On defendant's appeal from the district court's denial of the motion, the Second Circuit stated that, "[u]nder the circumstances, to change course and revive its right to move to compel arbitration, [the defendant] must show that the amended complaint contains charges that, in fairness, should nullify its earlier waiver and allow it to reassess its strategy, for example, that the amended complaint changed the scope or theory of [the plaintiff's] claims in a manner that is relevant to the issues presented by [the defendant] in the district court." (Id. at p. 113.) The Second Circuit concluded that the defendant had failed to make such a showing. (Ibid.) Quoting Gilmore, supra, 811 F.2d 108, 114, the Sempra parties argue that "[w]here an amended pleading 'alter[s] the scope or theory' of the claims in issue, a party can invoke a right to arbitration even if it did not previously do so."
The Sempra parties' next case, Envirex, Inc. v. K.H. Schussler Fur Umwelttechnik GMBH (E.D. Wis. 1993) 832 F.Supp. 1293, relies on the principle set forth in Gilmore, supra, 811 F.2d 108, 113. In Envirex, the defendants answered the original complaint, counterclaimed, participated in discovery, and moved jointly for rescheduling orders, but they did not file any motions going to the merits of the action. (Envirex, at p. 1296.) The plaintiff then "filed an amended complaint alleging a new basis for its fraud count, and then a second amended complaint alleging a new breach of warranty count." (Ibid.) Promptly after these amendments, the defendants moved to compel arbitration. (Ibid.) Citing Gilmore, supra, 811 F.2d 108, 113-114, the court held that "[e]ven if defendants had defaulted on arbitration before these amendments and the time when the litigation in this court really began to heat up, the new allegations in the amended complaints rejuvenate their right to demand arbitration. . . . The plaintiff has made major, not merely cosmetic, changes to its original complaint, altering and adding to the issues to be determined at trial." (Envirex, at p. 1296, citations omitted.)
Finally, the Sempra parties cite Brown v. E.F. Hutton & Co., Inc. (S.D. Fla. 1985) 610 F.Supp. 76. In Brown, the plaintiff sued his securities broker based on a single ill-advised transaction. (Id. at p. 78.) Plaintiff filed an second amended complaint that "significantly broadened the focus of the litigation" to allege "that damage occurred with respect to the entire course of dealings between the parties — not simply one transaction." (Ibid.) Further, "[w]hereas the original complaint alleged that the damages suffered by the Plaintiff totaled some $50,000 as a result of one 'unsuitable' transaction, the Second Amended Complaint allege[d] that mismanagement of the entire account resulted in damages of $150,000." (Ibid.) The court relied on the pleading rule that "the Defendant is allowed to plead anew as though it were the original complaint filed by the Plaintiff" when "a plaintiff files an amended complaint which changes the theory or scope of the case." It concluded that"the Defendant should also be permitted, notwithstanding passage of time, to respond as if the second amended complaint were the original complaint and to invoke its contract right to arbitrate" the new pleading. (Ibid.,italics added.)
The Sempra parties cite two other cases that are less squarely on point, as they discuss whether a defendant may compel arbitration of a subsequent lawsuit arising under the same agreement but involving different issues. (Doctor's Associates, Inc. v. Distajo (2d Cir. 1997) 107 F.3d 126, 133; Gingiss Intern., Inc. v. Bormet (7th Cir. 1995) 58 F.3d 328, 332.) Unlike our situation, those two cases do not concern an amended pleading in the same lawsuit, and thus are less useful to our analysis.
All of these authorities stand for the same basic principle: when an amended complaint makes significant changes to the scope or theory of the litigation, fairness requires that the opposing party be given another chance to elect arbitration. Thus, where an amended pleading is "sufficiently changed" (Keating, supra, 31 Cal.3d at p. 607) and "contains charges that, in fairness, should nullify its earlier waiver," such as where the "amended complaint changed the scope or theory of [the plaintiff's] claims" (Gilmore, supra, 811 F.2d at p. 113), the opposing parties' prior waiver may be treated as nullified.
b. The Amended Cross-complaint Does Not Nullify the Sempra Parties' Waiver
We now apply this principle to the pleadings in the case before us. As we have explained, the amended complaint makes several changes to DWR's case against the Sempra parties. We will discuss these amendments and consider whether any of them change the litigation in a manner that is significant enough to nullify the Sempra parties' earlier waiver of the right to elect arbitration.
i. Amendments to the substance of the breach of contract cause of action
First, one of the most significant changes to DWR's pleadings is in the substance of the breach of contract allegations. The breach of contract cause of action used to focus solely on Sempra's failure to construct the Elk Hills simple cycle facility. Now, DWR has broadened the cause of action to allege that Sempra breached its obligation "to deliver power from the generating facilities listed in Appendix B to the [Agreement], including the Elk Hills [combined cycle facility]." The body of the amended cross-complaint also adds factual allegations on this issue, including that "[s]ince 2002, none of the energy [Sempra] has provided under the [Agreement] has come from the two new generation resources located inside California, the Elk Hills [combined cycle facility] and the [Citracado facility], but [Sempra] continues to supply a significant amount of energy to [DWR] from market sources."
While these allegations certainly broaden the scope of the breach of contract cause of action, in light of the allegations in Sempra's own declaratory relief complaint and other allegations in DWR's original cross-complaint, we do not believe that the new allegations in the amended cross-complaint sufficiently broaden the issues in the litigation so as to nullify Sempra's waiver. The breach of contract cause of action, as amended, will now focus on whether Sempra has an obligation under the Agreement to deliver power from the Projects in Appendix B, or, on the contrary, whether it is permitted to deliver power from Market Sources. That is the same issue presented in Sempra's own declaratory relief complaint. Specifically, Sempra sought a declaration "that, in accordance with the terms of the Agreement, . . . [Sempra] is entitled to provide electrical energy from any source, including Market Sources." It is also the same issue that was presented in the fifth and sixth causes of action for declaratory and injunctive relief in the original cross-complaint, which put forth the theory that "[Sempra] may not freely substitute market energy for energy from new sources of generating capacity." Further, it is the same issue that was already litigated to judgment in the trial court and reversed on appeal. The trial court's judgment, since reversed, specifically ruled that "Sempra is entitled to provide electrical energy from any source, including market sources."
Thus, although the dispute as to whether Sempra has an obligation to deliver power from the Projects in Appendix B was not previously a predicate for the breach of contract cause of action, it was certainly always a major issue in this litigation, and it was first put into play by Sempra itself through its declaratory relief complaint. Thus, Sempra long ago chose the trial court as the forum for the resolution of the issue of whether "in accordance with the terms of the Agreement, . . . [Sempra] is entitled to provide electrical energy from any source, including Market Sources."
The Sempra parties claimed at oral argument that the filing of the amended cross-complaint revived their right to compel arbitration because it presents complex issues concerning the delivery of electricity that is better resolved by arbitrators with specialized technical expertise. We do not find the argument persuasive. Sempra's declaratory relief complaint also raised complex issues concerning a similar subject matter, but Sempra chose to have those issues resolved in court rather than through arbitration.
By filing its declaratory relief complaint in court rather than in an arbitration forum, Sempra has taken actions that are " ' "inconsistent with the right to arbitrate" ' " the issues presented in that complaint (St. Agnes Medical Center, supra, 31 Cal.4th at p. 1196), whether those issues are posed in its own complaint or in the amended cross-complaint's breach of contract cause of action. As our Supreme Court has stated, " '[t]he courtroom may not be used as a convenient vestibule to the arbitration hall so as to allow a party to create his own unique structure combining litigation and arbitration.' " (Christensen, supra, 33 Cal.3d at p. 784.) Sempra is impermissibly trying to do just that by first filing a complaint seeking resolution of certain issues in court and then later attempting to force DWR to arbitrate those same issues.
ii. Amendments to the remedies sought in the breach of contract cause of action
The second significant change appearing in the amended cross-complaint is the scope of the remedies sought in the breach of contract cause of action. The original cross-complaint sought only damages as a remedy for breach of contract. The amended cross-complaint seeks rescission of the Agreement and restitution. The Sempra parties argue that this change is significant enough to nullify its waiver. We disagree.
Although the breach of contract cause of action in the original cross-complaint did not specify rescission as a remedy, that pleading did seek rescission of the Agreement in its third cause of action for declaratory relief. Specifically, the original cross-complaint sought a declaration that "because [Sempra] induced [DWR's] execution of the [Agreement] through fraud, [DWR] did not actually consent to the [Agreement], and there is no contract between [DWR] and [Sempra]." One basis for DWR's allegation of fraud underlying this cause of action was that in supplying the electricity provided for under the Agreement, Sempra would rely only on electricity from Market Sources in specific limited instances, and that it induced DWR to enter into the Agreement by falsely promising that it would build new plants and supply energy from those plants. Thus, ever since the filing of the original cross-complaint, the Sempra parties understood that DWR was seeking rescission of the Agreement based on the fact that energy from the Projects was not being used to supply the electricity called for by the Agreement. That claim is now being made in the amended cross-complaint's breach of contract cause of action. We therefore conclude that the prayer for rescission of the Agreement in the amended cross-complaint does not sufficiently change the theory or scope of the litigation to nullify the Sempra parties' waiver of the right to elect arbitration.
iii. Addition of restitution as remedy
A further difference between the original and amended cross-complaint is that the amended cross-complaint adds restitution as an additional remedy for the Sempra parties' alleged fraud and negligent misrepresentation, and adds restitution as a remedy in the breach of contract cause of action.
In evaluating this argument, we note that restitution is an implied part of a request for rescission, which was already present in the original cross-complaint. As stated in Civil Code section 1692, "If in an action or proceeding, a party seeks relief based upon rescission, the court may require the party to whom such relief is granted to make any compensation to the other which justice may require[,]" and "[t]he aggrieved party shall be awarded complete relief, including restitution of benefits, if any . . . ." Accordingly, the original cross-complaint's request for rescission of the Agreement already put into play the possibility of restitution. Thus, DWR's amendment of the cross-complaint to expressly add restitution as a remedy does not significantly broaden the scope or theory of the litigation and does not nullify the Sempra parties' waiver of the right to arbitrate.
In the Factual and Procedural Background section of this opinion, we detailed two other changes that appear in the amended cross-complaint. (Pt. I.C., pp. 11-12, ante.) Specifically, we explained that the amended cross-complaint revises its description of the alleged misrepresentations relating to the fraud and negligent misrepresentation causes of action, and it changes some of the language in the former fifth and sixth causes of action for declaratory and injunctive relief. However, as we explained above, we do not view those amendments as diverging significantly from the scope and theory of the original cross-complaint. Accordingly, those amendments also do not serve to nullify the Sempra parties' waiver of the right to arbitrate.
2. Prejudice to DWR
The Sempra parties' second argument is that they have not waived their right to elect arbitration of the amended cross-complaint because DWR has failed to established that they were prejudiced by the delay in seeking arbitration. As we will explain, we reject this argument.
Under the applicable law for finding waiver of a right to arbitration, it is not sufficient that an action has been partially litigated in the trial court prior to a request for arbitration. As our Supreme Court has explained, " '[U]nder federal law, it is clear that the mere filing of a lawsuit does not waive contractual arbitration rights. The presence or absence of prejudice from the litigation of the dispute is the determinative issue under federal law.' . . . [¶] In California, whether or not litigation results in prejudice also is critical in waiver determinations." (St. Agnes Medical Center, supra, 31 Cal.4th at p. 1203, citations & fn. omitted.)
"[C]ourts assess prejudice with the recognition that California's arbitration statutes reflect ' "a strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution" ' and are intended ' "to encourage persons who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing." ' [Citation.] Prejudice typically is found only where the petitioning party's conduct has substantially undermined this important public policy or substantially impaired the other side's ability to take advantage of the benefits and efficiencies of arbitration." (St. Agnes Medical Center, supra,31 Cal.4th at p. 1204.)
The Sempra parties argue that DWR would not be prejudiced by being compelled to arbitrate the amended cross-complaint because the parties have not yet conducted any litigation as to that pleading. We disagree. As we have explained, the issues raised in the amended cross-complaint are fundamentally the same issues that have been present in this litigation since it was instituted by Sempra in 2002. Because Sempra delayed in seeking to arbitrate those issues, the parties have expended years attempting to obtain a resolution of their claims in court. If Sempra elected arbitration at the beginning of this dispute, the parties would have been spared much of the six years of litigation that has occurred in this action. In particular, one time-consuming event in this litigation was the appeal of the merits of the trial court's summary judgment ruling. Such an appeal would not have been possible if this case had been arbitrated from the beginning. (See Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11 ["it is the general rule that, with narrow exceptions, an arbitrator's decision cannot be reviewed for errors of fact or law"].)
In short, because Sempra has litigated the issues presented in this litigation for the last six years in court when the same issues could have been resolved long ago in arbitration, DWR has "lost whatever efficiencies . . . would otherwise have been available to it through arbitration." (Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558.) By their own conduct, the Sempra parties have "substantially undermined . . . the other side's ability to take advantage of the benefits and efficiencies of arbitration," resulting in prejudice. (St. Agnes Medical Center, supra,31 Cal.4th at p. 1204.)
3. The Agreement's No-waiver Provision
Next, the Sempra parties rely on the Agreement's no-waiver provision to argue that they have not waived their right to arbitrate the amended cross-complaint.
As we have explained, the Agreement's no-waiver provision states: "Any waiver at any time by any Party of its rights with respect to a default under this Agreement, or any other matter under this Agreement, shall not be deemed a waiver with respect to any subsequent default of the same or any other matter." The Sempra parties point out that DWR relied on the Agreement's no-waiver provision to argue that it did not waive its right to arbitrate different disputes arising under the Agreement by participating in this litigation. The Sempra parties argue that in this case, as well, the Agreement's no-waiver provision applies, giving them a right to arbitrate the amended cross-complaint despite their waiver of the right to litigate the original cross-complaint.
We conclude that the argument lacks merit. The Agreement's no-waiver provision is not applicable here because, as we have explained, the issues in the amended cross-complaint are not substantially different from those already present in this litigation. Because the amended cross-complaint concerns the issues already present in this litigation, it is covered by the waiver that has already occurred with respect to those claims. As relevant here, the Agreement's no-waiver provision states that "[a]ny waiver . . . shall not be deemed a waiver with respect to . . . any other matter." (Italics added.) However, the amended cross-complaint cannot fairly be described as "any other matter." Instead, as we have explained, the amended cross-complaint concerns the same issues that have been present in this litigation since 2002, and the waiver that arose due to the Sempra parties' extensive litigation of those issues continues to apply.
4. DWR Is Not Estopped to Claim a Waiver of the Right to Arbitrate
The Sempra parties also argue that because DWR twice filed arbitrations of issues arising under the Agreement, DWR has taken actions inconsistent with refusing to arbitrate the claims presented in this litigation, and thus should be equitably estopped from opposing the Sempra parties' motion to compel arbitration. We disagree. As we will explain, DWR's decision to commence the two arbitrations against Sempra is completely consistent with its position here.
First, based on our review of the demands for arbitration in the two arbitrations, they concerned different issues from those presented in this case. Thus, by commencing those arbitrations, DWR did not take a position inconsistent with continuing to litigate this action in court.
Second, in the two arbitrations commenced by DWR there was no long-running litigation between the parties on the issues sought to be determined in the arbitration. Accordingly, DWR's decision to commence those arbitrations does not conflict with its position that this litigation should be decided in the court because the parties have been litigating the issues in court since 2002.
5. The Sempra Parties' Contention That Their Waiver Was Not "Knowing"
The Sempra parties argue that their participation in this litigation since 2002 did not constitute a "knowing" waiver of the right to arbitrate the amended cross-complaint because they did not previously know that the amended cross-complaint would be filed.
For this argument, the Sempra parties rely on case law that was not developed in the context of a waiver of the right to arbitrate. Instead, they cite the general rule applicable to contractual rights, namely, that " ' "[w]aiver is the intentional relinquishment of a known right after knowledge of the facts," ' " and " '[t]he burden . . . is on the party claiming a waiver of a right to prove it by clear and convincing evidence that does not leave the matter to speculation, and "doubtful cases will be decided against a waiver" [citation].' " (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31.) The Sempra parties contend that they did not have "knowledge of the facts" when they originally waived the right to arbitrate the issues raised in this litigation because the amended cross-complaint had not yet been filed. We reject this argument for two reasons.
First, the term "waiver" has a specialized meaning in the context of the waiver of the right to arbitrate, which does not focus on the concept of relinquishment of a known right. "While 'waiver' generally denotes the voluntary relinquishment of a known right, it can also refer to the loss of a right as a result of a party's failure to perform an act it is required to perform, regardless of the party's intent to relinquish the right. [Citations.] In the arbitration context, '[t]he term "waiver" has also been used as a shorthand statement for the conclusion that a contractual right to arbitration has been lost.' " (St. Agnes Medical Center, supra, 31 Cal.4th at p. 1195, fn. 4.)
Second, even if knowledge of the facts was required to establish waiver in an arbitration context, as we have explained, the issues pled in the amended cross-complaint are not significantly different from the issues already present in the litigation. The Sempra parties participated in this litigation for years without requesting to arbitrate. Thus, the Sempra parties did knowingly waive their right to arbitrate when they knowingly litigated those same issues that are now asserted in the amended cross-complaint.
6. Conclusion
We have considered and rejected each of the arguments that the Sempra parties advance in an attempt to revive a right to arbitrate despite their undisputed waiver of that right before DWR filed the amended cross-complaint. We accordingly affirm the trial court's ruling denying the Sempra parties' motion to compel arbitration.
DISPOSITION
California Department of Water Resources' motion to dismiss the appeal and impose sanctions is denied. The trial court's order denying the motion to compel arbitration is affirmed.
WE CONCUR: HALLER, Acting P. J., O'ROURKE, J.
As for DWR's request for judicial notice, we grant the request for judicial notice as to (1) exhibit D, which is an order issued by the Los Angeles County Superior Court, and (2) exhibit I, which is an order of the Federal Energy Regulatory Commission. We deny DWR's request as to (1) exhibits A through C, which consist of discovery requests and responses in this action, which are not in the trial court record; (2) exhibits E and F, which consist of correspondence between the counsel for the parties; (3) exhibit G, which consists of orders of a panel convened by the AAA; and (4) exhibit H, which is a guide for commercial arbitrators obtained from the AAA Web site. We deny the request for judicial notice of all of those exhibits as identified above as rejected because they do not meet the requirements for judicial notice under Evidence Code section 452.