Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. U.

1989-03-06

Headline: Court allows state arbitration rules to pause arbitration when parties chose that state's law, upholding a university’s use of California rules and limiting immediate federal arbitration enforcement.

Holding:

Real World Impact:

Lets contracting parties choose state arbitration rules that can pause arbitration when related court cases exist.
Allows courts to stay arbitration in multiparty disputes involving non-signatory third parties.
Means federal arbitration enforcement may yield to explicit party choices about arbitration procedures.

Topics: arbitration procedures, state vs federal law, contract choice-of-law, construction disputes

Summary

Background

A construction subcontractor and a major university had a contract saying disputes would be resolved by arbitration and that the contract would be governed by the law where the project was located. A disagreement over extra work led the subcontractor to demand arbitration. The university sued in California court and joined two other contractors who were not bound by arbitration agreements. The university asked the court to use a California rule (§1281.2(c)) that lets courts stay arbitration when related litigation with non‑signatory third parties could produce conflicting rulings.

Reasoning

The core question was whether federal arbitration law (the Federal Arbitration Act, which enforces arbitration agreements) prevents a state court from applying California’s stay rule when the parties agreed their arbitration would be governed by California law. The majority said parties are free to set the terms of arbitration in their contract. Because the contract made California law govern, the Court held the California stay rule could apply and was not pre-empted by the federal arbitration statute in this situation. The Court emphasized the FAA’s purpose is to enforce private arbitration agreements according to their terms.

Real world impact

The ruling means parties who specify a state’s law for their arbitration can be bound by that state’s procedural rules, including rules that pause arbitration while related court cases proceed. It affects multiparty construction and similar commercial disputes where some parties did not agree to arbitrate. The decision enforces the parties’ contract choices but leaves open future challenges about which procedural federal provisions apply.

Dissents or concurrances

A dissent argued the choice-of-law clause should not be read to exclude federal law and that the Court should review the state court’s interpretation because it effectively denied the protections of the federal arbitration statute.