Engalla v. Permanente Med. Grp., Inc. - 15 Cal. 4th 951, 64 Cal. Rptr. 2d 843, 938 P.2d 903 (1997)

Rule:

A defrauded party has the right to rescind a contract, even without a showing of pecuniary damages, on establishing that fraudulent contractual promises inducing reliance have been breached. The rule derives from the basic principle that a contracting party has a right to what it contracted for, and so has the right to rescind where he obtained something substantially different from that which he is led to expect. It follows that a defrauded party does not have to show pecuniary damages in order to defeat a petition to compel arbitration.

Facts:

Wilfredo Engalla was enrolled, through his place of employment, in a health plan operated by the Permanente Medical Group, Inc., Kaiser Foundation Hospitals, and the Kaiser Foundation Health Plan (hereafter Kaiser). Prior to his death, Engalla was engaged in a medical malpractice dispute with Kaiser, which according to the terms of Kaiser’s Group Medical and Hospital Services Agreement, was submitted to arbitration. After attempting unsuccessfully to conclude the arbitration prior to Engalla's death, family members and representatives of his estate filed a malpractice action against Kaiser in superior court, and Kaiser filed a petition to compel arbitration pursuant to Code of Civil Procedure section 1281.2. In opposing the petition, plaintiffs claimed that Kaiser's self-administered arbitration system was corrupt or biased in a number of respects, that Kaiser fraudulently misrepresented the expeditiousness of its arbitration system, and that Kaiser engaged in a course of dilatory conduct in order to postpone Engalla's arbitration hearing until after his death, all of which should be grounds for refusing to enforce the arbitration agreement. The trial court found in the Engalla’s favor, denying Kaiser's petition to compel arbitration on grounds of fraud, but the Court of Appeal reversed. Plaintiffs appealed the appellate court’s decision.

Issue:

Did defendants engage in fraudulent conduct, thereby warranting the denial of its petition to compel arbitration? 

Answer:

Yes.

Conclusion:

The Court found that plaintiffs, in seeking to have the arbitration agreement rescinded on the basis of fraud in the inducement (Code Civ. Proc., § 1281.2, subd. (b)), successfully established the element of misrepresentation. The Court noted that the arbitration agreement provided that party arbitrators "shall" be chosen within 30 days and neutral arbitrators within 60 days, and that the arbitration hearing "shall" be held "within a reasonable time thereafter." However, there was evidence that defendants established a self-administered arbitration system in which delay for their own benefit and convenience was inherent. The Court further held that plaintiffs successfully established defendants' intent to induce reliance on the misrepresentations regarding the timely appointment of arbitrators, that the decedent's employer actually relied on defendants' misrepresentations in subscribing to the plan, and that plaintiffs presented sufficient evidence to establish actual injury. The Court also held that plaintiffs were entitled to have the case remanded to the trial court to determine whether defendants had waived their right to compel arbitration, but that plaintiffs were unable to establish that the arbitration agreement was unconscionable on its face.