Arbitration/Standard of Review: Though Parties Expressly Agreed To Judicial Review Of Legal Error, Trial Court Declining To Consider Whether Arbitrator Committed Legal Error Did Not Err
Review Of Legal Error Here Was Job For Court Of Appeal
Though an error in law or fact is not a basis for overturning an arbitrator’s award, in California, the parties by agreement can make the arbitrator’s award reviewable for legal error. Here, the parties agreed that the award was to be reviewed for legal error, yet the trial court simply affirmed the award, declining to review for legal error. Naturally, the losing plaintiffs appealed from the judgment. Clarke v. Kilpatrick, Case No. C071313 (3rd Dist. May 28, 2014) (Blease, Nicholson, Mauro) (unpublished).
Affirmed.
Why? The answer is to be found in the language of the arbitration agreement. The parties here agreed that “judicial review of any … legal error by the arbitrator shall proceed . . . from a final judgment . . . entered in the Superior Court. . . “ And that is what happened – the Court of Appeal, rather than the Superior Court, reviewed the final judgment for legal error, and found none.
DRAFTING TIP. If you want to empower a court to review the arbitrator’s award for legal error, it’s not enough to simply require the arbitrators to follow the rule of law – because that may allow them to apply it “wrongly as well as rightly.” Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334, 1360 (2008). Be sure to add that “legal errors are an excess of arbitral authority that is reviewable by the courts.” Id. at p. 1361. The language used in the specific agreement in Cable Connection did work to create the power to review for legal error.
Arbitration/Appealability/Waiver/1281.2/Agents: Court Of Appeal Reverses Denial Of Petition To Compel Arbitration, Because Delay In Bringing Petition Did Not Result In Prejudice
Also, California Code of Civil Procedure, Section 1281.2, Did Not Prevent Arbitration, Because Federal Arbitration Act Applied And Preempted State Provision
Defendants/appellants in the next case lost a petition to compel arbitration in the trial court. At first blush, they had waived their right to arbitrate, because they delayed bringing their motion to compel, and they chose a litigation route, filing an (unsuccessful) motion for summary judgment. However, defendants, who appear to have given particular attention to the risk of waiver, fared better when they appealed, managing to convince the Court of Appeal that they had not lost their right to arbitrate. Gloster v. Sonic Automotive, Inc., A137081 (1st Dist. Div. 1 filed 4/23/14, certified for partial publication 5/21/14) (Margulies, Dondero, Banke).
First, defendants appealed the denial of their summary judgment motion – a motion they brought arguing that plaintiff, an employee who was a party to numerous agreements requiring arbitration, had forfeited his right to bring any claims, by not following the arbitration route. This appeal issue was easily shot down, because absent extraordinary circumstances, an order denying summary judgment is not appealable.
Second, defendants had obviously given thought to the risk of waiving their right to arbitrate, because they were careful to assert the right to arbitrate as an affirmative defense, and because along with filing their motion for summary judgment, they petitioned to arbitrate in case they lost. While they delayed petitioning to compel arbitration, they were careful to consistently assert their right to arbitrate, and to only respond to discovery rather than to propound discovery. Furthermore, the motion for summary judgment was not viewed by the Court of Appeal as deciding the merits of the employee’s substantive claims. In sum, there was no convincing showing that the defendants’ delay resulted in an advantage in litigation to the defendant – hence, no showing of waiver of the right to arbitrate.
Third, Cal. Code of Civ. Proc., section 1281.2(c) allows the court to deny a petition to compel arbitration under circumstances where, for example, pending litigation and an arbitration would present the possibility of conflicting rulings on a common issue of law or fact. However, here, the arbitration provisions were contractually governed by the Federal Arbitration Act, which preempts 1281.2(c). The FAA is not concerned with the possibility of conflicting rulings; if the parties agree to arbitrate, then section 1281.2(c) offers no escape hatch.
Fourth, several defendants argued that another defendant, Toyota, should be deemed a third party beneficiary of the arbitration agreement, because Toyota was labeled an “agent” of the other defendants in boilerplate complaint allegations. However, the defendants making the argument did not concede the truth of the boilerplate allegations. The issue is resolved conclusively by a case we have posted about on April 18, 2013, Barsegian v. Kessler & Kessler, 215 Cal.app.4th 556 (2013): a third party cannot be deemed an agent under an arbitration agreement based on boilerplate allegations, particularly when the party advocating agency status denies the allegations, as was the case here.
DRAFTING TIP. Many arbitration provisions contain confusing language to the effect that the arbitration agreement is governed by some combination of the FAA, California law, the rules of the AAA, or some other rules. Because of confusion about what law governs, there may be confusion about whether section 1281.2 applies, allowing the court to deny a request for arbitration because of the possibility of conflicting rulings. One can resolve that issue upfront by spelling out the result one desires in the arbitration clause. Here, for example, one of the contracts provided: “the court may not refuse to enforce this arbitration agreement and may not stay the arbitration proceeding despite the provisions of California Code of Civil Procedure section 1281.2 [subdivision] (c).” The Court of Appeal concluded that the parties could not have stated their intent “any more clearly.”
Arbitration/Delegation: Trial Court Lacked Authority To Rule On Enforceability Of Arbitration Agreement, Because Authority To Do So Was Delegated To Arbitrator (Even Though Delegation Clause Was Procedurally Unconscionable)
Split Of Opinion In District Two Over Enforceability Of Delegation Clauses
Poker game of construction workers at canteen, Shasta Dam. Russell Lee, photographer. 1939. Library of Congress.
When Lourdes Tiri, a cook fired by Lucky Chances, a card-club casino and restaurant, sued her employer, the employer petitioned to compel arbitration. However, the trial court denied the petition on the basis that the arbitration agreement was unconscionable and therefore unenforceable. Employer appealed. Tiri v. Lucky Chances, Inc., A136675 (1st Dist. Div. 4 May 15, 2014) (Humes, Ruvolo, Reardon) (published).
The Court of Appeal now holds: “the trial court lacked the authority to rule on enforceability of the agreement because the parties’ delegation of this authority to the arbitrator was clear and is not revocable under state law.”
The delegation clause is not the same as the arbitration agreement. Thus, the delegation provision may be enforceable – as it was here – though the arbitration agreement itself could be unconscionable.
The delegation clause here provided: “The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.”
For a delegation clause to be enforceable, (1) the language of the clause must be “clear and unmistakable”; and (2) the delegation must not be revocable under state contract defenses such as unconscionability.
Here, the Court of Appeal agreed that the delegation clause was procedurally unconscionable, as it was presented on a “take it or leave it” basis. However, it was not lacking in mutuality so as to be substantively unconscionable. Moreover, the language of the delegation clause was “clear and unmistakable.” Therefore, the delegation clause satisfied the requirements for enforceability.
The Court of Appeal notes that it has now created a split of opinion with two other decisions from the district, Ontiveros v. DHL Express (USA), Inc. 164 Cal.App.4th 494 (2008) and Murphy v. Check ’N Go of California, Inc.,156 Cal.App.4th 138 (2007), both of which declined to enforce delegation clauses in employment arbitration contracts of adhesion on unconscionability grounds.
So has Lourdes Tiri been dealt a bad hand by Lucky Chances? Now it’s up to the arbitrator to decide the merits of the employee’s claim, and whether the arbitration agreement itself is unconscionable.
Arbitration/Rules/Fees: Court Of Appeal Affirms Denial Of Request For Attorney’s Fees As AAA Rules Were Insufficient Basis For Fee Entitlement
AAA Clause Does Not Contain Required Prevailing Party Language Necessary For Fee Recover Under Civ. Code section 1717
In Fujian Peak Group, Inc. v. Huang, No. D063296 (4th Dist. Div. 1 May 15, 2014) (Huffman, McConnell, O’Rourke) (unpublished), defendant Huang was deleted from an arbitration award because he had neither been served nor had he consented to arbitration. Denied a request to recover his attorney’s fees, he appealed – unsuccessfully.
While there were several grounds for denying Huang’s request for fees, the most relevant one to the subject of arbitration is that AAA rule-43 did not include “prevailing party” language that would allow for fee recovery under Civ. Code section 1717 principles of reciprocity. Under AAA rule 43(d), the award could include an award of attorney fees if all parties have requested such an award or it is authorized by law or their arbitration agreement. Here, because the arbitration clause also did “not contain the required prevailing party language” applicable to the individual defendant/appellant, the AAA rules alone could not authorize fee recovery.
Affirmed.
Mandatory Fee Arbitration Act/Deadlines/Standard of Review
Failure To Observe 30-Day Deadline To File Rejection Or Request Trial Tubes Appeal
Rothman v. Deshay, Case No. B245075 (2nd Dist. Div. 4 May 13, 2014) (Epstein, Manella, Edmon) (unpublished) is a Court of Appeal case that has its genesis in mandatory fee arbitration between attorney Rothman and client Deshay. Though unpublished, the case has some worthwhile lessons for clients and attorneys engaged in fee arbitration.
First, the review of a judgment confirming an arbitration award – like the review of arbitration awards in general – will be limited. The award won’t be subject to judicial review except on the grounds set forth in Code of Civ. Proc. sections 1286.2 (to vacate) and 1286.6 (for correction).
Second, even though elective arbitration before the County Bar may seem informal, there is a strict 30-day deadline to challenge the award by filing a rejection and request for trial. Bus. & Prof. Code section 6203(b). Here, the appellant failed to observe the 30-day deadline, and that tanked, tubed, torpedoed, and doomed the appeal.
Third, a party needs to be careful about whom they say they represent in arbitration. Appellant contended that the arbitration award was invalid because it only bound Deshay, and failed to bind other affiliated parties in the dispute. Despite some confusion in the record, however, appellant had written earlier to the arbitrators and the court to clarify he sought arbitration on behalf of all appellants who were affiliated with him. “Under these circumstances, the arbitration award bound appellants referenced in respondent’s underlying complaint, Deshay’s letter to the arbitrators and the court, and the ‘et al’ reference in their request for arbitration.”
Fourth, the opinion discusses whether the trial court erred by denying a motion for leave to file a cross-complaint. Deshay wanted to file a cross-complaint for malpractice. The MFAA prohibits clients from raising malpractice claims during the arbitration, except insofar as the claim bears upon fees. Here, the trial court denied appellant’s motion for leave to file a cross-complaint (i) because it was untimely; and (ii) because the malpractice issues, though they could not have been raised affirmatively as a cross complaint in MFAA arbitration, should have been raised defensively.
Fifth and finally, the case discusses whether the attorney was entitled to recover fees under Trope v. Katz, 11 Cal. 4th 274 (1995) (holding that an attorney who chooses to litigate his own case cannot recover fees under Civ. Code section 1717). Here, attorney Rothman was entitled to recover, because he employed independent contractors. For further discussion of the attorney’s fees aspect of the case, see the May 14, 2014 blawg post on California Attorney’s Fees.
Arbitration/Collateral Estoppel/Res Judicata: Second District, Division 2 Holds Arbitrator’s Findings Do Not Bar Indemnification Claims Against Third-Party Subcontractors, And Reverses Judgment
An Exercise In Drawing Bright Lines
Home seller Reagan Silber sought indemnification from subcontractors after rather decisively losing an arbitration with a home buyer, who discovered extensive and undisclosed water intrusion in the Bel Air home. “The groundskeeper recalled that, on one occasion, Silber had joked to him that the house was worth over $20 million, but had to be ‘covered with plastic’ every time it rained.” However, the subcontractors successfully demurred to Mr. Silber’s indemnification claim, “arguing the arbitrator’s finding that Silber had deceived the purchaser barred any subsequent claim for indemnification.” Basically, the subcontractors argued that the arbitrator’s findings meant that Silber’s damages were his own bloody fault.
Given that the arbitrator awarded approximately $2.65 million in compensatory damages, $1.25 million in attorneys fees, and $850,000 in punitive damages, it is not surprising that Mr. Silber appealed. Silber v. Hanover Builders, Case No. B246975 (2nd Dist. Div. 7 May 12, 2014) (Zelon, Woods, Segal) (unpublished). And it was wise of him to do so (though obviously Mr. Silber did not seek indemnification for the punitive damages award).
The outcome hinges on the Court of Appeal’s analysis and conclusion that neither res judicata (claim preclusion) nor collateral estoppel (issue preclusion) barred Silber’s indemnification claim against third-party subcontractors.
Vandenberg v. Superior Court, 21 Cal.4th 815, 834 (1999) “established a bright-line rule that ‘a private arbitration award, even if judicially confirmed, can have no collateral estoppel effect in favor of third persons unless the arbitral parties agreed, in the particular case, that such a consequence should apply.’” Here, as there was no such private agreement among the arbitral parties, there could be no collateral estoppel effect.
Nor could there be claims preclusion, for the simple reason that the arbitration, based on deceit claims, and the indemnification action, arising from the subcontractors’ alleged failure to complete repairs they were hired to perform, did not involve the same “primary rights”, and hence did not involve the same cause of action. In the case of the arbitration, the buyer’s “primary right” was to be free from the injury caused by deception, whereas in the lawsuit against subcontractors, Silber’s “primary right” was the right to be free from harm caused by a subcontractor’s inadequate performance.
Reversed.