Settlement Agreements: Civil Code Section 1668 Negates Contractual Clause Eliminating Liability For Fraud When Tortious Elements Are In The Past
But Civil Code Section 1668 Does Negate Contractual Clause Exempting Party From Responsibility When Elements Of Tort Are Concurrent Or Future Events When Contract Is Signed.
Until Lingsch v. Savage, 213 Cal.App.2d 729 (1963) and Orlando v. Berkeley, 220 Cal.App.2d 224 (1963) came along, sellers attempted to remove liability for the condition of property by using "as-is" conditions in contracts, taking advantage of the ancient rule, "caveat emptor" or "buyer beware." As a consequence of those cases, interpreting as-is clauses so as to be consistent with Civil Code section 16681, which does not allow one to exempt oneself from one's own fraud, an as-is provision is ineffective to relieve the seller of fraud. And so argued the assignee of an apartment complex purchased earlier from a developer when suing the developer and related entities for defective construction. SI 59 LLC v. Variel Warner Ventures, LLC et al., B285086 (2/2 11/15/18) (Ashmann-Gerst, Chavez, Hoffstadt).
In affirming dismissal of Plaintiff/Appellant's complaint, the Court explains the temporal limitation of section 1668: "section 1668 negates a contractual clause exempting a party from responsibility for fraud or a statutory violation only when all or some of the elements of the tort are concurrent or future events at the time the contract is signed. Contrariwise, we hold that section 1668 does not negate such a clause when all the elements are past events. Regarding the element of damages, which is necessary for tort liability, this means that at least some form of economic or physical damage has occurred." Thus, with a suitable disclaimer, one can be off-the-hook for past fraud, but not fraud occurring concurrently with or after the contract is signed.
COMMENT: This is a slippery area, and the ruling, particularly with regard to damages, could invite future litigation. One can foresee future argument arising over whether a statutory violation that arguably led to a diminution in market value before a contract was signed, and which was known to the seller but not to the buyer, and subsequently led to physical injury after the contract was signed, nevertheless allows for a complete release of liability, despite Civil Code section 1668, because some damage by way of diminution of value occurred before the contract was signed.
1 Section 1668 provides: "All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."
Legislation: Democrats Introduce Bill To Protect Workers By Cutting Back On Mandatory Arbitration
"Restoring Justice For Workers Act."
Vox reports on November 14, 2018, that on October 30, 2018, Rep. Jerrold Nadler (D-NY) and other House Democrats introduced the "Restoring Justice for Workers Act." The self-explanatory caption of the Bill is: " A BILL — To prohibit forced arbitration in employment disputes, and for other purposes." Republicans have thus far shown little interest to eliminate mandatory arbitration for workers, and of course the Bill would also require Senate approval to become law.
The Vox article references an Economic Policy Institute report dated September 27, 2017, and authored by Prof. Alexander J.S. Colvin of the Cornell University School of Industrial and Labor Relations. Among other things, Colvin writes: "This study finds that since the early 2000s, the share of workers subject to mandatory arbitration has more than doubled and now exceeds 55 percent. This trend has weakened the position of workers whose rights are violated, barring access to the courts for all types of legal claims, including those based on Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Family and Medical Leave Act, and the Fair Labor Standards Act."
Rules: California’s New Rules Of Professional Conduct Include Rules Pertaining To Mediators And Arbitrators
The Current Rules Of Professional Conduct Became Effective On November 1, 2018.
The following new rules pertain to arbitrators, mediators, or other third party neutrals:
Rule 1.12 Former Judge, Arbitrator, Mediator, or Other Third-Party Neutral;
Rule 2.4 Lawyer as Third-Party Neutral;
Rule 2.4.1 Lawyer as Temporary Judge, Referee, or Court-Appointed Arbitrator.
Rule 1.12(a) provides that lawyers shall not represent anyone in connection with a matter in which the lawyer "participated personally and substantially" as a judge, arbitrator, mediator, or other third-party neutrals, "unless all parties to the proceeding give informed written consent," and except as stated in paragraph (d).
Whereas Rule 1.12(a) applies to representation, Rule 1.12(b) applies to employment. If the lawyer participates "personally and substantially" as a judge, arbitrator, mediator, or other third-party neutral, the lawyer can't seek employment from any person involved as a party or as a lawyer for a party. However, judicial staff attorneys and law clerks can seek such employment, but only with the permission of the court.
Rule 1.12(c) disqualifies other attorneys in a law firm if one of the attorneys is disqualified from representation by paragraph (a), unless:
"(1) the prohibition does not arise from the lawyer's service as a mediator or settlement judge;
(2) the prohibited lawyer is timely screened from any participation in the matter and is apportioned no part of the fee therefrom; and
(3) written notice is promptly given to the parties and any appropriate tribunal to enable them to ascertain compliance with the provisions of this rule."
Rule 1.12(d) provides that an arbitrator "selected as a partisan of a party in a multimember arbitration panel is not prohibited from subsequently representing that party." Evidently the partisan arbitrator is expected to remain partisan.
A Comment to Rule 1.12 points out that "[o]ther law or codes of ethics governing third-arty neutrals may impose more stringent standards of personal or imputed disqualification. (See rule 2.4.)."
. . . which brings us to Rule 2.4, "Lawyer as a Third-Party Neutral." The lawyer serving as a third-party neutral must inform unrepresented parties that he is not representing them, and if the lawyer believes the unrepresented party does not understand the lawyer's role, then the lawyer must explain the difference between the lawyer as a third-party neutral and as an advocate.
Rule 2.4.1 provides that the lawyer acting as temporary judge, referee, or court-appointed arbitrator is subject to canon 6D of the California Code of Judicial Ethics, allowing the State Bar to discipline lawyers who violate the Code of Judicial Ethics while acting in a judicial capacity.
The distinction between 2.4 and 2.4.1 is that the first rule applies to the lawyer acting in a non-judicial functions whereas rule 2.4.1 refers to the lawyer acting in a judicial function. Thus, Rule 2.4 pertains to lawyers serving as third-party neutrals in a mediation, settlement conference, or arbitration pursuant to an arbitration agreement, whereas Rule 2.4.1 applies to judges, referees or court-appointed arbitrators.
Arbitration, Employment, Confidentiality, Construction, Unconscionability: First District, Division 1: Armendariz Is Good Law, Making Law Firm’s Arbitration Agreement Unconscionable
Under Armendariz Framework, Court Finds Parties' Arbitration Agreement Is Unconscionable.
Constance Ramos, "an experienced litigator and patent practitioner with a doctorate in biophysics" petitioned the Court of Appeal to vacate superior court Judge John Stewart's order granting the motion of her erstwhile employer, Winston & Strawn, to compel arbitration of her employment/FEHA dispute. Ramos v. Superior Court, A153390 (1/1 11/2/18) (Margulies, Humes, Banke).
Ramos had filed a complaint against Winston asserting causes of action for sex discrimination, retaliation, violation of California's Equal Pay Act, and wrongful termination. Relying on the arbitration agreement between Ramos and Winston, the superior court had granted Winston's motion to compel arbitration, while severing portions of the arbitration agreement deemed unconscionable, prompting Ramos's petition to the Court of Appeal.
The Court of Appeal vacated the superior court's order, finding that the arbitration agreement contained four unconscionable terms: "The provisions requiring Ramos to pay half the costs of arbitration, pay her own attorney fees, restricting the ability of the panel of arbitrators to "override" or "substitute its judgment" for that of the partnership, and the confidentiality clause, are unconscionable and significantly inhibit Ramos's ability to pursue her unwaivable statutory claims." The agreement was too flawed to allow for severance — in effect, the court would have had to rewrite the agreement between the parties to make it enforceable.
This case has a number of interesting aspects:
- The opinion clearly states that Armendariz is still good law, notwithstanding AT&T Mobility v. Concepcion and the FAA — probably dictum, since Winston failed to show that the FAA applied in the case.
- The reason the confidentiality provision was substantively unconscionable was because it required all aspects of the arbitration to be secret, hindering the ability of Ramos to develop a case.
- An issue in the case, given Ramos's status as an "Income Partner" was whether she was to be considered as an employee or as a partner, for purposes of applying the law firm's partnership agreement, and the procedural protections of Armendariz. The Court explained that it did not need to decide whether Ramos was an employee or a partner, because the critical points, requiring that the Armendariz protections apply, were that Ramos asserted statutory rights Armendariz held to be unwaivable, and Winston was in a superior bargaining position vis-a-vis Ramos.
- In construing the scope of the arbitration clause, the Court reminds us that "arise under" or "relate to" is broader than "arising from" or "arising out of" an agreement.
COMMENT. Why not include a provision in an employee/employer arbitration agreement to the effect that, if any provisions are determined by a judge or an arbitrator to be inconsistent with the five minimum requirements for the lawful arbitration of unwaivable statutory rights, as set forth in Armendariz, then the five requirements in Armendariz shall take precedence and govern the application of the agreement. Would this make it easier for employers to enforce arbitration agreements precisely because it would protect employees with Armendariz minimum requirements?
Arbitration, FAA, Adequacy of Record, Collateral Estoppel, Fees: Five Unpublished Cases Involving Hodgepodge Of Issues Result In Four Affirmances And One Dismissal.
Arbitration Cases Fly Under The Radar.
In recent years, I have concentrated more on published arbitration cases than on unpublished cases — first, because the unpublished cases are not citable in California state courts, and second, because there are simply so many of them. However, today, I have gathered five unpublished cases appearing in just the last five days to make three points:
First, all five cases involve affirmances, or in one case, a grant of defendants'/respondents motion to dismiss the appeal. And this is an example of what we know to be true: it is very difficult in the courts to undo results of an arbitration.
Second, the five unpublished cases demonstrate just how widely arbitration is now used to resolve myriad disputes: Loeffler v. RSM 8, LLC, No. G055100 (4/3 10/25/18) (Thompson, Fybel, Ikola) (dispute between home buyer and seller); Kivorkian v. Star Insurance Company, No. B272162 (2/3 10/26/18) (Egerton, Lavin, Dhanidina) (dispute between injured driver and insurance company); Belnap v. Pierce, No. D071245 (4/1 10/26/18) (O'Rourke, Nares, Haller) (partnership dispute between two dentists); Axten v. Axten, No. D073089 (4/1 10/30/18) (Guerrero, O'Rourke, Dato) (dispute between ex-spouses concerning attorney fees and costs award); Kote v. Blonska et al., No. G055436 (4/3 10/30/18) (Thompson, Aronson, Ikola) (dispute concerning accounting by trustee).
Third, the five unpublished cases provide an example of how arbitration-related issues tend to fly under the radar. First, the arbitration itself is usually a private affair, without precedential importance. Second, when arbitration issues do end up in the appellate courts, resulting in written opinions, then the written opinions, like most generated by the California Courts of Appeal, are unpublished and uncitable. That is the case with all five of these unpublished opinions, appearing over a span of five calendar days. During the same time period, as of the time of this post, I had not seen any published California state court appellate opinion involving arbitration.
As to the issues addressed by these five opinions, here is a brief and incomplete rundown:
- Loeffler — whether the FAA governed, whether the arbitration award was untimely, and whether the arbitrator should have issued a statement of decision;
- Kivorkian — whether a bad faith action filed to attack an arbitration constituted an improper collateral attack on the arbitration award;
- Belnap — whether plaintiff's claims were barred by res judicata and collateral estoppel;
- Axten — whether an adequate record allowed review of a claim on the merits and whether the arbitrator determined appellant was a prevailing party;
- Kote — whether a notice of appeal of an order confirming an award was proper in the absence of a judgment.
Arbitration, Class, Pending Cases: SCOTUS Case May Decide Whether Arbitration Clause Allowed For Class Arbitration
The Case Is Lamps Plus Inc. v. Varela.
Yesterday, I posted about three arbitration cases pending before the Supreme Court, one of which is Lamps Plus Inc. v. Varela. Charlotte Garden, Co-Associate Dean For Research and Faculty Development, and Associate Professor at the Seattle University School of Law, has drilled down with a preview of arguments in the Lamps Plus case in today's Scotusblog.
"In Lamps Plus Inc. v. Varela," Prof. Garden explains, "the Supreme Court will decide whether the U.S. Court of Appeals for the 9th Circuit correctly held that an employer did consent to class arbitration when it included language in the arbitration contract that committed the parties to use arbitration 'in lieu of any and all lawsuits or other civil legal proceedings,' specified that arbitral claims include those 'that, in the absence of this Agreement, would have been available to the parties by law,' and authorized the arbitrator to 'award any remedy allowed by applicable law.'" [Query whether a convoluted explanation puts the 9th Circuit behind the eight ball]. Then Prof. Garden has some fun explaining the sub-arguments in the case that could, conceivably, enable SCOTUS to duck the issue entirely if it so chose to do.
COMMENT: If SCOTUS were to reach the merits and conclude that the correct result is that the allegedly ambiguous arbitration clause referencing legal proceedings that "would have been available to the parties by law" authorizes class arbitration, it seems likely that sophisticated employers will soon find a drafting solution to forestall class arbitration in the future. Or SCOTUS may save them the effort.