California Attorney’s Fees has a short post dated February 18, 2015, with tips for successful enforcement of arbitration clauses in fee retainers found in a recent article in the Daily Report, authored by Randy Evans and Shari Klevens of McKenna Long.
When Does Trial Commence In “Dual Track” Arbitration/Litigation?
The Danger Signal. Currier & Ives. 1884. Library of Congress.
Parties routinely avoid exposure to attorneys fees under Cal. Civ. Code section 1717 by voluntarily dismissing their action before “the actual commencement of trial”. The meaning of “the actual commencement of trial” presented a novel question where “dual track” arbitration/litigation occurred -- the facts presented in Mesa Shopping Center-East, LLC v. O Hill, Case No. G049205 (4/3 Dec. 23, 2014) (Ikola, O’Leary, Aronson) (published).
Parties are permitted to follow a “two-forum approach to litigation (i.e., court for provisional remedies, arbitration for the merits) . . . but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief.” And that’s exactly what occurred here, where two sets of real estate investors disputed spending and management issues. Plaintiffs filed a court action seeking – unsuccessfully – to obtain preliminary injunctive relief – and plaintiffs and defendants agreed to arbitrate the merits. After an unfavorable interim award analyzing the merits was issued by the Arbitrator, plaintiffs “voluntarily” dismissed their court action, hoping to avoid attorney’s fee exposure. The trial judge agreed the voluntary dismissal of the court action, prior to commencement of trial, meant attorney’s fees could not be awarded against plaintiffs in the court action (as contrasted to the arbitration, in which plaintiffs clearly lost).
Closely scrutinizing the meaning of “commencement of trial,” the Court of Appeal disagreed with the trial court, and reversed. Essentially, the Court of Appeal refused to view the court action and the arbitration as two entirely separate proceedings: “it is self-evident from the record that this action and the arbitration were interdependent, featuring the same parties fighting over the same causes of action.” The Court concluded, “The parties commenced arbitration on the merits . . . when they presented evidence and argument before the arbitrator. This qualified as the ‘commencement of trial’ referenced in section 581, subdivisions (b)(1) and (c), thereby cutting of the Mesa Investors’ unilateral right to dismiss this action without prejudice."
COMMENT: The dual forum scenario deserves a caution sign.
Proceed with caution, because if the litigation train is running out of steam, you cannot depend on a “voluntary” dismissal of the court action prior to a court trial to avoid exposure to attorney’s fees once a dual-track arbitration hearing has commenced. Trial may have actually commenced – in arbitration!
Mesa Shopping Center-East, LLC v. O Hill is also the subject of a December 28, 2014 post in Mike and Marc’s California Attorney’s Fees blog.
Court Does Not Decide Whether Contractual Provision Limiting Arbitrator’s Power To Apply Definition Of “Prevailing Party” Other Than Found In Agreement Would Be Unenforceable As Violative Of Public Policy.
Does an arbitrator who applies the statutory definition of “prevailing party” found in Civil Code Section 1717(b)(1), rather than than the definition the parties contractually agreed to, violate his powers? No – at least not when the issue of attorney’s fees is submitted to the arbitrator, and there is no express limitation on the powers of the arbitrator. Safari Associates v. Superior Court (Alan Tarlov, real party interest), Case No. D065684 (4/1 Dec. 2, 2014) (Aaron, Huffman, Irion).
Under section 1717, the prevailing party is the one “who recovered a greater relief in the action on the contract.” However, in the contractual dispute between Safari and Tarlov, the arbitration clause provided that “the term ‘prevailing party’ means the party . . . that obtains substantially the relief sought in the arbitration.” The different definitions of “prevailing party” proved to be important here, because Safari argued that Tarlov was required to pay, at a minimum, $768,228 to reimburse Safari for Tarlov’s personal expenses that Safari paid, but the arbitrator only awarded $152,611.48 in damages to Safari, plus $211,620 in attorney’s fees and $37,224.05 in costs.
Thus, the arbitration award set the stage for Safari to move to confirm the award in the trial court, and for Tarlov to argue that the award needed to be modified or corrected as to fees, because he had “substantially” received the relief he sought in the arbitration by beating back much of Safari’s claim. The trial judge sided with Tarlov, agreeing that the arbitrator had exceeded his powers by failing to apply the contractual definition of “prevailing party.”
The Court of Appeal, however, disagreed, and granted Safari’s petition for writ of mandate. The parties had submitted the issue of attorney’s fees and briefed the issue of “prevailing party” to the arbitrator. Quoting Moore v. First Bank of San Luis Obispo, 22 Cal.4th 782, 787 (2000), but changing the names of the parties, the Court of Appeal explained: “Having submitted the fees issue to arbitration, [Tarlov] cannot maintain the arbitrator  exceeded [its] powers, within the meaning of [Code of Civil Procedure] section 1286.6, subdivision (b), by deciding it, even if [the arbitrator] decided it incorrectly.”
The Court further observed that it was aware of “no authority that would support the conclusion that an arbitrator acts in excess of his powers in refusing to apply a provision in the parties’ agreement that the arbitrator determines is avoid as violative of public policy.”
COMMENT: Could one draft an agreement that would limit the arbitrator’s power to apply a definition of prevailing party other than that found in the arbitration agreement? One could define “prevailing party”, as did the parties in Safari, and then add that the arbitrator shall apply that definition, and that modifying, changing, or excusing that provision is outside the powers of the arbitrator. In Safari, however, the parties merely defined “prevailing party”, but did not expressly state that application of a different definition would exceed the powers of the arbitrator. Similarly, the Safari panel distinguished Gueyffier v. Ann Summers, Ltd., 43 Cal.4th 1179 (2008) on the narrow ground that the agreement in Gueyffier “explicitly precluded the arbitrator from modifying or changing” a provision.
If the parties in Safari had intended to “attempt to limit the arbitrator’s power to apply a definition of prevailing party other than the definition contained in the Agreement”, would language evincing such an intent have been enforceable? The Safari Court declines to decide that question. (Safari, footnote 5).
NOTE: This post also appears on the California Attorney’s Fees blog today.
Also, JAMS Rules Did Not Enlarge Arbitrator's Powers To Correct Final Award.
Cooper v. Lavely & Singer, Case No. B251508 (2/4 Sept. 26, 2014) (Manella, Epstein, Willhite) (published) offers a very instructive discussion about correction of an arbitration award. Perhaps the best lesson here is for arbitrators – be careful about issuing dicey final awards that may require further tinkering.
The key statutory provisions at issue in Cooper are: CCP section 1286.2, providing grounds for vacating an award by the court; section 1286.6, providing grounds for the court to correct an award; and, section 1284 providing grounds for an arbitrator to correct an award – which, however, precludes an arbitrator from making a substantive change that affects the merits of the final decision. See CCP sections 1284 and 1286.6(b), which work in tandem.
In an attorney fee dispute between client Cooper and law firm Lavely & Singer, the arbitrator issued a Final Award declaring the law firm the prevailing party, but denying fees to it, because it appeared that the law firm had represented itself in the litigation. However, after Lavely & Singer submitted a motion for "correction, modification and/or reconsideration of the Final Award," the arbitrator concluded that reconsideration was proper, and issued a Revised Final Award, incorporating the Final Award, and including attorney's fees.
The problem here is that "Section 1284 prohibits substantive amendments to final awards to include new awards of attorney fees." Section 1284 allows an arbitrator latitude to make other types of changes, where, for example, there is a miscalculation of figures, or the award is imperfect as to form. And there is even a further nonstatutory amendment doctrine, allowing the arbitrator to amend an award to include rulings on mistakenly omitted issues. Because the Revised Final Award here purported to eliminate substantive errors in the Final Award, it simply couldn’t be shoe-horned into any of the narrow exceptions that allow for amendment by the arbitrator.
However, the parties had agreed to be governed by JAMS rules, leaving as a “key issue . . . whether the parties . . . expanded the scope of the arbitrator’s ability to modify a final award beyond that granted by section 1284.” After all, some of the CCP rules governing arbitration can be governed by agreement of the parties, and whereas other rules will always, as a matter of policy, take priority over a private agreement. The JAMS rules, however, contain the further provision that “If any of these Rules . . . is determined to be in conflict with a provision of applicable law, the provision of law will govern over the Rule in conflict . . . “ Therefore, the Court of Appeal is able to conclude here, on these facts, that by agreeing to arbitrate under JAMS rules, the parties “did not attempt to modify section 1284 to permit substantive revisions of an award that was final for purposes of that statute . . . “
Here, the arbitrator, hamstrung by the earlier issuance of a Final Award, would have had more flexibility if an Interim Award had been issued.
So in the end, trial court erred by denying Cooper's petition to vacate the fee award contained in the Revised Final Award. Thus, Lively & Singer is the prevailing party – but it doesn't get attorney's fees incurred in the arbitration.
COMMENT: By concluding here that the parties, by agreeing to JAMS rules, did not intend to modify section 1284, the Court leaves it for another day to decide whether section 1284 could be modified by agreement of the parties to devise a more flexible procedure for correcting an award.
Chairez and Guerra entered into a “LEASE AGREEMENT with OPTION TO PURCHASE & EXTEND” (agreement) relating to a property at which Chairez and Guerra lived. Chairez borrowed $1.1 million against the property and defaulted on the loan, resulting in nonjudicial foreclosure proceedings by Aurora. Aurora also brought an unlawful detainer action against Guerra, and Guerra successfully moved to compel arbitration under the agreement.
Guerra did well in the arbitration. The arbitrator ordered Aurora to grant the property to him, to cancel the note, to reconvey the deed of trust, and to pay $14K in attorneys fees.
The appeal by Aurora yielded a reversal. Aurora was a nonsignatory to the arbitration agreement between Chairez and Guerra. Aurora was not a beneficiary of the agreement. And the relationship between Chairez and Aurora, i.e., between borrower and lender, was different than the types of relationships such as principal and agent or employer and employee, where the identity of interest is sufficient to bind a nonsignatory to an arbitration agreement. Hence, the trial court erred by ordering arbitration.
Interestingly, on the basis the the Court of Appeal determined that it was improper to compel arbitration – namely, Aurora was a nonsignatory to the arbitration agreement – the trial judge denied attorney’s fees to Guerra, even though he had prevailed in the arbitration. Because the Court of Appeal reversed the judgment confirming the arbitration award (see above), Guerra was not a prevailing party, and therefore the order denying him attorney’s fees was affirmed.
Court of Appeal Was Unable To Find Precedent On Whether CCP 1284.3, Pertaining To Consumer Arbitrations, Applies To Employer-Employee Arbitrations, And Reaches Its Own Conclusion
On March 12, 2014, I posted about an earlier Court of Appeal decision involving the same parties and the same arbitration agreement as here, in which the Court held that, with the exception of a claim for unpaid wages, other claims in the case could be arbitrated. Unfortunately, the decision in that case apparently came down too late to offer guidance to the trial judge in this case, who denied plaintiff’s motion to compel the former employee to arbitrate, only to be reversed on appeal. Francis Capital Management LLC v. Martin Keith Lane, Jr., B253559 (2/1 Sept. 9, 2014) (Manella, Epstein, Willhite) (unpublished).
The most interesting issue presented by the case is the application of Cal. Code of Civ. Proc., section 1284.3. (I posted about 1284.3 earlier on May 1, 2014). Subpart (a) of this provision states:
“No neutral arbitrator or private arbitration company shall administer a consumer arbitration under any agreement or rule requiring that a consumer who is a party to the arbitration pay the fees and costs incurred by an opposing party, if the consumer does not prevail in the arbitration, including, but not limited to, the fees and costs of the arbitrator, provider, organization, attorney, or witnesses.”
The parties had designated the AAA as the arbitration organization. The issue presented by section 1284.3 was whether a prevailing party fee shifting provision in the arbitration agreement prohibited the AAA from arbitrating the dispute. The trial court concluded that the answer was “yes”, but the Court of Appeal concluded here, on the facts, that the answer was “no.”
A threshold question is whether employee-employer arbitrations even qualify as “consumer arbitrations.” Finding an absence of case law, and looking to guidance in California Rules of Court, Ethics Standard for Neutral Arbitrators, promulgated pursuant to section 1281.85, the Court of Appeal answered the threshold question in the affirmative.
Several factors here saved the fee shifting provision from the clutches of section 1284.3.
First, the fee shifting was not “mandatory,” but rather “discretionary.” The clause provided that the arbitrator “may” award reasonable fees.
Second, the arbitrator was given authority to award costs and fees “authorized by law.” That meant that if 1284.3 didn’t allow for fee shifting, then the arbitrator lacked the authority to shift fees. DRAFTING TIP: the phrase “authorized by law” can be useful to save a questionable provision.
Third, there was a severability provision.
Fourth, plaintiff had agreed to waive fees.
In short, the Court of Appeal concluded “no legal bar prohibits the AAA from accepting the arbitration.” The Court remanded the matter to the trial court “to enter an order granting FCM’s motion to compel Lane to submit to arbitration of FCM’s claims.”
If published, this case would provide useful guidance about section 1284.3 to parties drafting fee clauses in consumer arbitration agreements, and to arbitrators having to confront the impact of such clauses on their ability to accept the arbitration.
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.
Hobson’s Choice? – Defendant Can Choose To Pay Arbitration Fees If Trial Court Determines Plaintiffs Are Unable To Pay
“The only issue before us is whether plaintiffs, each of whom were subsequently granted permission to proceed in forma pauperis in the trial court, could likewise be excused from the obligation to pay fees associated with arbitration. We conclude they could.” That’s the holding in Roldan v. Callahan & Blaine, G047306 (4th Dist. Div. 3 Aug. 26, 2013) (Rylaarsdam, J. author 3:0) (published).
All the plaintiffs – elderly, of limited means, and relying on section 8 housing – settled the underlying case involving toxic mold, but reluctantly, after their attorneys (now defendants) unsuccessfully attempted to have their clients declared legally incompetent so that a guardian ad litem could be appointed to cooperate with the attorneys’ efforts. Plaintiffs sued their attorneys, based on the allegedly inadequate settlement, and attorney conduct. Defendants/attorneys successfully moved to compel arbitration.
The Court of Appeal refused “to effectively deprive [plaintiffs] of access to any form for resolution of their claims against Callahan.” An interesting comparison is the recent United States Supreme Court majority opinion, holding that the Federal Arbitration Act does not permit courts to invalidate a contractual waiver of class arbitration just because the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery. American Express Co. et al. v. Italian Colors Restaurant et al., No. 12-133 (June 20, 2013). “Just too darn bad,” is how Justice Kagan, dissenting, described the Supreme Court majority opinion allowing arbitration and waiver of class action, even if the result was to effectively deprive plaintiffs of a viable forum – leaving them with a right but not an effective remedy.
Quotation of the day:
“In theory, a written contract is the embodiment of a fully and fairly negotiated agreement setting forth the terms and conditions governing a particular transaction or relationship. It reflects the mutual intentions and expectations of both parties, who have an equal understanding of the contract’s legal and practical effect. However, in cases where parties to the contract have widely divergent levels of sophistication, a written contract is often less the embodiment of true mutual agreement than it is the product of the drafting party’s desire and a series of legal fictions.”
Above: Rich and poor. Sol Eytinge. 1873. Library of Congress.
Plaintiff Abbey filed two lawsuits against Fortune Drive Associates, LLC, the first lawsuit concerning his business dealings, the second lawsuit seeking declaratory relief to stay an arbitration commenced by Fortune. Abbey prevailed in the second lawsuit, successfully staying the arbitration, and before the conclusion of the first lawsuit, obtained an award of attorney’s fees in the second lawsuit. Fortune appealed. Abbey v. Fortune Drive Associates, LLC, Case No. A135062 (1st Dist. Div. 1 July 29, 2013) (Margulies, Acting P.J., author 3:0) (unpublished).
The Court agreed with Fortune: the award of attorney’s fees is available only to the prevailing party in the underlying contractual dispute. See my May 27, 2012 post on Frog Creek Partners, LLC v. Vance Brown, Inc., 206 Cal.App.4th 515 (2012) (“there may only be one prevailing party entitled to attorney fees on a given contract in a given lawsuit”). Reversed.
"Customary Provision Allowing for the Award of Legal Fees in Any Action on a Contract" Was Missing Here
This case presents a common issue: whether a prevailing party must seek fees from the arbitrator or from the trial court. Here, the issue was resolved by express, non-standard language in a settlement agreement. DeSena v. Richert, C070461 (3d Dist. May 13, 2013) (Butz, J., author 3:0).
Plaintiff settled a neighbor dispute during mediation. The settlement agreement provided that the mediator could resolve future disputes acting as an arbitrator. Sure enough, disputes arose, the mediator cum arbitrator resolved the disputes in favor of Plaintiff, and Plaintiff was thus the prevailing party. As the prevailing party, Plaintiff expected to recover fees based on a contractual fee provision in the settlement agreement. Consequently, Plaintiff appealed after the superior court judge denied her motion for legal fees incurred to confirm the ruling of the mediator acting as an arbitrator.
Plaintiff ended up cornered by the language of the settlement agreement. "The intent reflected in the terms of the . . . settlement . . . was for the parties to bear their own costs and legal fees except in matters relating to the enforceability and interpretation of the settlement agreement (undoubtedly as a way to avert any subsequent truculence about settling the dispute). This exception, however, is limited to issues of enforceability and interpretation submitted to the mediator for binding arbitration, as to which the mediator possesses sole discretion to award costs or legal fees." Here, because the Plaintiff did not submit the fee issue to the arbitrator, Plaintiff was unable to recover fees. Focusing on the language of the settlement agreement, the Court of Appeal pointed out," this is not the equivalent of the customary provision allowing for the award of legal fees in any action on a contract . . . . "