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.