California Mediation and Arbitration

Arbitration/1286.2 Vacatur: Second District, Div. 2 Affirms Judgment Confirming Arbitration Award in Attorney-Client Fee Dispute

“Manifest Disregard of the Law” Doctrine Inapplicable to Arbitrator’s Decision Concerning Attorney’s Fees Dispute Between Law Firm and Client

     Appellant Fuchs & Associates, Inc. (Law Firm) sued former client, Elke Lesso, for unpaid attorney’s fees of $647.688.13.  An arbitrator found Law Firm was not entitled to recover additional fees, and its attorney fee lien was invalid.  On appeal, the Law Firm attacked the arbitration award – unsuccessfully.  Fuchs & Associates, Inc. v. Lesso, Case No. B239246 (2nd Dist. Div. 2 January 8, 2013) (Doi Todd, Acting P.J., author) (unpublished). 

     The Court of Appeal rejected arguments that the Arbitrator exceeded his powers by rewriting the fee agreement, failing to decide issues submitted, or deciding issues not submitted.  The Court also rejected an argument that the arbitration hearing should have been continued, because the Law Firm did not identify what additional evidence it wished to present that it was precluded from presenting, or how it was prejudiced.

     The Law Firm also argued that the arbitration award should be vacated because of the Arbitrator’s “manifest disregard of the law.”  This is a basis for rejecting an award in federal cases, but in state cases, a strict review standard for legal error “does not include a ‘manifest disregard’ exception, while at the same time leaving open the possibility of greater judicial review . . . in the case of rulings inconsistent with the protection of statutory rights.”  (citing Pearson Dental Supplies, Inc. v. Superior Court, 48 Cal.4th 665, 679, n. 3 (2010)). 

      Evidently, however, the Court of Appeal viewed this attorney-client fee dispute as a private affair that did not trigger protection of statutory rights and heightened scrutiny, for it observed:  “[Law Firm] has not cited any authority showing than an arbitrator’s decision on a law firm’s action for attorney fees has ever been reviewed on the merits by a trial court under the exceptional circumstances involving a statutory or public policy decision.”

     Is it possible that the Court’s view of the case was somewhat colored by Law Firm’s failure to “advise Lesso to seek independent legal counsel before she signed the loan” (to make possible the payment of in pendente lite attorney fees); by Law Firm’s concession “that it did not inform Lesso that it would be taking the position that the [attorney’s fees] lien would attach to all of her assets”; or by the fact that at the time of the arbitration, the attorney had been disciplined by the State Bar three times?  See Fuchs & Associates, Inc., n. 3.

Scope of Arbitrator’s Power: Arbitrator Did Not Exceed Scope of His Power When He Denied A Motion For An Uncontested Arbitration

Result Is Dictated By Stipulation to Arbitrate, Weak Record, and Failure To Object Earlier

Wheel of Fortune.  Carol M. Highsmith, photographer.  Between 1980 – 2006.  Library of Congress.

     Plaintiff Jin Gang Zhao was on a bus headed to a casino, when a bus accident occurred, he fell to the floor, and injured his back.  In the ensuing arbitration, Mr. Zhao was awarded $15,000 in damages against a dissolved bus company located in China, and defendant was awarded $26,268.03 in costs.  The Arbitrator apparently rejected the plaintiff’s objection that injury in the bus accident drove plaintiff to drink “Red Sorghum,” a strong Chinese liquor, causing him to suffer liver damage.  Plaintiff appealed confirmation of the arbitration award on the grounds that the stipulation to arbitrate was invalid, and the Arbitrator exceeded the scope of his power by denying plaintiff’s motion for an uncontested arbitration.  Zhao v. Ming Du International Trade, Inc., Case No. B236813 (2nd Dist. Div. 5 January 7, 2013) (Turner, P.J., author) (unpublished).

     The wrinkle here is that the defendant was dissolved and absent from the US, did not sign the stipulation to arbitrate, and did not show up at the hearing.  Because the defendant did not sign the stipulation, plaintiff argued it was invalid.  And because defendant did not show up at the hearing, despite a notice to attend, plaintiff argued that the arbitration should have been tried as an uncontested matter.

     But the Court of Appeal did not agree with plaintiff.  The defendant didn’t sign the stipulation, but its carrier did, and no evidence was offered that plaintiff objected, or that the carrier lacked agency authority.  True, defendant failed to appear for the hearing, but the Court of Appeal explained, “it is clear that the very intention of the stipulation was to have the matter proceed to a contested binding arbitration, otherwise the stipulation itself makes no sense.”  The stipulation provided that the Arbitrator “[i]n his sole discretion” would control proceedings and regulate the order of proof, and determine all questions submitted to the Arbitrator.  Result:  “The arbitrator acted well within the scope of his powers.” 

     Thus, the plaintiff was stuck with the outcome, as the arbitration award was affirmed.

     Of course, the plaintiff and his counsel didn’t have to sign the stipulation to arbitrate, but absent 20/20 hindsight, plaintiff and his counsel could not know the result would be unfavorable.

Arbitration/Vacatur: “Manifest Disregard Of The Law” Is Manifestly Not A Ground For Vacating Arbitration Award Under California Law

 

Second District Division 2 Concludes That Arbitrator Did Not Disregard Choice Of Law Provision

     Roller Bearing Company of America (RBC) manufacturers roller bearing assembly parts and Honeywell International use them in engines it manufacturers.  Roller Bearing Company of America, Inc. v. Honeywell International, Inc., Case No. BS127074 (2nd Dist. Div. 2 August 23, 2012) (Chavez, J.) (unpublished) is a contract dispute between the two companies.  The arbitrator issued a ruling in favor of Honeywell in this breach of contract dispute, the judgment confirmed the award, and RBC appealed.

    

Inspector at the Fafnir Bearing Company inspecting large roller bearing which will probably end up in an Army tank.  1943.  Gordon Parks, photographer.  Library of Congress.

      The main issue in the case was whether the arbitrator disregarded a New York choice of law provision in order to consider inadmissible parol and extrinsic evidence to contradict the terms of the contract.  Honeywell argued that the arbitrator’s disregard of the parties’ contractual choice of law provision constituted “manifest disregard of the law.

     We posted on August 21, 2012 about Comerica Bank v. Howsam, et al. Case No. B232749 (2^nd Dist. Div. 5 August 20, 2012) (Turner, P.J., author)(partially published) , explaining that “manifest disregard of law” is not a ground for vacating an arbitrator’s award in California.  The grounds for vacatur are set forth in Cal. Code Civ. Proc. section 1286.2, and “manifest disregard of the law” is not one of those grounds.  The court concluded the same here, but then treated the argument as one that the arbitrator “exceeded the scope of his authority” by refusing to apply New York law governing parol evidence and integrated contracts.  The different label placed on the argument allowed the court to consider whether it provided a basis for vacating the award.  However, the court then concluded that the argument the arbitrator had disregarded New York law was “flatly contradicted” by the record.  The arbitrator had considered extrinsic evidence to interpret ambiguity, something permitted under New York law and the law of most states.

    RBC’s argument that the arbitrator admitted inadmissible parol and extrinsic evidence was “simply another way of saying that the arbitrator committed legal error.”  But legal error is not a ground for vacating an arbitration award. 

     Judgment affirmed.

    

International Arbitration/Disclosures: Second District Division 5 Affirms Orders In International Arbitration Denying Vacatur Motion and Confirming Award and Judgment

 

California’s Code of Civil Procedure Provisions Governing International Arbitration Differ From Ordinary Domestic Arbitration Provisions

     With this post, we inaugurate a new sidebar category: “Arbitration: International.”

     Comerica Bank v. Howsam, et al. Case No. B232749 (2^nd Dist. Div. 5 August 20, 2012) (Turner, P.J., author)(partially published) involves appeals from orders confirming three international arbitration awards. The underlying disputes concerned Comerica Bank’s loans totaling $37 million to Mr. Howsam, a Canadian resident, and various Canadian corporations controlled by him. The loans were to fund the production of seven films. The loans, which the bank alleged had been obtained through fraud, were not repaid. The bank initiated legal action, and several defendants moved to compel arbitration. The arbitrator found in favor of the bank, the superior court denied a motion to vacate the awards (vacatur), and appeals followed.

     The Court of Appeal affirmed across the board, after addressing four issues.

     First, the Court of Appeal discussed whether the arbitrator’s failure to timely disclose an alleged disqualifying factor – he had once had signature authority for a client on a Comerica Bank account – is a proper vacatur ground (i.e., a ground upon which the trial court judge could have vacated the arbitration award). However, the failure to timely disclose potential disqualifying circumstances, as required by “Arbitration and Conciliation of International Commercial Disputes” provisions of the Code of Civil Procedure, specifically, section 1297.121, simply is not a ground for vacatur under section 1286.2(a)(6)(A) , the ground relied upon by Defendants, and governing vacatur by the trial judge of an arbitration award. Therefore, the trial judge did not err by failing to vacate an award on the basis of a disqualifying factor in international arbitrations that is not a basis for vacatur under 1286.2(a). The Court of Appeal notes, however, that failure of the arbitrator to disclose disqualifying factors in an international arbitration is not immune to review – but it requires following a different procedural path:  “A litigant remains free to raise the failure to disclose issue in a writ petition.”  Beware:  trap for the unwary.

     Second, the Court of Appeal concluded that the award was not secured by corruption, fraud, or other undue means. Billing errors of the arbitrator had no bearing on the outcome, and were explainable by procedural complexities “with fast moving substantive changes being pursued by both sides.”

     Third, the award did not result from a manifest disregard of the law – an issue forfeited in any case by Defendants who withdrew from the arbitration and who therefore failed to raise the point before the arbitrator.

     Fourth, the arbitrator did not exceed his power when he decided alter ego issues. The rules of the arbitral organization (Independent Film & Television Alliance) and Code of Civ. Proc. section 1297.161, providing that in international arbitration, the arbitrator may rule on his or her own jurisdiction, allowed him to do decide alter ego issues.

     COMMENT: We gleaned interesting tidbits from this case.

     First, title 9.3 of the Code of Civil Procedure, entitled “Arbitration and Conciliation of Commercial Disputes”, sections 1297.11 et seq., while similar to domestic arbitration provisions, also differs substantially in some respects, for reasons that are not intuitively obvious. For example, “the disclosure duties and the consequences of a failure to disclose differ in domestic and international arbitrations.” Therefore, if you have a case involving international arbitration, we urge you to read Cal. Code of Civ. Proc. sections 1297.11 et seq. Comerica Bank v. Howsam will also be a useful case to read.

     Second,”federal Courts of Appeals are divided as to whether the arbitrator’s manifest disregard of the law remains a basis for vacatur in federal court . . . . But one thing is clear, an arbitrator’s manifest disregard of the law is not a ground for vacatur under California law.”