Arbitration: Third Party Cannot Rely On Res Judicata Effect Of Arbitration Unless That Is Intent Of Parties To The Arbitration

 

Court of Appeal Borrows Reasoning From Collateral Estoppel Effect Of Arbitration On Third Party

     The Wus (Sellers) sold an apartment building to the Sobel Family Trust (Buyer). Buyer sued Seller for failure to disclose material defects in the 75 year old building, and obtained an award in arbitration that Sellers paid. Sellers followed up by suing the Sellers’ broker (Lee) and the Buyer’s broker (Sherman). The trial court sustained demurrers in favor of all defendants, and granted summary judgment on remaining causes of action for fraud and breach of contract. Sellers appealed. Wu v. Lee, Case No. B227087 (2^nd Dist. Div. 8 June 4, 2012) (Grimes, J., author) (unpublished).

     The Court of Appeal explained that the trial court had erroneously relied on the res judicata effect of the arbitration between Sellers and Buyer when it sustained demurrers in favor of the brokers. Relying on Vandenberg v. Superior Court, 21 Cal.4th 815, 833-834 (1999), which holds 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 that such a consequence should apply, the Court of Appeal applied the same principle to res judicata (without distinguishing between res judicata and collateral estoppel).

     The trial court error was harmless in the case of the Sherman defendants, because in their case, the Court of Appeal affirmed the summary judgment in their favor. But the trial court’s error in sustaining the demurrer was corrected in the case of the Lee defendants. There, the error made a difference to the outcome, because material disputes as to the Lee defendants precluded summary judgment.