Who Decides Illegality Of A Contract, The Arbitrator Or The Court?
Michael Bacall, an actor, was represented by Jeffrey Shumway, an attorney, who provided "legal/management services and [Chief Content Officer] services." Bacall alleged Shumway failed to disclose he was "inactive" with the State Bar, and Bacall terminated the contract with Shumway and his company Timaeus. Timaeus filed a demand for arbitration with the AAA, and Bacall filed a complaint asserting various claims, including breach of contract and rescission. The trial court granted the motion to arbitrate (be careful what you ask for), and the arbitrator issued an award requiring Shumway and Timaeus to return $201,025.82 to plaintiffs/respondents Bacall and his company RBC Entertainment, and also to pay them $237.607.25 in fees and costs.
Shumway and Timaeus appealed. Michael Bacall et al. v Jeffrey Shumway et al., B302787 (2/8 3/16/21) (Ohta, Grimes, Wiley).
The chief argument by Shumway was that it was the duty of the court, not the arbitrator, to review the legality of the contract. This was somewhat curious, given that it was Bacall who filed a lawsuit and Shumway who successfully moved to compel arbitration. Shumway relied on a case, Loving & Evans v. Blick, 33 Cal.2d 603 (1949), in which a party sought to vacate an arbitration award on the basis the arbitrator enforced an illegal contract, and the California Supreme Court held the arbitrator who enforced an illegal contract exceeded his powers. Why? An arbitrator who enforces an illegal contract presumably has no rights and powers conferred under the contract. But the Loving case did not convince the court here, because the situation was the opposite: instead of enforcing an illegal contract, "the arbitrator severed the unlawful legal services rendered on a contract that Respondents had terminated . . . and allocated damages accordingly."
Russian-made antipersonnel mine in Cambodia. Creative Commons License.
Another aspect of the case concerning legal fees is troubling as an example of the landmines litigators can step on in arbitration. Shumway alleged the arbitrator engaged in misconduct by denying an opportunity to address issues related to attorney fees and costs. After the arbitration hearing, Bacall requested attorneys fees and costs and submitted billing records. Shumway's counsel wrote to the arbitrator that arbitrators typically entertain such requests after an award has been rendered. The arbitrator wrote back: "Consideration of attorney fees will not take place until the case is decided and a prevailing party is determined. Anything submitted in that regard will not be read until then." Shumway did not submit a response, and the arbitrator's final award also included the fee award.
Evidently Shumway felt sandbagged by the arbitrator's response. But the Court of Appeal disagreed, though it did acknowledge, "the arbitrator's response was vague," and that one might not know best how to argue the attorneys fees issue before one knew who would be the prevailing party However, the court pointed out that the arbitrator had not never explicitly ordered that Shumway could not file an opposition before the arbitrator addressed fees and costs.
COMMENT: Regarding the briefing of the fees and cost issue, the Court explained, "the onus was on Appellants to seek clarification, which they failed to do." Good advice -- and a painful lesson.
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