California Mediation and Arbitration

Employment: Employee's Release Of Claim After It Accrued Is Not Illegal Or A Violation Of Public Policy

Employee Entered Into Release Of Claims In Her Separation Agreement.

        Elizabeth Castelo entered into a release of claims in her separation agreement from her employer Xceed Financial Credit Union. In arbitration, the employee argued that she had entered into a pre-dispute arbitration agreement that was invalid. The arbitrator ruled in favor of the employer, the court confirmed the award, and the employee appealed. Castelo v. Xceed Financial Credit Union, B311573 (2/7  5/18/23) (Escalante, Perluss, Segal).

        Some pre-dispute releases can be found invalid under some circumstances. Civil Code section 1668 provides: "All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."

        Here, however, the Court of Appeal agreed that Castelo knew about her claims before she entered into the release of claims. There was no violation of public policy.

Arbitration, Vacatur, Illegality, Fees: Second District, Div. 8 Holds That Arbitrator Could Decide Contract Was Illegal

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.

 

Arbitration, Delegation, Gateway Issues: SF Sup. Ct. Judge Holds Judge, Not Arbitrator, Decides Whether Contract With Arbitration Clause Is Legal

JAMS Clause Delegating Validity Issue To Arbitrator Was Not Clear and Unmistakable Delegation Of Legality Issue.

        Who decides whether an arbitration agreement is part of an enforceable legal services agreement, the judge or the arbitrator?   That was the issue addressed by the Hon. Harold E. Kahn in an "Order Denying Defendants' Petition for Order Compelling Arbitration," filed December 12, 2017 in Marble Bridge Funding Group, Inc. v. Buchalter, et al., CGC-17-560501 (SF Sup. Ct.).  

        The general rule is that the legality of a contract is decided by the court.  Loving & Evans v. Blick, 33 Cal.2d 603 (1949).  But in Marble Bridge Funding Group, Inc. v. Buchalter, the issue of validity was delegated by JAMs rules to the arbitrator.  The court here decided that the delegation of the issue of validity was not a "clear and unmistakable" delegation of the issue of illegality to the arbitrator.  

        The court further ruled that Buchalter had a conflict of interest making the arbitration language in its service agreement unenforceable.  

        COMMENT:  Obviously, conflict checks and waiver agreements are intended to prevent such a problem from ever arising in the first instance.  Perhaps a delegation clause that delegated the issue of illegality to the arbitrator would have also solved the problem, at least, from the standpoint of the party seeking to compel arbitration with language that is "clear and unmistakable".

        HAT TIP to Rebecca M. Coll of Quadra & Coll, LLP, who brought Judge Kahn's order to my attention.  Ms. Coll represented Marble Bridge Funding Group, Inc.

Illegality/Enforceability: Arbitration Agreement with Unlicensed Contractor May Still Be Enforceable

 

Fifth District Finds That The Contract Containing the Arbitration Clause Is Not Automatically Unenforceable

     With limited exceptions, an unlicensed contractor will find it impossible to collect payment, and may also have to disgorge payments already made. Can an award in favor of the client of an unlicensed contractor be set aside on the grounds of illegality? Our next case, Templo Calvario Spanish Assembly of God v. Gardner, 198 Cal.App.4th 509, 129 Cal.Rptr.3d 574 (2011), answers “no,” at least not when it is the unlicensed contractor trying to avoid the arbitration award.

     In Templo Calvario, the dispute between the church and the unlicensed contractor who had agreed to construct the church was subject to an arbitration clause. The arbitrator’s award required the unlicensed contractor to disgorge its fees. The trial court sided with the view that the contract with the unlicensed contractor could not be enforced, because void and illegal, and granted the contractor’s petition to vacate the award.

     The church appealed, and the Court of Appeal reversed the order that had vacated the award. Relying on MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc., 36 Cal.4th 412, 30 Cal.Rptr.3d 755 (2005) (MW Erectors), the court held that the contract containing the arbitration provision was not automatically illegal and void just because the contractor was unlicensed. MW Erectors had held that a contract entered into by an unlicensed contractor was not void under circumstances where the contractor became licensed during the course of its work.

     The Court of Appeal was not persuaded by the California Supreme Court holding in an older case, Loving & Evans v. Blick, 33 Cal.2d 603 (1949) (Loving & Evans). In Loving & Evans, the Supreme Court held that an arbitration clause could not be relied upon by the unlicensed contractor to compel arbitration. Loving & Evans is distinguishable, because in that case, it was the unlicensed contractor seeking to take advantage of the illegality of the provision to compel arbitration, and the Supreme Court refused to allow that. But the Court of Appeal noted that the Supreme Court, in MW Erectors, described Loving & Evans as not a “modern case,” implicitly overruling the holding that a contract containing the arbitration provision was void ab initio, just because the contractor was unlicensed.