California Mediation and Arbitration

Arbitration: Setoff In Arbitration Award That Affected 3d Party Could Not Be Corrected By Trial Court

Can A Merits Award In Arbitration That Affects Rights Of Third Party Who Did Not Participate In Arbitration Be Corrected?

        The majority opinion in E-Commerce Lighting, Inc. v. E-Commerce Trade LLC, E074525 (4/1  12/9/22) (Raphael, Ramirez; dsst. Mentrez), answered the above question with a "no", reversing the trial judge. Judge Menetrez, dissenting, answered "yes," under circumstances where the he believed the award could be corrected without affecting the merits.

        Trade purchased ECL's assets for $11.5, financing the asset sale with several loans.

        After the sale, E-Commerce Lighting, Inc. (ECL) and E-Commerce Trade LLC (Trade) arbitrated competing claims. The arbitrator's award setoff the claims against each other: $2,756.635.66 in favor of ECL and $2,611,463.58, yielding an award in favor of ECL of $145,172.08. 

        Trade then convinced the trial court that the setoff needed to be corrected, because it affected the rights of third party lenders who did not participate in the arbitration. The trial court agreed.

        The Court of Appeal reversed, explaining that while an award on the merits could be corrected if it did not affect the merits, here, correction would affect the merits award.

        Judge Menetrez disagreed, agreeing with the trial court that the arbitrator had exceeded the arbitrator's powers by issuing an award that affected the rights of third party lenders, including their security interest. Also, he argued that the award could be corrected without affecting the merits by simply removing the setoff.

        COMMENT: This is an interesting case, and given the dissent, we will monitor to see whether there is an appeal.

Award, Fees: Award Of Arbitrator Was Final And Could Not Be Changed By Later Efforts To Award Fees

Once The Arbitrator Determines All Issues Necessary To Resolve The Essential Dispute, The Arbitrator's Ruling Constitute A Final Award Under § 1283.4.

        The arbitrator issued an award, labeled neither final nor interim, on April 3, 2020, denying employee a finding of liability in her favor, and denying employee and respondent employer attorney's fees, on the grounds that employee's claim was neither frivolous nor meritless. After post-hearing briefing, the arbitrator awarded $53,705.43 in fees to employer on June 11 in a revised award. Finally, on June 29, the arbitrator issued a corrected final award of $73, 756.43. The employer then asked the trial court to confirm the award denying employee a finding of liability and awarding $73,756.43 to employer. The trial court confirmed the award, except as to the fees, and so the employer appealed in order to recover its fees. Elizabeth Taska v. The RealReal, Inc., A164130 (1/5  11/4/22) (Jackson, Burns, Wiseman).

        First, whether the award was labeled final, interim, revised, or corrected could not be dispositive, because the law values substance over form. Second, what was dispositive was that the initial award, issued on April 3, was in substance a final award: the arbitrator addressed the liability issue, ruling against the employee, and she addressed the fee issue, denying fees to the employer. Once she determined all issues necessary to resolve the essential dispute, the arbitrator had, in substance, issued the final award. She had no power, except on narrow grounds that were not present, to change her award. And so the Court of Appeal confirmed the trial judge's judgment.

        COMMENT: My colleague Mike Hensley and I have another blog entitled California Attorney's Fees. Our mission statement in that blog cites the words of  the late Justice Edward Wallin: "All too often attorney fees become the tail that wags the dog in litigation." 

Arbitration, Award, Finality, Correction, Vacatur: 4th Dist Div 4 Holds Arbitrator's Amendment Of Final Award Did Not Exceed Her Powers

Arbitrator Acted Within Nonstatutory Power To Amend Award and Also Exercised Equitable Powers.

        Starr v. Mayhew, G060277 (4/2  9/1/22, cert for pub. 9/28/22) (Moore, Goethals, Moteike) involved a dispute among members of an LLC as to their respective ownership interests and as to whether Mayhew, who managed the LLC, had a right to be fully indemnified for legal fees and damages in an arbitration he lost to Starr and another LLC member. The "final award" did not fully clear up the issues, and the arbitrator issued an amended award, at the behest of Mayhew, that did clarify the issues, but not to Mayhew's satisfaction. The trial judge confirmed the award and Mayhew appealed.

        Ordinarily an award can only be corrected for limited statutory reasons, such as a miscalculation of figures, misdescription of a person, thing, or property, or imperfect form that does not affect substance. See Cal. Code Civ. Proc., §§ 1284 (correction) and 1286.6 (vacatur). But did you know that, in addition to the limited statutory grounds for correcting an award or vacating it, a final award can be amended based on nonstatutory law? Well, it's a possibility.

        And nonstatutory amendment of the award worked here. In an amended award, the arbitrator clarified that damages were to be paid by Mayhew, and that he was entitled to limited indemnity, but not full indemnity. The Court of Appeal explained that the arbitrator had acted upon equitable grounds. And she had not exceeded her powers, because the issues had been presented to the arbitrator for resolution. In any case, she had reached legal and factual conclusions, and if she was mistaken, that would not be a basis for overturning an arbitration award.

        COMMENT: The case is a reminder that an arbitration is an equitable proceeding. Thus, here an arbitrator was able to limit indemnity, though the indemnification clause seemed to provide for full indemnity, because she thought that given the conduct of Mayhew, limiting but not eliminating indemnity would be fair. The case is also a reminder that a seemingly final award can sometimes be amended on nonstatutory grounds. But beware: there is a split of authority as to whether the party seeking amendment has 30 days from the time the final award is served, or up to the time of confirmation of the award to obtain an amendment of the award. See note 3 of the Starr opinion.

Arbitration Awards: Time To Change "Award" And Add Attorneys Fees Did Not Expire, Because Award Was Not Final Award

This Case Is Must Reading For Determining Whether An Arbitrator's Ruling Is An Award.

        "As this case highlights, whether an arbitrator's ruling constitutes an 'award' is a significant event." Lonky v. Patel, B295314 consolidated with B297632 (2/2  7/2/20) (Hoffstadt, Lui, Chavez). Indeed. The arbitrator can continue to issue interim rulings before there is an award. But once there is a final award, the clock begins to run on the  time the arbitrator has to continue to rule and correct or amend an award. In this case, the Court of Appeal ruled that a Second Interim Ruling did not constitute an Award, and thus the Arbitrator's time to increase compensatory damages and add attorney's fees had not expired.

        Very helpfully, the Court explains upfront how a court determines whether a ruling constitutes an award: "We hold that a court does so (1) by asking whether the ruling (a) determines all issues necessary to resolve the entire controversy and (b) leaves unaddressed only those issues incapable of resolution at that time because those issues are potential, conditional or contingent, and (2) answers those questions by looking to the specific procedures adopted in the arbitration at issue."

        The case is a model of clarity and genuinely useful for practitioners, because it addresses the nettlesome question of when a ruling complete enough to constitute an award. Here, the arbitration was divided into three phases: 1) liability, amount of compensatory damages, and eligibility for punitive damages; 2) amount of punitive damages and entitlement to attorney fees and costs; and 3) amount of attorney fees and costs. The Court of Appeal ruled that the arbitration ruling in phase two did not constitute an award, because it did not determine the amount of attorney fees, i.e., it did not determine all the  issues submitted to arbitration, and the amount was not potential, conditional, or could not otherwise have been determined at the time.

        

       

Arbitration/Correction by Arbitrator/Fees: Arbitrator Exceeded Power By Substantively Revising Final Award

Also, JAMS Rules Did Not Enlarge Arbitrator's Powers To Correct Final Award.

     Cooper v. Lavely & Singer, Case No. B251508 (2/4 Sept. 26, 2014) (Manella, Epstein, Willhite) (published) offers a very instructive discussion about correction of an arbitration award. Perhaps the best lesson here is for arbitrators – be careful about issuing dicey final awards that may require further tinkering.

     The key statutory provisions at issue in Cooper are: CCP section 1286.2, providing grounds for vacating an award by the court; section 1286.6, providing grounds for the court to correct an award; and, section 1284 providing grounds for an arbitrator to correct an award – which, however, precludes an arbitrator from making a substantive change that affects the merits of the final decision.  See CCP sections 1284 and 1286.6(b), which work in tandem.

     In an attorney fee dispute between client Cooper and law firm Lavely & Singer, the arbitrator issued a Final Award declaring the law firm the prevailing party, but denying fees to it, because it appeared that the law firm had represented itself in the litigation. However, after Lavely & Singer submitted a motion for "correction, modification and/or reconsideration of the Final Award," the arbitrator concluded that reconsideration was proper, and issued a Revised Final Award, incorporating the Final Award, and including attorney's fees.

     The problem here is that "Section 1284 prohibits substantive amendments to final awards to include new awards of attorney fees."  Section 1284 allows an arbitrator latitude to make other types of changes, where, for example, there is a miscalculation of figures, or the award is imperfect as to form.  And there is even a further nonstatutory amendment doctrine, allowing the arbitrator to amend an award to include rulings on mistakenly omitted issues.  Because the Revised Final Award here purported to eliminate substantive errors in the Final Award, it simply couldn’t be shoe-horned into any of the narrow exceptions that allow for amendment by the arbitrator.

      However, the parties had agreed to be governed by JAMS rules, leaving as a “key issue . . . whether the parties . . . expanded the scope of the arbitrator’s ability to modify a final award beyond that granted by section 1284.”  After all, some of the CCP rules governing arbitration can be governed by agreement of the parties, and whereas other rules will always, as a matter of policy, take priority over a private agreement.  The JAMS rules, however, contain the further provision that “If any of these Rules . . . is determined to be in conflict with a provision of applicable law, the provision of law will govern over the Rule in conflict . . . “  Therefore, the Court of Appeal is able to conclude here, on these facts, that by agreeing to arbitrate under JAMS rules, the parties “did not attempt to modify section 1284 to permit substantive revisions of an award that was final for purposes of that statute . . . “

      Here, the arbitrator, hamstrung by the earlier issuance of a Final Award, would have had more flexibility if an Interim Award had been issued. 

     So in the end, trial court erred by denying Cooper's petition to vacate the fee award contained in the Revised Final Award. Thus, Lively & Singer is the prevailing party – but it doesn't get attorney's fees incurred in the arbitration.

     COMMENT:  By concluding here that the parties, by agreeing to JAMS rules, did not intend to modify section 1284, the Court leaves it for another day to decide whether section 1284 could be modified by agreement of the parties to devise a more flexible procedure for correcting an award.