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California Supreme Court: A Downside to Arbitration

by D. Gregory Valenza | | May 30, 2019

Employers should remember that arbitration is not a panacea. There are pros and cons, as with most things. The California Supreme Court today unanimously reminded everybody of one of the pitfalls.  The case is Heimlich v. Shivji and the opinion is here.  

The substantive issue decided in the case is important for the lawyers, employment and otherwise. So, first, a little background.

The California Supreme Court held that an offer of compromise under section 998 of the Code of Civil Procedure* can be presented to the arbitrator either during the arbitration, or even after the arbitrator issues a final award.

*A section 998 offer is a settlement tool that provides an incentive for parties to accept a reasonable settlement early, rather than litigate the case.  The incentive is that if a party does not accept the section 998 offer to compromise, that party may lose out on costs and, possibly, attorney’s fees, incurred after the date of the offer.  I’ve over-simplified section 998, because the Legislature has modified it, and courts have interpreted it, to reduce its effectiveness, particularly in FEHA cases (in which the section 998 offer is practically meaningless now.

Anyway, a section 998 offer may be used in arbitration proceedings to encourage settlement, just like in court. But the statute is drafted for use in court, so the timing provisions do not really apply in arbitration. As part of the Heimlich case, the California Supreme Court decided that if the arbitrator issues a “final award” which normally divests the arbitrator of jurisdiction, the party looking to enforce the section 998 offer has 15 days to ask the arbitrator to correct or modify the award.  

Now here’s the cautionary tale portion of our otherwise boring story. After the arbitrator issued the award, Shivji sought to collect his post-offer costs because Heimlich did not “beat” Shivji’s section 998 offer to compromise.  But the arbitrator said, “no” because he already had issued his “final award” and lacked jurisdiction under applicable rules.  Shivji challenged the arbitrator’s decision in court and the case made it all the way to the California Supreme Court. 

The Court’s opinion was unanimous. It sure looked like Shivji was going to win. First, the Court decided that Shivji could have raised the section 998 offer either before or after the arbitration. The Court held that Shivji’s attempt to have the arbitrator award costs was timely because it was within the normal time period for collecting costs in court. Then, the Court held that a “final award” in arbitration is not a bar to the arbitrator’s jurisdiction to hear the section 998 issue. 

The arbitrator was wrong. Shivji was probably savoring the big win as he leafed through the opinion.  Alas, that’s where we come to the twist.

The Court held that although Shivji was correct on all counts, he was out of luck. Why?  Well, although the arbitrator erred by refusing to hear his claim for costs after issuing the final award, Shivji had agreed to arbitrate his claim. And arbitration is in most cases a binding award that is unreviewable on appeal.  So, the arbitrator’s error did not provide a basis for the courts to review the arbitrator’s award. Per the Court’s opinion: 

Most legal errors in arbitration are not reviewable. (Moshonov v. Walsh, supra, 22 Cal.4th at p. 775; Moncharsh, supra, 3 Cal.4th at pp. 11, 33.)9 An award may be vacated only for fraud, corruption, misconduct, an undisclosed conflict, or similar “circumstances involving serious problems with the award itself, or with the fairness of the arbitration process.” (Moncharsh, at p. 12; see § 1286.2, subd. (a).) Otherwise, judicial corrections are limited to remedying “obvious and easily correctable mistake[s],” “technical problem[s],” and actions in excess of authority so long as the correction leaves the merits of the decision unaffected. (Moncharsh, at p. 13; see § 1286.6.) “[B]y voluntarily submitting to arbitration, the parties have agreed to bear the risk [of uncorrectable legal or factual error] in return for a quick, inexpensive, and conclusive resolution to their dispute.” (Moncharsh, at p. 11.)   *  *  *  *

Shivji relies on cases holding that arbitrators have the power to amend their decisions to add cost and fee awards. (See Evans v. Centerstone Development Co. (2005) 134 Cal.App.4th 151, 159–160; Britz, Inc. v. Alfa-Laval Food & Dairy Co. (1995) 34 Cal.App.4th 1085, 1105–1106.) But if an arbitrator elects not to amend a decision in order to add costs or fees, these cases do not hold that a court may overrule that refusal. 

The Court also disagreed that the arbitrator’s failure to consider the section 998 offer was a “refusal to hear evidence,” justifying court review.  

To allow an arbitration award to be set aside under section 1286.2, subdivision (a)(5), whenever an erroneous legal ruling results in the exclusion of evidence deemed important would undermine a foundation of the Arbitration Act, that an arbitrator’s legal error ordinarily is not judicially reviewable.

Now the Court also pointed out that 

Parties can expand judicial review of arbitration awards to reach ordinary errors of law (Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1339–1340), but no such agreement was entered here.

The Court raises an interesting point, but also highlights a dilemma.  Arbitration in employment cases is already expensive and takes longer than it should, because of the various requirements imposed by court decisions that have developed into a substantial body of rules over time. Is it a good idea to add appeal of legal rulings, particularly when the employer has to pay for the costs that are not associated with litigating in court, and when the right to appeal has to be mutual? Or is it better to take the risk that the arbitrator will make an error of law that is not subject to review by the courts, even if it might change the result of the case? That is a serious consideration that merits discussion with counsel. Having good arbitration counsel helps, too.

The Court closed by noting:

When parties opt for the forum of arbitration they agree to be bound by the decision of that forum knowing that arbitrators, like judges, are fallible.’ ” (Moncharsh, supra, 3 Cal.4th at p. 12, quoting That Way Production Co. v. Directors Guild of America, Inc. (1979) 96 Cal.App.3d 960, 965.)

Put another way, “be careful what you contract for…. We’re (usually) not going to bail you out.”  

A few lessons from this decision? Carefully consider all the pros and cons of arbitration. Draft arbitration agreements with finality in mind. Choose arbitrators carefully. Communicate uncertainty with the arbitrator up front regarding handling matters such as post-award proceedings.  


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