Heimlich v. Shivji
Heimlich v. Shivji
Opinion
*607
*356
Code of Civil Procedure section 998
1
creates an incentive for settlement. It authorizes an award of costs to a party that makes a pretrial settlement offer when the opponent rejects the offer and obtains a lesser result at trial. (
Martinez v. Brownco Construction Co.
(2013)
We hold a request for costs under section 998 is timely if filed with the arbitrator within 15 days of a final award. In response to such a request, an arbitrator has authority to award costs to the offering party. However, if an arbitrator refuses to award costs, judicial review is limited. The Court of Appeal erred in relying on a narrow exception to those limits, for failure to consider evidence. We reverse.
*357 I. FACTUAL AND PROCEDURAL BACKGROUND
In 2003, engineer and inventor Shiraz Shivji retained Attorney Alan Heimlich to handle a range of intellectual property matters. The representation agreement included a clause providing for private arbitration of all disputes, including those involving legal fees. Heimlich represented Shivji in connection with patent applications and formation of a start-up company.
In 2012, Heimlich sued Shivji, alleging he owed roughly $125,000 in legal fees. One year into the litigation, Shivji made an offer to settle the case under section 998 (998 offer) for $30,001. The offer was not accepted. In November 2013, with proceedings ongoing, Shivji filed a demand for arbitration with the American Arbitration Association. Heimlich requested dismissal, urging that Shivji had waived his arbitration rights. The arbitrator denied the request pending a judicial determination of the waiver question. The court granted Shivji's motion to compel arbitration and stayed further litigation.
Shivji and Heimlich then filed claims against each other. Shivji asked for a refund of $176,000 for sums already paid. Heimlich sought $125,000 for unpaid fees. Each party also requested costs, placing that issue squarely before the arbitrator. On March 5, 2015, the arbitrator issued an award granting $0 to both Heimlich and Shivji and directed that "each side will bear their own attorneys' fees and costs." (Capitalization altered.) The award was "intended to be a complete disposition of all claims and counterclaims submitted to this Arbitration."
On March 11, 2015, Shivji advised the arbitrator of the original 998 offer and a second one for $65,001. Shivji sought costs because Heimlich had failed to obtain a more favorable result. He assumed "the demand for an award for recovery of these costs should be submitted to the Arbitrator rather than directly to the Court." The arbitrator replied by email: "Counsel, once I issued [my] Final Award I no longer [had] jurisdiction to take any further action in this matter. As discussed in the Award, whatever may have been costs, fees, etc. associated with the [court] litigation were to be borne by the parties and I didn't award either party attorneys' fees related to the arbitration."
**861
Shivji then filed a trial court motion to confirm the award and attached a memorandum
*608
of costs seeking $76,684.02. The court confirmed the award but refused to add costs. It relied on
Maaso v. Signer
(2012)
The Court of Appeal reversed, holding Shivji's postaward request to the arbitrator was timely. It observed that a " section 998 determination necessarily must postdate an arbitration award," and that a 998 offer " 'cannot be
*358
given in evidence upon the trial or arbitration.' " (
Heimlich v. Shivji
(2017)
II. DISCUSSION
A. The Allocation of Costs Was an Issue for the Arbitrator in the First Instance
Arbitration is a matter of consent. (
Sandquist v. Lebo Automotive, Inc.
(2016)
Here, that agreement is broad. It commits the parties to arbitrate "all disputes or claims of any nature whatsoever, including but not limited to those relating to [Heimlich's] fees or the adequacy or appropriateness of [Heimlich's] services ...." (Capitalization altered.) While the agreement does not explicitly address jurisdiction over ancillary matters such as costs, neither does it exclude them from consideration. "Absent an express and unambiguous limitation in the contract or the submission to arbitration, an arbitrator has the authority to find the facts, interpret the contract, and award any relief rationally related to his or her factual findings and contractual interpretation." (
Gueyffier v. Ann Summers, Ltd.
(2008)
As a result, Shivji was required to request costs from the arbitrator in the first instance. Failure to do so would have precluded relief. (See
Maaso v. Signer
,
supra
, 203 Cal.App.4th at pp. 377-378,
*359 B. Evidence of a Section 998 Offer May Be Presented Before or After a Final Arbitration Award
Section 1032 provides: "Except as otherwise expressly provided by statute, a
*609
prevailing party is entitled as a matter of right to recover costs in any action or proceeding." (§ 1032, subd. (b).) Section 998 amends this rule, creating an additional avenue for cost recovery. A party that might not otherwise qualify as prevailing may still be entitled to costs because it extended a formal pretrial or prearbitration settlement offer that was declined and a better outcome ensued. (See § 998, subds. (c) - (e).) "It is the very essence of section 998 that, to encourage both the making and the acceptance of reasonable settlement offers, a losing defendant whose settlement offer exceeds the judgment is treated for purposes of postoffer costs
as if
it were the prevailing party."
**862
(
Scott Co. v. Blount, Inc.
(1999)
A 998 offer must be made at least 10 days before the beginning of trial or arbitration. ( § 998, subd. (b).) If the offer is declined or not accepted in time, "it shall be deemed withdrawn, and cannot be given in evidence upon the trial or arbitration." (
Id.
, subd. (b)(2).)
2
Shivji contends this restriction on admissibility prevented him from seeking costs until after the arbitrator issued an award because he was barred until then from telling the arbitrator about his settlement offers. Heimlich argues that under
White v. Western Title Ins. Co.
(1985)
Both views are incorrect. With certain limits, evidence of a 998 offer may be presented before or after an arbitrator's final award on the merits. While Shivji would not have been categorically prohibited from advising the arbitrator of the rejected 998 offer sooner, his proffer six days after the final award was timely.
1. Notice of a Section 998 Offer Before an Award
In
White v. Western Title Ins. Co.
,
supra
,
On appeal, we rejected Western Title's argument that its settlement offers were inadmissible. The policy behind the Evidence Code's general prohibition against introduction of settlement offers (see Evid. Code, § 1152 ) is that candor is essential to productive settlement negotiations (
C & K Engineering Contractors v. Amber Steel Co.
(1978)
White
acknowledged that Code of Civil Procedure section 998, subdivision (b)(2), imposes a specific and arguably broader bar against admissibility. While the Evidence Code bars admission of a settlement offer specifically "to prove [a party's] liability for ... loss or damage" ( Evid. Code, § 1152, subd. (a) ), the Code of Civil Procedure states without any limitation that a declined 998 offer "cannot be given in evidence" ( Code Civ. Proc., § 998, subd. (b)(2) ). Nonetheless, we concluded that provision should be read to implement the same policies as those underlying the Evidence Code bar, and thus be subject to similar limitations, notwithstanding its absolute terms. Accordingly, although a 998 offer is inadmissible to prove liability, it may be admissible to prove unrelated matters. (
White v. Western Title Ins. Co.
,
supra
, 40 Cal.3d at p. 889,
White
limits the force of section 998 's broad language by conforming the scope of its evidentiary bar to circumstances implicating
**863
the policy underlying the prohibition. The Court of Appeal erred in concluding, without discussion of
White
, that section 998, subdivision (b)(2), prevented Shivji from revealing the offer. (See
Heimlich v. Shivji
,
supra
, 12 Cal.App.5th at p. 169,
2. Notice of a Section 998 Offer After an Award
Just because Shivji could have raised the rejected 998 offer sooner does not mean that he was required to do so. The text of section 998 and the *361 rules governing arbitration do not mandate that a rejected offer be presented to an arbitrator before issuance of an award. Furthermore, the policy underlying section 998 militates in favor of permitting disclosure after issuance.
Section 998 sets out when a settlement offer may be made and by when it must be accepted. ( § 998, subd. (b).) It does not address when a request for costs must be made. In court cases, that timing is governed by California Rules of Court, rule 3.1700. A party seeking costs must file a memorandum within 15 days of notice of entry of judgment, or 180 days of entry of judgment in the absence of a notice. ( Cal. Rules of Court, rule 3.1700(a)(1) ; see
Kahn v. The Dewey Group
(2015)
When the Legislature amended section 998 to extend its application to private arbitrations, it did not specify a different timeline for seeking costs. (Stats. 1997, ch. 892, § 1, pp. 6389-6391.) 3 Had the Legislature sought to impose more stringent time limits, it was free to say so. But neither the statutory text nor any relevant legislative history reflects an intent to deviate from settled court practice and require different timing.
The policies underlying Code of Civil Procedure section 998 strengthen the inference that the Legislature did not intend
*611
to require pre-decision introduction of settlement offers. As discussed, section 998 and its limits on settlement offer admissibility were drafted to promote the same pro-settlement policies as Evidence Code section 1152. (
White v. Western Title Ins. Co.
,
supra
, 40 Cal.3d at p. 889,
When the Legislature amended section 998 to encompass arbitrations, it sought to place parties in arbitration on equal footing with parties to civil actions. (See Sen. Com. on Judiciary, Analysis of Sen. Bill.
*362
No. 73 (1997-1998 Reg. Sess.) as amended May 1, 1997, p. 7;
Pilimai v. Farmers Ins. Exchange Co.
,
supra
, 39 Cal.4th at pp. 150-151,
There was no risk of prejudice in
White v. Western Title Ins. Co.
,
supra
,
Against these considerations, Heimlich asserts that allowing a 998 offer to be raised after a final award would destroy the finality of arbitration awards. At common law, the issuance of an arbitration award was treated as
functus officio
, an act that terminates the actor's authority. (See
Moshonov v. Walsh
,
supra
, 22 Cal.4th at p. 780, fn. 1,
But the rule that issuance of a final award terminates an arbitrator's power is not so rigid. 4 " Functus officio " renders an actor "without further authority or legal competence because the duties and functions of the original commission have been fully accomplished." (Black's Law Dict. (10th ed.
*363
2014) p. 787, col. 2.) The doctrine applies only after the arbitrator's assigned duties have ended. Further, common law rules are subject to legislative revision. (
McMillin Albany LLC v. Superior Court
(2018)
The California Arbitration Act (§§ 1280-1294.2; the Arbitration Act) governs private arbitration. Section 1284 expressly vests arbitrators with continuing jurisdiction for a brief period following a final award: "The arbitrators, upon written application of a party to the arbitration, may correct the award upon any of the grounds set forth in subdivisions (a) and (c) of Section 1286.6 not later than 30 days after service of a signed copy of the award on the applicant. [¶] Application for such correction shall be made not later than 10 days after service of a signed copy of the award on the applicant." Section 1288.4 protects this arbitral jurisdiction; it bars parties from filing petitions in superior court to vacate or confirm an award "until at least 10 days after service of the signed copy of the award on the petitioner." These provisions ensure that an arbitrator retains jurisdiction to modify an award for at least 10 and as many as 30 days after its filing and service. (See
Cooper v. Lavely & Singer Professional Corp.
(2014)
To be sure, the grounds for correction of an award are narrow (see § 1286.6) and are not implicated here. But the principle the Arbitration Act illustrates is that issuance of an award does not immediately and automatically terminate an arbitrator's powers. Instead, the Legislature can, and has, authorized continuing jurisdiction even after issuance of a final award.
**865
The Arbitration Act also provides implicit authority for ongoing jurisdiction. Section 1283.4 requires that an award "include a determination of
all
the questions submitted to the arbitrators the decision of which is necessary in order to determine the controversy." (Italics added.) In light of this duty, courts have inferred that when a putatively final arbitration award omits resolution of an issue necessary to decide the parties' controversy, the arbitrator retains power to amend the award to address the undecided issue. (
Delaney v. Dahl
(2002)
*613
*364
A.M. Classic Construction, Inc. v. Tri-Build Development Co.
(1999)
For example, in
Century City
,
supra
,
Century City
and other amendment cases rest on the understanding that an arbitrator's authority does not expire at the moment an award is issued, even when the award was intended as final. The Legislature has imposed a duty to determine all questions necessary to resolve the parties' dispute (§ 1283.4) and has enacted "no statutory provisions precluding issuance of an
amended
award." (
A.M. Classic Construction, Inc. v. Tri-Build Development Co., supra
, 70 Cal.App.4th at p. 1477,
*365
The Arbitration Act is not the only legislative source of arbitral power.
Pilimai v. Farmers Ins. Exchange Co.
,
supra
,
A harmonization of section 998, the Arbitration Act, and the applicable Rules of Court leads to the following conclusions. Cost applications in court are filed after a judgment, generally within 15 days. ( Cal. Rules of Court, rule 3.1700(a)(1).) Cost applications in a case governed by section 998 likewise must come after a judgment or award. Only then can the outcome be compared with the terms of the settlement offer and deemed more or less favorable. Section 998 is intended to place parties to arbitration and court proceedings on equal footing and should be read to grant arbitration parties the same shield against premature disclosure of settlement offers that parties in court enjoy. Arbitrators have limited continuing jurisdiction after issuance of a final award, and the Legislature by statute can expand an arbitrator's powers. The rule most consistent with these principles is this: Consistent with practice in civil litigation, for 15 days after issuance of a final award, a party to an arbitration may submit a cost request asserting rejection of an earlier 998 offer. The arbitrator has implicit power under section 998 to consider the request and amend any award accordingly. To deem any postaward application untimely would ignore the parity between arbitrations and court cases that section 998 sought to ensure; the policy against early disclosure of settlement offers reflected in section 998, subdivision (b)(2) ; and the Legislature's power to grant arbitrators supplemental but limited authority to act even after a final award.
Contrary to Heimlich's argument, the American Arbitration Association's commercial rules do not conflict with the procedures we derive from the statutory scheme. Rule R-47 describes the range of dispositions an arbitrator may issue: "In addition to a final award, the arbitrator may make other decisions, including interim, interlocutory, or partial rulings, orders, and awards." (American Arbitration Assn., Commercial Arbitration Rules and Mediation Procedures (2013) rule R-47(a).) Neither rule R-47 nor rule R-7, which expressly governs the arbitrator's jurisdiction, provides that the issuance of a final award terminates that jurisdiction. (See
Heimlich relies principally on
Maaso v. Signer
,
supra
,
C. The Arbitrator's Denial of Costs Cannot Be Vacated
The conclusion that Shivji's request was timely does not automatically entitle him to judicial relief. "Typically, those who enter into arbitration agreements expect that their dispute will be resolved without necessity for any contact with the courts." (
*367
Blanton v. Womancare, Inc.
(1985)
Most legal errors in arbitration are not reviewable. (
Moshonov v. Walsh
,
supra
, 22 Cal.4th at p. 775,
Here, the arbitrator refused to consider Shivji's request for costs. On its face, the arbitrator's response shows he believed he lacked jurisdiction to consider Shivji's request. While this conclusion was incorrect as explained above, ordinary errors in ruling on costs are not subject to correction, nor do they serve as a basis for vacating an award. An arbitrator's legal or factual error in determining which party prevailed may not be reversed. (
Pierotti v. Torian
(2000)
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)
**868
*368
Britz, Inc. v. Alfa-Laval Food & Dairy Co.
(1995)
Alternatively, Shivji contends, and the Court of Appeal held, that the award here could be vacated because "[t]he rights of [a] party were substantially prejudiced ... by the refusal of the arbitrators to hear evidence material to the controversy ...." (§ 1286.2, subd. (a)(5); see
Heimlich v. Shivji
,
supra
, 12 Cal.App.5th at pp. 175-177,
The exceptions to the limits on review of awards protect against error that is so egregious as to constitute misconduct or so profound as to render the process unfair.
10
The Legislature has authorized "judicial review in circumstances involving
serious problems
with the award itself, or with the fairness of the arbitration process." (
Moncharsh
,
supra
, 3 Cal.4th at p. 12,
*617
It follows that vacation of an award for "refusal ... to hear evidence material to the controversy" (§ 1286.2, subd. (a)(5)) must rest on more than a simple error in applying the rules of evidence. As
Schlessinger v. Rosenfeld, Meyer & Susman
(1995)
Royal Alliance Associates, Inc.
is the paradigmatic example of when a refusal to hear evidence will justify vacation of an award. A financial services client alleged a securities broker sold her unsuitable, high-risk investments. The broker's firm settled the arbitration claim, then sought to have the arbitration panel expunge the allegations from the broker's public record. At a hearing, the panel allowed the broker to speak, unsworn and at length. Over her counsel's objection, it denied the former client the opportunity to cross-examine the broker or to speak herself. (
Royal Alliance Associates, Inc. v. Liebhaber
,
supra
, 2 Cal.App.5th at pp. 1097-1100,
In contrast, section 1286.2, subdivision (a)(5) does not contemplate vacation of an award merely because arbitrators refuse to consider evidence they find legally irrelevant, even if the irrelevance determination rests upon an incorrect legal foundation. (See
Schlessinger v. Rosenfeld, Meyer & Susman
,
supra
, 40 Cal.App.4th at pp. 1110-1111,
The
Hall
and
Schlessinger
view preserves the limits on judicial review while protecting against arbitrary refusal to hear one side's case.
Burlage
cannot be reconciled with these decisions. (
Burlage v. Superior Court
,
supra
, 178 Cal.App.4th at pp. 533-535,
As the party challenging the arbitrator's award and the trial court's judgment, Shivji must establish his entitlement to relief. His sole argument for vacating the arbitrator's award is an alleged refusal to hear evidence. (See § 1286.2, subd. (a)(5).) Accordingly, all other arguments are forfeited, and we do not consider whether any other basis for challenge might exist under the Arbitration Act.
Insofar as appears from the record, Shivji did not seek a stipulation that would allow the parties jointly to advise the arbitrator of a 998 offer. Instead, he chose to wait until shortly after the arbitrator's merits award to raise the issue. While Shivji was legally entitled to do so, he ran the risk that the arbitrator would erroneously refuse to award costs, leaving him without recourse under the narrow grounds for vacation or correction contained
**870
in the statutory scheme. " '[I]t is within the power of the arbitrator to make a mistake either legally or factually. When
*619
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,
III. DISPOSITION
The Court of Appeal's judgment is reversed with directions to affirm the trial court's confirmation of the arbitration award and denial of costs.
We Concur:
CANTIL-SAKAUYE, C. J.
CHIN, J.
LIU, J.
CUÉLLAR, J.
KRUGER, J.
All further unlabeled statutory references are to the Code of Civil Procedure.
These offers expire after 30 days or at the start of trial or arbitration, whichever comes first. (§ 998, subd. (b)(2).) There is no dispute Shivji's offers were never accepted.
The timeline for recovering costs in court was the same in 1997 as it is today. (See Cal. Rules of Court, former rule 870(a)(1).)
As one sister court has noted, the rule, "riddled with exceptions, ... is hanging on by its fingernails." (
Glass, Molders v. Excelsior Foundry Co
. (7th Cir. 1995)
These cases can be interpreted as recognizing a legislative modification of the functus officio doctrine or, alternatively, as recognizing that the doctrine only comes into play once an arbitrator's duties have been fully discharged and is inapplicable if the arbitrator has failed to resolve an issue necessary to fully resolve the dispute.
In contrast, arbitrators are constrained by the legislative limits on arbitral correction of awards from revisiting final awards to alter their decisions on matters actually addressed in those awards. (§ 1284;
Cooper v. Lavely & Singer Professional Corp.
,
supra
, 230 Cal.App.4th at pp. 12-19,
Although
Maaso
did not expressly require preaward submission, Heimlich quotes from a treatise stating that
Maaso
imposes that requirement. (Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2015) ¶ 5:402.14 ["The arbitrator must be informed, however, of the rejected ... § 998 offer prior to making a final award in order to impose any applicable costs 'penalties' "].) The gloss from a treatise cannot change the actual holding of a case. (See
Cooper v. Lavely & Singer Professional Corp.
,
supra
, 230 Cal.App.4th at p. 18, fn. 7,
Parties may also agree to jointly tell an arbitrator, before any award is announced, that a 998 offer was made and rejected, without identifying the terms or who made the offer. Such notice would permit the arbitrator to designate an otherwise final award as interim and then consider the parties' presentations concerning costs and fees. But a stipulation is not required, and in its absence Shivji was not untimely in advising the arbitrator when he did.
Parties can expand judicial review of arbitration awards to reach ordinary errors of law (
Cable Connection, Inc. v. DIRECTV, Inc.
(2008)
See, e.g., section 1286.2, subdivision (a)(1) ("corruption, fraud, or other undue means"), (2) ("corruption"), (3) ("misconduct"), (4) (action in excess of powers), (6) (failure to disclose ground for disqualification or to disqualify when required to do so).
Reference
- Full Case Name
- Alan HEIMLICH, Plaintiff and Respondent, v. Shiraz M. SHIVJI, Defendant and Appellant.
- Cited By
- 53 cases
- Status
- Published