October 31, 2019 Articles

California Supreme Court Rules on Timing for Requesting Arbitration

The court held that requests for costs under California Code of Civil Procedure section 998 are timely if raised within 15 days of an arbitrator’s final award.

By Carolyn G. Burnette and Casey M. Curran

California Code of Civil Procedure Section 998

Under California law, a prevailing party is generally entitled to recover litigation costs. California Code of Civil Procedure section 998 widens the scope of this general principle. It more broadly provides that a non-prevailing party may recover costs if (1) the party made a legally compliant pretrial (or pre-arbitration) settlement offer, (2) the offer was rejected by the opposing party, and (3) the opposing party failed to obtain a trial (or arbitration) award more favorable than the offer. In other words, where a party makes a timely, good-faith settlement offer that the opposing party does not beat at trial (or arbitration), section 998 allows the offering party to recover some costs even if the offering party does not ultimately prevail on the merits. In such circumstances, the prevailing party is generally denied an award of post-offer costs. The policy objective of section 998 is to avoid the time and expense of protracted litigation and to encourage parties to settle.

Until now, practitioners have had an ongoing struggle with ambiguity as to the proper timing of requests for costs under section 998 in the context of arbitration. On the one hand, raising a section 998 offer before an arbitrator reaches his or her final decision could create prejudice by influencing the arbitrator’s assessment of the merits. On the other hand, the arbitrator’s jurisdiction typically terminates when he or she issues a final decision, which could render any subsequent request for costs untimely. Fortunately, the California Supreme Court settled this question in Heimlich v. Shivji, 7 Cal. 5th 350 (2019). 

The Ruling: Arbitrators May Consider Requests for Costs after Issuing a Final Award

The Heimlich case arose out of a dispute over legal fees between an inventor and his attorney. Both the attorney and the inventor asserted claims for money owed. Because the attorney’s representation agreement included a clause providing for private arbitration of all disputes, the matter was sent to arbitration. Sometime before the arbitration hearing, the inventor made a section 998 offer to settle, which the attorney rejected.

The arbitrator in Heimlich found that neither party’s claim had merit and issued a final decision awarding zero dollars to both of them. The arbitrator also determined that neither party was entitled to recover fees or costs because both failed to prevail on their respective claims.

After the arbitrator made the final decision, the inventor quickly submitted evidence of his section 998 offer and sought to recover costs as authorized by the statute. The arbitrator refused to consider the inventor’s request on the grounds that jurisdiction over the matter had ceased. The inventor then pursued judicial review.

The California Supreme Court ultimately heard the matter. It held that the arbitrator’s failure to consider the section 998 offer after issuing the final decision was incorrect. The court reasoned that while it is true that generally an arbitrator cannot amend his or her final award, there is an exception for requests for costs under section 998. The court went further and opined that section 998 offers cannot be considered before an arbitrator’s ruling on the merits because disclosing the offer to an arbitrator could result in prejudice to the offering party. The court found that to deem all post-award applications untimely would ignore (1) the parity that should exist between arbitrations and court cases, (2) the policy against early disclosure of settlement offers reflected in section 998(b)(2), and (3) the legislature’s power to grant arbitrators supplemental but limited authority to act even after final award. The final rule of the California Supreme Court was that a request for costs under section 998 is timely if presented to the arbitrator within 15 days of a final award.

Judicial Review of Arbitrator Error

Despite finding that the arbitrator’s denial of costs was incorrect, the California Supreme Court refused to overturn the award. The court held instead that, absent the parties’ agreement for review, a court can overturn an arbitration award only for egregious error. It reiterated the standard that 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.” The court reasoned that ordinary errors in ruling on costs are not subject to correction. It again emphasized the broad scope of an arbitrator’s powers and the narrow scope of judicial review considering the parties’ choice of arbitration.

Conclusion

The Heimlich case provides clarity as to the timing of a request for costs under section 998 in holding that these requests may be made within 15 days of a final award. Practitioners should be wary of this deadline, particularly in light of the restrictive limits on judicial review.

Carolyn G. Burnette is an American Arbitration Association employment law panelist and principal at Jackson Lewis P.C. in Sacramento, California. The article was coauthored by Casey M. Curran, an associate at Jackson Lewis P.C. in Sacramento, California. 


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