Heimlich v. Shivji , 7 Cal. 5th 350 ( 2019 )

IN THE SUPREME COURT OF
CALIFORNIA
ALAN HEIMLICH,
Plaintiff and Respondent,
v.
SHIRAZ M. SHIVJI,
Defendant and Appellant.
S243029
Sixth Appellate District
H042641
Santa Clara County Superior Court
112CV231939
May 30, 2019
Justice Corrigan authored the opinion of the court, in which
Chief Justice Cantil-Sakauye and Justices Chin, Liu, Cuéllar,
Kruger, and Groban concurred.
HEIMLICH v. SHIVJI
S243029
Opinion of the Court by Corrigan, J.
Code of Civil Procedure section 9981 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) 56 Cal. 4th 1014, 1019.) In 1997, the
Legislature amended the statute to make the same incentive
available in arbitrations. (Stats. 1997, ch. 892, § 1, p. 6390;
Pilimai v. Farmers Ins. Exchange Co. (2006) 39 Cal. 4th 133, 139,
149.) This case involves the procedures for seeking these costs
in arbitration.
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.
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
1
All further unlabeled statutory references are to the Code
of Civil Procedure.
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Opinion of the Court by Corrigan, J.
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:
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Opinion of the Court by Corrigan, J.
“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.”
Shivji then filed a trial court motion to confirm the award
and attached a memorandum of costs seeking $76,684.02. The
court confirmed the award but refused to add costs. It relied on
Maaso v. Signer (2012) 203 Cal. App. 4th 362, which held a
request for section 998 costs in connection with an arbitration
must be resolved by the arbitrator.
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 given in evidence upon
the trial or arbitration.’ ” (Heimlich v. Shivji (2017) 12
Cal.App.5th 152, 169, review granted Aug. 23, 2017, S243029,
quoting § 998, subd. (b)(2), italics omitted.) Moreover, it held
the trial court could vacate the arbitrator’s award because the
arbitrator had “ ‘refus[ed] . . . to hear evidence material to the
controversy’ ” (Heimlich, at p. 175, quoting § 1286.2,
subd. (a)(5)) when he summarily rejected Shivji’s attempt to
raise the issue (Heimlich, at pp. 175–177).
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) 1 Cal.5th 233, 252.) Consequently,
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Opinion of the Court by Corrigan, J.
whether an arbitrator or court should allocate costs depends on
the parties’ agreement, which defines the scope of the
arbitrator’s power. (Moncharsh v. Heily & Blase (1992) 3
Cal. 4th 1, 8.)
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) 43
Cal. 4th 1179, 1182.) This principle extends specifically to costs:
If the parties’ agreement does “not limit the issues to be resolved
through arbitration, the issue of [a party’s] entitlement to . . .
costs, as requested in his complaint, [is] subject to
determination in arbitration proceedings.” (Corona v. Amherst
Partners (2003) 107 Cal. App. 4th 701, 706; see Moshonov v.
Walsh (2000) 22 Cal. 4th 771, 776; Maaso v. Signer, supra, 203
Cal.App.4th at p. 377.)
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; Corona v. Amherst Partners, supra, 107
Cal.App.4th at pp. 706–707.) Shivji’s request for costs in his
arbitration claim and his March 11 attempt to raise the issue
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Opinion of the Court by Corrigan, J.
with the arbitrator were sufficient to avoid this bar. The next
question is timeliness.
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 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.” (Scott Co. v. Blount, Inc.
(1999) 20 Cal. 4th 1103, 1114.) A plaintiff who rejects a
defendant’s 998 offer, then fails to obtain a more favorable
judgment, cannot recover postoffer costs. That plaintiff is also
liable for the defendant’s postoffer costs, and in the discretion of
the court, for expert witness fees as well. (§ 998, subd. (c)(1).)
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
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Opinion of the Court by Corrigan, J.
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) 40
Cal. 3d 870, there is no evidentiary bar. To the contrary, he
urges preaward submission is mandatory because the arbitrator
loses all jurisdiction after an award.
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, 40 Cal. 3d 870,
plaintiffs sued a title insurance company for breach of contract
and negligence. The insurer made a series of settlement offers,
including one pursuant to section 998. The insureds rejected all
offers and added a claim for breach of the covenant of good faith
and fair dealing. The court bifurcated proceedings, trying the
contract and negligence claims first. After the insurer was
found liable, trial proceeded on the good faith claim. To prove
the insurer handled the underlying insurance claim in bad faith,
the insureds introduced evidence of the settlement offers.
(White, at pp. 878–879.)
2
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.
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Opinion of the Court by Corrigan, J.
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) 23 Cal. 3d 1,
13). Parties should be encouraged to make offers without fear
that they will be treated as an admission of either liability or
the minimal value of a claim. However, Western Title’s offers
were not being used to show contractual liability. Because that
question had already been adjudicated in the first part of the
bifurcated proceeding, the offers could be admitted for a
different purpose: to show the insurer’s bad faith. (White v.
Western Title Ins. Co., supra, 40 Cal.3d at pp. 887–888.)
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 the policy underlying the prohibition. The Court of
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Opinion of the Court by Corrigan, J.
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, rev. granted.)
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 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) 240
Cal. App. 4th 227, 234–237.) This postjudgment window allows
a party to wait until after a decision on the merits to reveal a
998 offer.
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–
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HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
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
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; see Bank of San Pedro v.
Superior Court (1992) 3 Cal. 4th 797, 804.) The statutes
recognize that if a court or jury is informed of a settlement offer
before determining liability, the offering party may be
prejudiced in its ability to obtain any outcome better than that
which it had previously expressed a willingness to accept. (See
Stockman v. Oakcrest Dental Ctr., P.C. (6th Cir. 2007) 480 F.3d
791, 800 [“The prejudice that inheres in [knowledge of] offers to
settle is patently virulent”].) That reality could chill the making
of reasonable offers and undermine the policy favoring
settlement. Accordingly, the statutes insulate parties from this
potential prejudice by limiting admissibility. (Evid. Code,
§ 1152, subd. (a); Code Civ. Proc., § 998, subd. (b)(2).)
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. No. 73 (1997–1998 Reg. Sess.) as amended
3
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).)
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Opinion of the Court by Corrigan, J.
May 1, 1997, p. 7; Pilimai v. Farmers Ins. Exchange Co., supra,
39 Cal.4th at pp. 150–151.) By extending the general rule
against admissibility to arbitrations (§ 998, subd. (b)(2)), the
Legislature expressed its view that arbitrators, no less than
juries and judges, may be influenced if aware of settlement
offers. To require parties in an arbitration to disclose settlement
offers before an award is made would contradict the goal of equal
treatment.
There was no risk of prejudice in White v. Western Title
Ins. Co., supra, 40 Cal. 3d 870, because the jury had already
determined the insurer’s liability for contract damages. The
same is not true for disclosure of a settlement offer before an
arbitrator’s decision on the merits. Requiring a defendant to
advise an arbitrator it has offered to settle, even if no amounts
are mentioned, could influence a merits determination by
signaling that the defendant is willing to pay at least some
amount. Heimlich argues that a party could alert the arbitrator
to the existence of an offer without disclosing the amount or who
made it. But as Shivji rightly notes, a decision maker alerted to
an offer may likely assume the alert comes from the party with
an incentive to mention it: the party whose offer was rejected.
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 (conc. opn. of Kennard,
J.).) “It is, apparently, an ancient rule that ‘when arbitrators
have published their award by delivering it to the parties as the
award, that it is not the subject of revision or correction by them,
and that any alteration without the consent of the parties will
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Opinion of the Court by Corrigan, J.
vitiate it.’ ” (Elliott & Ten Eyck Partnership v. City of Long
Beach (1997) 57 Cal. App. 4th 495, 501, quoting Porter v. Scott
(1857) 7 Cal. 312, 316.) “Arbitrators exhaust their power when
they make a final determination on the matters submitted to
them. They have no power after having made an award to alter
it; the authority conferred on them is then at an end.” (Bayne v.
Morris (1863) 68 U.S. 97, 99; see Doke v. James (1851) 4 N.Y.
568, 575–576.) From this, Heimlich reasons, notice of a
settlement offer must necessarily be given before the final
award, when the arbitrator still has the power to act.
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. 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) 4 Cal.5th 241, 249.) The Legislature may confer
authority to correct or amend a final decision or make additional
rulings contingent upon, and necessarily subsequent to, a final
award. A change in the scope of an arbitrator’s duties will affect
when those duties have been completed and the arbitrator’s
powers extinguished.
The California Arbitration Act (§§ 1280–1294.2; the
Arbitration Act) governs private arbitration. Section 1284
expressly vests arbitrators with continuing jurisdiction for a
4
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) 56 F.3d 844, 846.)
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Opinion of the Court by Corrigan, J.
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) 230 Cal. App. 4th 1,
18.) If no application for correction is filed within 10 days,
jurisdiction expires and a petition to vacate or confirm may be
filed in superior court. If an application is filed, the arbitrator
retains jurisdiction for up to 30 days after the award was filed.
(§ 1284.)
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.
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
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Opinion of the Court by Corrigan, J.
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) 99 Cal. App. 4th 647, 657–658; Century City Medical
Plaza v. Sperling, Isaacs & Eisenberg (2001) 86 Cal. App. 4th 865,
879–882 (Century City); A.M. Classic Construction, Inc. v. Tri-
Build Development Co. (1999) 70 Cal. App. 4th 1470, 1475–1478.)
This retention of authority stems from the statutory obligation
to decide all issues within the scope of the arbitrator’s
assignment. It flows as well from the policy underlying that
duty: “[T]he fundamental purpose of contractual arbitration is
to finally resolve all of the issues submitted by the parties as
expeditiously as possible [citation], without the time and
expense burdens associated with formal judicial litigation.”
(Century City, at p. 882).5
For example, in Century City, supra, 86 Cal. App. 4th 865,
the arbitrator issued an award in a landlord-tenant dispute.
The landlord promptly contacted the arbitrator, seeking to have
the award amended to include prejudgment interest, costs, and
contractual attorney fees. The landlord reasoned that because
fees were to be awarded to the prevailing party following entry
of judgment, it “was required to await the award before making
a motion for attorney fees.” (Id. at p. 872.) The arbitrator by
letter agreed to make an award and directed the landlord to
5
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.
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Opinion of the Court by Corrigan, J.
submit a motion for fees and costs under Civil Code section 1717.
The arbitrator then issued an amended award that included
amounts for interest, costs, and fees. (Century City, at pp. 872–
873.) The trial court refused to confirm the amended award, but
the Court of Appeal reversed, explaining that while arbitrators
generally are without power to correct errors of fact or law in
rulings they made, they retain power to rule on issues submitted
to them but left undecided. (Id. at pp. 877–881.)
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.) Arbitrators can, and do, revisit final awards to ensure
aspects of the parties’ controversy not addressed in those awards
are resolved. Indeed, “[f]ailure to find on all issues submitted is
. . . a statutory ground for vacating an award.” (Banks v.
Milwaukee Ins. Co. (1966) 247 Cal. App. 2d 34, 38.)6
The Arbitration Act is not the only legislative source of
arbitral power. Pilimai v. Farmers Ins. Exchange Co., supra, 39
6
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; Severtson v.
Williams Construction Co. (1985) 173 Cal. App. 3d 86, 93–96;
Banks v. Milwaukee Ins. Co., supra, 247 Cal.App.2d at pp. 36–
37.)
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Opinion of the Court by Corrigan, J.
Cal.4th 133, held parties to an uninsured motorist arbitration
(see Ins. Code, § 11580.2) could recover deposition and exhibit
preparation costs. Even though the Arbitration Act did not
authorize these costs, “Code of Civil Procedure section 998 itself
provides the statutory authorization.” (Pilimai, at p. 150.)
Pilimai recognized that section 998 can act as supplemental
legislative authorization for an arbitrator’s action, in addition to
authority provided in the Arbitration Act itself.
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,
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Opinion of the Court by Corrigan, J.
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 id., rules R-7, R-47.)
To the contrary, rule R-50 preserves postaward arbitral
jurisdiction to consider requests for correction filed within 20
days. (Id., rule R-50.) Under rule R-50, “[t]he arbitrator is not
empowered to redetermine the merits of any claim already
decided” (ibid.), but the rule does not preclude decisions on
undecided claims. Rule R-47 also confers authority to “grant
any remedy or relief that the arbitrator deems just and
equitable and within the scope of the agreement of the parties
. . . .” (id., rule R-47(a)). Nothing in these provisions forecloses
an arbitrator from deciding whether to award costs under
section 998 after all underlying claims have been resolved.
Heimlich relies principally on Maaso v. Signer, supra, 203
Cal. App. 4th 362. But Maaso does not require submission of an
offer’s details before a final award. There, the party that made
a rejected 998 offer so advised the arbitrators before issuance of
a final award. Even so, the arbitrators made no cost award to
the offeror, instead directing that each side bear its pro rata
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Opinion of the Court by Corrigan, J.
share of costs. (Id. at p. 377.) The party claiming costs sought
to confirm the arbitration award in court but asked the court to
“add costs and interest not awarded by the panel, and which
were in fact inconsistent with the panel’s award.” (Id. at p. 378.)
The Court of Appeal rejected this approach, explaining that the
prevailing party was at fault for never “stat[ing] the amount or
seek[ing] to present evidence on the issue” to the arbitrators.
(Id. at p. 377.) The prevailing party thus lost because (1) he
made an inadequate presentation to the arbitrators, who had
jurisdiction to confer costs; (2) the arbitrators issued an award
that did not provide for section 998 cost shifting; and (3) even if
that omission was legal error, it was not one that could be cured
by the courts in the guise of confirming the arbitration award.
(Maaso, at pp. 377–380.) Maaso did not hold that section 998
cost requests must be presented before issuance of an award on
the merits.7
Here, Shivji raised the issue six days after the arbitrator’s
award. His request for costs was timely.8
7
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 [rejecting reliance on the Knight treatise on similar
grounds].)
8
Parties may also agree to jointly tell an arbitrator, before
any award is announced, that a 998 offer was made and rejected,
17
HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
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.” (Blanton v. Womancare, Inc. (1985) 38 Cal. 3d 396, 402,
fn. 5.) A court’s power to correct or vacate an erroneous
arbitration award is closely circumscribed. (Moshonov v. Walsh,
supra, 22 Cal.4th at pp. 775–776; Moncharsh v. Heily & Blase,
supra, 3 Cal.4th at pp. 8–13 (Moncharsh).) Shivji has not shown
a basis for correcting the arbitrator’s error.
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
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.
9
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.
18
HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
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.)
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) 81 Cal. App. 4th 17, 24–26; Creative
Plastering, Inc. v. Hedley Builders, Inc. (1993) 19 Cal. App. 4th
1662, 1666.) Error in failing to identify any prevailing party,
even upon request, is likewise unreviewable. (Moore v. First
Bank of San Luis Obispo (2000) 22 Cal. 4th 782, 788.) Most
specifically, error in failing to award costs to a qualifying party
under section 998 is not grounds for relief. (Maaso v. Signer,
supra, 203 Cal.App.4th at pp. 377–380; Woodard v. Southern
Cal. Permanente Medical Group (1985) 171 Cal. App. 3d 656,
661–662.)
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.
19
HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
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, rev. granted.) This analysis fails.
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,
italics added.) “ ‘The statutory provisions for [review of an
arbitration award] are manifestly for the sole purpose of
preventing the misuse of the proceeding, where corruption,
fraud, misconduct, gross error, or mistake has been carried into
the award to the substantial prejudice of a party to the
proceeding.’ ” (Pacific Vegetable Oil Corp. v. C. S. T., Ltd. (1946)
29 Cal. 2d 228, 240.)
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)
40 Cal. App. 4th 1096, 1110, noted, section 1286.2 subdivision
(a)(5), “if not properly limited, could swallow the rule that
10
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).
20
HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
arbitration awards are generally not reviewable on the merits.”
The provision is not “a back door to Moncharsh through which
parties may routinely test the validity of legal theories of
arbitrators.” (Hall v. Superior Court (1993) 18 Cal. App. 4th 427,
438–439.) Instead, it was designed as a “safety valve in private
arbitration that permits a court to intercede when an arbitrator
has prevented a party from fairly presenting its case.” (Id. at
p. 439.) It comes into play, for example, when an arbitrator,
without justification, permits only one side to present evidence
on a disputed material issue. (See Moncharsh, supra, 3 Cal.4th
at p. 13.) The Arbitration Act codifies “the fundamental
principle that ‘[a]rbitration should give both parties an
opportunity to be heard.’ [Citation.] . . . [T]he opportunity to be
heard must be extended to all parties equitably.” (Royal
Alliance Associates, Inc. v. Liebhaber (2016) 2 Cal.App.5th
1092, 1108.) To conduct an arbitration without abiding by that
principle evinces bias, constituting misconduct.
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.) The record
suggested the arbitration panel may have felt itself too busy to
allow each side the opportunity to present evidence. Addressing
one member’s thought that perhaps they should grant the
21
HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
former client’s request, the presiding arbitrator said, “ ‘Well,
how can we make sure we’re not going to be here for another two
hours? That’s the problem.’ ” (Id. at p. 1099.) The third panelist
concurred, and the requests to speak and cross-examine the
broker were denied. In its award, the panel found the broker
credible and repeatedly relied on the former client’s failure to
dispute the broker’s account or to offer evidence of financial
losses. (Id. at pp. 1100–1102.) The award was vacated because
“the hearing was not fair. The arbitrators gave [the brokerage]
an unfettered opportunity to bolster the written record but
denied [the client] even a limited chance to do the same.” (Id. at
p. 1110.)
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; Hall v. Superior Court,
supra, 18 Cal.App.4th at pp. 438–439.) This case presents such
a circumstance. The arbitrator refused to hear any evidence
concerning Shivji’s 998 offer because he viewed the underlying
controversy submitted to him as a dispute over attorney fees.
Having resolved that dispute, the arbitrator concluded he “ ‘no
longer [had] jurisdiction to take any further action in this
matter.’ ” (Heimlich v. Shivji, supra, 12 Cal.App.5th at p. 159,
rev. granted.) There is a difference between a legal conclusion
that jurisdiction is lacking and an arbitrary refusal to hear
relevant evidence on an issue properly before the arbitrator.
Shivji’s complaint is with the underlying jurisdictional
determination. Neither that determination nor the resulting
refusal to consider evidence erroneously deemed irrelevant is
22
HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
misconduct under the evidentiary prong of section 1286.2,
subdivision (a)(5). Under Moncharsh, supra, 3 Cal. 4th 1, the
award should have been allowed to stand.
The Court of Appeal held the arbitrator erred by
“refus[ing] even to hear evidence relevant to” the 998 offer.
(Heimlich v. Shivji, supra, 12 Cal.App.5th at p. 176, rev.
granted.) To support this conclusion, it relied principally on
Burlage v. Superior Court (2009) 178 Cal. App. 4th 524. There,
the arbitrator ruled that any damages in the action were fixed
at the date that escrow closed on the property at issue, and
thereafter excluded evidence regarding postescrow events that
would seem to have substantially limited the compensable
damages. Consistent with our holding today, the majority
acknowledged that it could not vacate the award based on the
original legal error. (Id. at p. 530.) But the majority then went
on to vacate based on the evidentiary rulings that logically
followed from that error. (Id. at pp. 530–532.) As the dissent
persuasively argued, “[v]irtually every ruling on a ‘legal issue’
at trial results in limiting the admissibility of evidence.” (Id. at
p. 532 (dis. opn. of Perren, J.).) 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.
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 (dis. opn. of Perren, J.).) Hall, Schlessinger, and
the Burlage dissent are more faithful to Moncharsh and the
23
HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
Arbitration Act. Burlage v. Superior Court, supra, 178
Cal. App. 4th 524, is disapproved to the extent it is inconsistent
with this opinion.
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 in the statutory scheme. “ ‘[I]t is within the
power of the arbitrator to make a mistake either legally or
factually. 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.)
24
HEIMLICH v. SHIVJI
Opinion of the Court by Corrigan, J.
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.
CORRIGAN, J.
We Concur:
CANTIL-SAKAUYE, C. J.
CHIN, J.
LIU, J.
CUÉLLAR, J.
KRUGER, J.
GROBAN, J.
25
See next page for addresses and telephone numbers for counsel who argued in Supreme Court.
Name of Opinion Heimlich v. Shivji
__________________________________________________________________________________
Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 12 Cal.App.5th 152
Rehearing Granted
__________________________________________________________________________________
Opinion No. S243029
Date Filed: May 30, 2019
__________________________________________________________________________________
Court: Superior
County: Santa Clara
Judge: William J. Elfving
__________________________________________________________________________________
Counsel:
Ellahie & Farooqui, Javed I. Ellahie, Omair M. Farooqui and Leila N. Sockolov for Defendant and
Appellant.
Law Offices of Nicholas D. Heimlich, Nicholas D. Heimlich and Caitlin E. Kaufman for Plaintiff and
Respondent.
Counsel who argued in Supreme Court (not intended for publication with opinion):
Omair M. Farooqui
Ellahie & Farooqui
1023 Corporation Way, 2nd Floor
Palo Alto, CA 94303
(408) 294-0404
Nicholas D. Heimlich
Law Offices of Nicholas D. Heimlich
5595 Winfield Boulevard, Suite 110
San Jose, CA 95123
(408) 457-9364