California Court of Appeal reverses order confirming award under Mandatory Fee Arbitration Act; the fact that scope of issues for arbitration included whether award would be binding does not mean arbitrators’ determination of that issue is unreviewable; where parties dispute whether fee arbitration is binding trial court must independently review whether parties agreed to be bound by award; and the firm’s rejection of client’s initial request for binding arbitration terminated client’s offer to have award be binding. Glaser, Weil, Fink, Jacobs & Shapiro LLP v. Goff (4/15/11, Calif. 2nd Appellate District, B220639)
This decision underscores the importance of deciding at the outset of a fee dispute whether the parties both agree that an award issued under the Mandatory Fee Arbitration Act (Bus. & Prof. Code §6200 et seq.) will be binding. It also confirms the requirement that in order for a fee arbitration to be binding, both the client and the lawyer must agree to such. Finally, the decision holds that where the parties dispute whether an MFAA arbitration proceeding is binding or non-binding the trial court must “independently review” the issue of whether the parties agreed to binding arbitration. Such a review must be conducted even if the parties concede that the arbitrators were authorized to rule on the issue of whether the arbitration was binding.
This case involved a law firm and two clients who participated in a fee arbitration under the Mandatory Fee Arbitration Act (“MFAA”). The firm provided written notice to the clients of its intent to sue and advised them of their right under the MFAA to submit the matter to arbitration through the Los Angeles Bar Association. The clients submitted a request for binding arbitration to the Bar Association’s arbitration services provider. The firm advised the clients that it declined binding arbitration. The service provider thereafter sent a letter to the firm and to the clients advising them of their appointed panel. The letter indicated that the firm had declined binding arbitration and advised that if the parties agreed to binding arbitration before the start of the arbitration then the arbitration would become binding.
The Chair of the panel sent a letter to the parties proposing dates for the arbitration and asked whether the firm would agree to binding arbitration. Having now learned the identity of the panelists, the firm advised the Chair that it would agree to binding arbitration. The Chair then wrote to the parties stating “both sides have now agreed to have this matter heard as binding arbitration” and asked them to sign and return a “Stipulation for Binding Arbitration”. The firm signed the stipulation. The clients, however, advised the Chair that they would not agree to binding arbitration. The firm asked the arbitrators to resolve the issue of whether the arbitration was binding as soon as possible given that the arbitration was scheduled to begin in approximately a month.
Several days later the Chair ruled that the clients’ original request for binding arbitration constituted an offer that was accepted by the firm. The Chair reasoned that the firm had not expressed a willingness to withdraw its request for binding arbitration, and the clients had requested binding arbitration in their initial papers.
The arbitrators subsequently heard the substance of the fee dispute and issued a fee award in the firm’s favor. The fee award reiterated the arbitrators’ prior ruling that the award was binding because the parties had agreed in writing to be bound. The award was accompanied by a “Notice of Your Rights After Fee Arbitration”. The notice explained that after service of a “nonbinding” fee award a client has 30 days to seek a new trial in court, and after service of a “binding” fee award a client has 100 days to file to petition to vacate or correct the award.
The firm thereafter filed a petition to confirm the fee award, and a motion for entry of judgment on the award (pursuant to CCP 1285). The clients opposed the petition and motion on the grounds that the arbitrators “exceeded their powers” by ruling that the arbitration was binding. The clients asked that the award be vacated as a binding arbitration award and that they be granted 30 days in which to request trial de novo of the nonbinding award. In response, the firm submitted a declaration from an attorney who had appeared on behalf of the firm at the arbitration. He stated that at the beginning of the arbitration hearing the firm had sought a continuance and, as a result of that request, the arbitrators had asked the clients if they would agree to a continuance in exchange for making the arbitration nonbinding, and the clients had refused. The clients submitted their own declaration stating that the arbitrators did not ask them if they would agree to a continuance in exchange for making the arbitration nonbinding and that the clients did not state that they were opposed to the arbitration proceeding as nonbinding.
The trial court conducted an evidentiary hearing concerning the conflicts between the respective declarations. After supplemental briefing and further argument the trial court rendered its decision. It found the firm’s counsel to be more credible, and thus held that the arbitrators made, and the clients rejected, an offer to agree to a continuance in exchange for making the arbitration nonbinding. The clients rejection of the offer precluded the clients from now arguing that the award was nonbinding. The court further held that even assuming the award was nonbinding when it was made, the clients’ failure to request a trial de novo within 30 days of service of the award rendered it binding pursuant to MFAA rules.
The court entered an order granting the firm’s petition to confirm the award and a judgment to the same effect. The clients timely appealed.
Reviewability of Arbitrators’ Ruling that Arbitration Was Binding
The court of appeal began by addressing the issue of whether the arbitrators’ ruling that the award was binding was even reviewable. Relying on the decision in Trabuco Highlands Community Assn. v. Head (2002) 96 Cal.App.4th 1183, the court found that it was. The court explained that while there are few statutory grounds on which an arbitration award can be vacated, and an arbitrator’s decision is not generally reviewable for factual or legal errors except with regard to narrow exceptions, the binding nature of the arbitration sought to be confirmed is a “structural aspect” of the arbitration and “independent judicial review” of whether an arbitration is binding is necessary to preserve the integrity of the arbitration process and the judicial system.
Here, the court explained, while the arbitrators determined that the parties had agreed to binding arbitration it was not clear that a court had ever determined that the parties agreed to binding arbitration, and the clients contended they had not. Thus, under Trabuco the trial court should have independently reviewed whether the parties had agreed to make the arbitration binding. “An approach other than Trabuco’s would mean that, because the arbitrators determined that the parties agreed to binding arbitration, no California court can review that determination, because according to the arbitrators, the parties agreed to be bound by it. That would be precisely the kind of impermissible ‘bootstrapping’ that the arbitration case law warns against.” Thus “independent judicial review of whether an arbitration is binding is necessary.”
The appellate court rejected several arguments to the contrary. First, the court found that while the clients had allegedly conceded in their appellate brief that the parties had authorized the arbitrators to rule on the issue of bindingness “it does not follow that the arbitrators had authority to bind the parties (or, equivalently, to make unreviewable rulings) on that issue or any other.” The court further rejected the contention that because the parties had allegedly authorized the arbitrators to rule on the issue of bindingness the arbitrators could not have exceed their powers in purporting to issue a “binding” award. “Arbitrators in a nonbinding arbitration exceed their powers by purporting to issue a binding award.” Accordingly, if a party seeks to vacate or opposes confirmation of an award on the grounds that the parties never agreed to make the arbitration binding then in order to determine whether the arbitrators exceeded their powers the court hearing the petition must independently review whether the parties agreed to be bound.
The court noted that “the entire system of narrowly circumscribed judicial review of binding arbitration awards is premised on the parties having agreed to it.” If the parties “have not agreed to binding arbitration, then there is no justification for channeling their dispute into the system of extremely limited judicial review that is applicable to parties who have agreed to it.” The only way for the court to justify treating anything in the award as binding is for the court first to determine that the parties actually agreed to be bound. Hence, “[i]ndependent judicial review of whether an arbitration is binding is necessary.”
The court also noted that the general presumption in the context of predispute contractual arbitration agreements, that parties intend arbitration to be binding, is not the same in MFAA arbitrations. There is no predispute arbitration agreement, but rather a statutory scheme that makes arbitration mandatory for the attorney upon the request of the client. By statute, the proceeding is “nonbinding” unless the parties agree in writing to make it binding. “Under these circumstances, if a defendant in a fee collection action requests nonbinding arbitration under the MFAA and never in any way vacillates from that position, then there is simply no question that everything the arbitrator says or does, every ruling the arbitrator makes, and every statement in the arbitrator’s award is nonbinding. The client has never agreed to be bound by anything in the arbitration.” The fact an arbitrator has authority to rule on an issue, the court said, does not mean the arbitrator has authority to make a binding (and hence unreviewable) ruling on that issue. Accordingly, the fact the clients in this case allegedly conceded that the arbitrators were authorized to rule on the issue of bindingness does not defeat their argument that the arbitrators’ decision on that issue is “nonbinding” and still subject to judicial review.
Whether Arbitrators Exceeded Their Powers By Issuing a Binding Award
The court next addressed the clients’ contention that the arbitrators had exceeded their powers by purporting to issue a binding award when the undisputed facts established that the arbitration was nonbinding as a matter of law. The court agreed. “It is hornbook law that an unequivocal rejection by an offeree, communicated to the offeror, terminates the offer.” Once this occurs the offferee cannot later purport to accept the offer and thereby create an enforceable contract. “Thus, when the Firm unequivocally rejected the [clients’] written request for binding arbitration and communicated that rejection to the [clients], the [clients’] offer was terminated and could not later be accepted by the Firm.” When the firm changed its mind and submitted its own request for binding arbitration, the clients rejected that offer. “Accordingly, the parties never entered into a written agreement for binding arbitration, so the arbitration was nonbinding.”
No Implied Waiver of Argument that Arbitration Was Not Binding
Finally, the court turned to the firm’s “implied waiver” arguments. The fact the clients had allegedly not argued that the panel lacked authority to decide whether the arbitration was binding during the arbitration proceeding itself did not constitute a waiver, the court said, since the clients’ alleged recognition that the arbitrators had authority to rule on the issue of bindingness “does not constitute a concession that the arbitrators’ ruling on that issue would itself be binding and not subject to judicial review.”
The appellate court acknowledged that the trial court’s finding that the clients had turned down the arbitrators’ offer to make the arbitration nonbinding in exchange for agreeing to a continuance was supported by substantial evidence and therefore could not be disturbed on appeal. However, the appellate court explained that it is nonetheless permitted to “review independently the trial court’s conclusions as to the legal significance of the facts.” Because prior to the arbitrators’ offer, the parties had not agreed to binding arbitration, the clients’ rejection of the offer could not, as a matter of law, constitute a waiver or forfeiture. “Having never entered into an agreement for binding arbitration, the [clients] had an absolute right to insist on nonbinding arbitration.” The client’s rejection of the arbitrators’ offer “was fully consistent with – indeed, it was an expression of – their position that they had an unfettered right to nonbinding arbitration and should not have to agree to a continuance or anything else in order to exercise it.”
The court also dismissed the argument that, even assuming the award was nonbinding, the clients’ failure to seek a trial de novo within 30 days after service of notice of the award “rendered the nonbinding award binding”. The court acknowledged that Bus. & Prof. C. §6203(b) provides “[e]ven if the parties to the arbitration have not agreed in writing to be bound, the arbitration award shall become binding upon the passage of 30 days after service of the notice of the award, unless a party has, within the 30 days, sought a trial after arbitration pursuant to [Business and Professions Code section ] 6204.” However, by its terms, the court explained, the relevant provision of 6203 (b) applies only “if the parties to the arbitration have not agreed in writing to be bound.” The award in this case stated on its face that the award is binding “because the parties agreed in writing to be bound.” Thus, until the award was vacated or corrected on that point, the statute did not apply.
The court further reasoned that under such circumstances “it would make no sense to require the parties to file a request for trial after arbitration unless and until the arbitrators’ determination that the award was binding was set aside – before then, any request for trial de novo would be rejected by the trial court, which would consider itself powerless to grant the request with respect to a facially binding award. “Because the law does not require an idle act [citations omitted] we conclude that the Legislature did not intend to require a party in the [clients’] position to file a futile request for trial de novo before obtaining relief from the arbitrators’ erroneous ruling that the award was binding. We therefore hold that in the case of an arbitration award that states on its face that it is binding, the statute and rules on which the Firm relies do not operate to render the award binding if no party requests trial de novo within 30 days of service of the award.”
Finally, the appellate court rejected a number of waiver arguments raised by the dissent. First, the court found that the fact the clients allegedly did not “contest” the issue of bindingness after the arbitrators ruled that the arbitration was binding and, instead proceeded in the arbitration, did not constitute a waiver of their claim that the arbitration was nonbinding. Before the arbitrators had ruled on the issue the clients had argued in written submissions to the panel that the arbitration was nonbinding. “There is no reason why they needed to present their arguments to the arbitrators again, after the arbitrators ruled, in order to preserve the issue for judicial review. The dissent cites no authority to the contrary, and we are aware of none. In general, a party aggrieved by a ruling need not seek reconsideration in order to preserve the issue for later review – advocating an opposing position before the ruling is sufficient.”
The court also rejected the argument that the clients’ failure to “withdraw from the arbitration” proceeding after the arbitrators ruled that it was binding constituted a waiver. “If a party disagrees with an arbitrator’s ruling on an issue early in arbitration, the party need not walk out of the arbitration in order to preserve the issue for later review.” The court also disagreed with the suggestion that the clients had blown “hot and cold” about their position on the issue and thereby unfairly misled the firm and the arbitrators about whether the arbitration was binding. Although the clients originally asked for binding arbitration, the court explained, the firm rejected their request. From that point forward the clients consistently insisted on nonbinding arbitration which, according to the court, they were entitled to do since they never agreed to make the arbitration binding.
The court of appeal therefore reversed the judgment and directed the trial court to enter an order vacating the arbitration award, declaring the award to be non-binding, and granting the clients 30 days from service of the order in which to request a trial after arbitration.
The court’s decision included a lengthy dissent in which it was argued that the arbitrators’ determination of whether the arbitration was binding was not reviewable under Greenspan v. LADT, LLC (2010) 185 Cal.App.4th 1413, and that the decision in Trabuco Highlands Community Association v. Head (2002) 96 Cal.App.4th 1183 was distinguishable. According to the dissent, the majority opinion “strains to announce a new rule of law devoid of jurisprudential basis, and which as a result has no utility within the framework of California law. The majority’s new rule makes a mockery of the arbitration process, undermines the basic principles of severely limited judicial review of matters parties have agreed to submit to arbitration, and ignores the countless decades of California jurisprudence that the rulings of arbitrators are reviewable only in very limited circumstances.”
A petition for rehearing was denied.