Heimlich v. Shivji, 12 Cal. App. 5th 152 (6th Dist. May 31, 2017), cert granted, 400 P.3d 442 (Aug. 23, 2017) – This is a very interesting case because it manages to harmonize – procedurally – the arbitration doctrine of functus oficio with the procedural requirements of CCP § 998(b)(2) and the powers vested in an arbitrator under Rules R-8 and R-47(d)(ii) of the AAA Commercial Rules (the provider rules at issue in the case). However, it has no precedential value because the California Supreme Court has accepted cert to decide the issue of “[w]hen a party to an arbitration proceeding makes an offer of compromise pursuant to CCP § 998 and obtains a result in the arbitration more favorable to it than that offer, how, when and from whom does that party request costs?”
In Heimlich, attorney Alan Heimlich (Attorney) sued his client Shiraz Shivji (Client) for unpaid invoices despite a provision in the retainer agreement providing for arbitration. After filing an answer, Client made an offer of settlement under CCP § 998. Later, when the time had passed for Attorney to accept the offer, Client moved to compel arbitration and that request was granted. The arbitration resulted in zero recovery for either side pursuant to an award issued by the arbitrator. Six days after the award was issued, Client asked the arbitrator to award him costs under CCP § 998 because Attorney’s non-recovery was less favorable than the 998 offer Client had made two months before demanding arbitration. Having issued a “final award,” the arbitrator determined that he lacked jurisdiction to act on Client’s request for a cost award. Client then petitioned the court to confirm the award and grant his request for costs under CCP § 998. The trial court confirmed the arbitration award, but denied costs on the grounds that Client had failed to timely submit a 998 claim to the arbitrator, finding that Client should have presented his 998 request for costs to the arbitrator before the award was rendered. Client appealed.
On appeal, the Sixth District Court of Appeal reversed the trial court and ordered that the trial court partially vacate the award and order the matter back to the arbitrator for a hearing and determination of Client’s 998 request. The court held that under the express provisions of CCP § 998(b)(2), the parties in an arbitration can say nothing about the existence of a 998 offer until after the award is rendered. CCP § 998(b)(2) provides as follows:
“If the offer is not accepted prior to trial or arbitration or within 30 days after it is made, whichever occurs first, it shall be deemed withdrawn, and cannot be given in evidence upon the trial or arbitration.” (Emphasis added.)
According to the court in Heimlich, under the terms of the statute, an arbitrator cannot compare the favorability of an arbitration award to a rejected statutory offer until after the award has been made. The court rejected the argument that it is incumbent on a party to ask the arbitrator to make an interim award (versus a final award) without explaining the reasons why. It also rejected the argument that arbitrators should be burdened with the obligation in every case of making inquiry into whether a 998 offer has been made and rejected because that would require the parties to violate CCP § 998(b)(2) (quoted above) by prematurely disclosing the existence of a rejected statutory offer. The court concluded that “[t]he best practice … would be to present evidence of a rejected section 998 offer after an arbitration award resolves the underlying dispute.” 12 Cal. App. 5th at 169. In this regard, the court noted that the AAA rules (which were the provider rules in question) authorize an arbitrator to “assess and apportion the fees, expenses, and compensation” related to an award. While the AAA Rules have no specific provision for awarding costs authorized by CCP § 998, the court stated that “arbitral authority to award costs is presumably subsumed in the authority to award expenses,” citing AAA Rule R-47. Id. at 173. Given, the broad discretion vested in arbitrators under the AAA Rule R-8 to “interpret and apply these rules insofar as they relate to the arbitrator’s powers and duties,” the court reasoned that if and when a party makes a section 998 post-award request, “an AAA arbitrator is empowered to recharacterize the existing award as interim, interlocutory, or partial and proceed to resolve the section 998 request by a subsequent award.” Id. at 173-174.
One commentator has noted that being aware of the Heimlich decision and its broad interpretation of CCP § 998(b)(2) as applied in an arbitral setting may be a “big deal” going forward because it seems to be at odds with (a) the Second District’s decision in Maaso v. Singer, 203 Cal. App. 4th 362 (2012), where the court noted without comment that counsel had raised the 998 issue in general terms prior to an award being made (but then failed to obtain a ruling in time thereafter), and (b) two unpublished decisions, one by the First District and one by the Fourth District, that have interpreted CCP § 998(b)(2) narrowly and so as to permit a party to alert the arbitrator to a 998 offer prior to an award being made. See, Barany v. Andron, 2012 WL 1187934 at *4 (1st Dist. 2012); Wells Fargo Advisors, LLC v. Fernandez, 2013 WL 527381 at *4 (4th Dist. 2013).[1]
As noted in the caption above, the California Supreme Court has accepted cert to decide the issue of “[w]hen a party to an arbitration proceeding makes an offer of compromise pursuant to CCP § 998 and obtains a result in the arbitration more favorable to it than that offer, how, when and from whom does that party request costs?” In all likelihood, we will not hear from the Supreme Court on these issues until sometime in 2019.
Comment: Before an award is formally rendered and served on the parties, the final draft is typically provided to the case manager for proofing and “administrative review.” My suggestion is a party who has made a 998 offer alert the case manager about the 998 offer and the potential need for further proceedings once the award has been issued. While the record will have been closed on the submitted issues, the issue of 998 costs is something that arises post-hearing and is a product of the award. Once the case manager receives the arbitrator’s draft award, he or she can alert the arbitrator of the need for further proceedings and provide the arbitrator with the opportunity to change the title of the award and any “finality” wording. Of course, this all assumes that the California Supreme Court decides that cost awards under 998 are for the arbitrator, and not the court, to decide. Stay tuned!