Heimlich v. Shivji

• Decision Date: 30 May 2019
• Docket Number: S243029
• Citation: 247 Cal.Rptr.3d 603,441 P.3d 857,7 Cal.5th 350
• Parties: Alan HEIMLICH, Plaintiff and Respondent, v. Shiraz M. SHIVJI, Defendant and Appellant.
• Court: California Supreme Court

7 Cal.5th 350

441 P.3d 857

247 Cal.Rptr.3d 603

Alan HEIMLICH, Plaintiff and Respondent,

v.Shiraz M. SHIVJI, Defendant and Appellant.

S243029

Supreme Court of California.

May 30, 2019

Ellahie & Farooqui, Javed I. Ellahie, Omair M. Farooqui and Leila N. Sockolov, San Jose, for Defendant and Appellant.

Law Offices of Nicholas D. Heimlich, Nicholas D. Heimlich, Palo Alto, and Caitlin E. Kaufman, San Mateo, for Plaintiff and Respondent.

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, 157 Cal.Rptr.3d 558, 301 P.3d 1167.) 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, 45 Cal.Rptr.3d 760, 137 P.3d 939.) 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 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."

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, 136 Cal.Rptr.3d 853, 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, 218 Cal.Rptr.3d 576, 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, 218 Cal.Rptr.3d 576, quoting § 1286.2, subd. (a)(5)) when he summarily rejected Shivji’s attempt to raise the issue ( Heimlich , at pp. 175–177, 218 Cal.Rptr.3d 576 ).

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, 205 Cal.Rptr.3d 359, 376 P.3d 506.) Consequently, 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, 10 Cal.Rptr.2d 183, 832 P.2d 899.)

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, 77 Cal.Rptr.3d 613, 184 P.3d 739.) 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, 132 Cal.Rptr.2d 250 ; see Moshonov v. Walsh (2000) 22 Cal.4th 771, 776, 94 Cal.Rptr.2d 597, 996 P.2d 699 ; Maaso v. Signer , supra , 203 Cal.App.4th at p. 377, 136 Cal.Rptr.3d 853.)

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, 136 Cal.Rptr.3d 853 ; Corona v. Amherst Partners , supra , 107 Cal.App.4th at pp. 706–707, 132 Cal.Rptr.2d 250.) Shivji’s request for costs in his arbitration claim and his March 11 attempt to raise the issue 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, 86 Cal.Rptr.2d 614, 979 P.2d 974.) 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 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, 221 Cal.Rptr. 509, 710 P.2d 309, 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, 221 Cal.Rptr. 509, 710 P.2d 309, 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...