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California Supreme Court Affirms Arbitrators’ Awards Denying Attorney Fees: Impact on Attorneys’ Decisions to Arbitrate or Not?

by Paul Fisher, Edited by Judith Stalk

On April 17, 2000, the California Supreme Court rendered two decisions affirming arbitrator awards which denied attorney fees in the presence of attorney fee provisions in the underlying contracts. These decisions should impact counsel’s determination of whether to arbitrate or resolve a contract claim when the contract contains an attorney fee provision. At issue in these two decisons is the Court’s determination not to overturn an arbitrator’s award, even if the arbitrator erred in interpreting the law. Also at issue is the Court’s refusal to overturn an arbitrator’s decision which determined that there was no prevailing party.

In Moshonov v. Walsh, 22 Cal.4th 771; –Cal.Rptr.2d –; — P.2d –, the California Supreme Court affirmed the decision of the Court of Appeal, First Dist. in which an arbitrator refused to award attorney fees to defendants as the prevailing parties. Both courts relied on Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 28 [10 Cal. Rptr.2d 183, 832 P.2d 899], which held that “[w]hether or not the arbitrator correctly interpreted the [attorney fees] clause, the award is not subject to judicial review on the basis of an error of law.” The Supreme Court concluded the arbitrator had the power to decide the entire matter of recovery of attorney fees; that the recovery or nonrecovery of fees was one of the issues of law and fact “submitted to the arbitrator for decision” (Moncharsh), and that the arbitrator’s decision was final and could not be judicially reviewed for error.

In the companion decision, Moore v. First Bank of San Luis Obispo, 22 Cal.4th 782; — Cal.Rptr.2d –; –P.2d –, issued the same day as Moshonov, the Supreme Court affirmed the decision of the Court of Appeal, Second Dist., in which a panel of arbitrators ordered each party to bear its own attorney fees without making a finding as to the existence of a prevailing party. The Supreme Court found the arbitration panel granted plaintiffs the equitable relief they sought on the contract causes of action, but no monetary damages. The Court reasoned “Because the grounds for relief are thus not set forth on the record, the possibility remains (emphasis added) that the arbitrators based the award to a significant degree on noncontractual theories, and thus saw no party that had unequivocally ‘prevail[ed] on the contract’”. The Supreme Court expressed very similar language as in Moshonov. “‘The arbitrator’s resolution of these issues is what the parties bargained for in the arbitration agreement’” (the Moore court quoting Moncharsh).

When the Court uses language as “possibility remains”, this implies the Court speculated in its reasoning or stretched in order to affirm the arbitrator in light of Moncharsh. This sends a strong message that the Court will not interfere with an arbitrator’s award once the parties have chosen to arbitrate their disputes. The Supreme Court in both Moshonov and Moore concluded, in identical language “the arbitrator has not ‘exceeded [his or her] powers’ (section 1286.2, subd. (d), 1286.6, subd. (b) as we have understood that narrow limitation on arbitral finality. (Moncharsh; Advanced Micro Devices, Inc. V. Intel Corp. (1994) 9 Cal.4th 362, 376-381 [36 Cal. Rptr.2d 581, 885 P.2d 884] (Advanced Micro Devices).)”

In both Moshonov and Moore, the parties seeking the award of attorney fees before the Court of Appeal relied on DiMarco v. Chaney (1995) 31 Cal. App. 4th 1809 [37 Cal.Rptr.2d 558] (DiMarco). The arbitrator in DiMarco denied the defendant’s request for fees, stating only that he believed he had the discretion to do so. The Court of Appeal affirmed the Superior Court correction of the award by giving the defendant reasonable attorney fees. The Court of Appeal concluded “the arbitrator’s decision to deny Chaney an award of attorney fees, notwithstanding his finding Chaney was the prevailing party, exceeded his powers because the agreement provides ‘the prevailing party shall be entitled to reasonable fees and costs.’ “Having made a finding Chaney was the prevailing party, the arbitrator was compelled by the terms of the agreement to award her reasonable attorney fees and costs” (DiMarco, supra, at 1809).

Issues Raised for Litigators Considering Whether to Arbitrate When There is an Attorney Fee Provision in the Contract

Attorney’s fees are not awardable in contract disputes unless there is a provision in the underlying contract calling for attorney’s fees in the event of dispute. The presence of an attorney’s fee provision in a contract may in some cases be a significant influence on a party and its attorney in deciding to proceed with litigation. When a claim is based, at least in part, on a written contract containing an attorney fee provision, the party and attorney may have the expectation, either as plaintiff or defendant, that when they “win” at trial or arbitration, they will also receive an award for attorney fees.

What will the impact be when parties are not automatically awarded attorney fees in arbitration? Are the stakes, and incentives, therefore reduced in going to arbitration? There is neither the incentive of automatically being awarded attorney fees as the prevailing party, nor is there the disincentive of automatically having to pay attorney fees to the prevailing party(s) if you lose.

I believe arbitrators have felt compelled to award attorney fees to the prevailing party in arbitration. However, Moshonov and Moore illustrate how clever or thoughful arbitrators can find ways not to award attorney fees in a manner that will be affirmed by the Supreme Court. Likewise, DiMarco provides instruction to arbitrators on what not to do when deciding not to award attorney fees.

The Supreme Court strongly supports the public policy of not overturning arbitrator awards, even in those instances of arbitrator error, except in the very limited circumstances set forth in Moncharsh, Advanced Micro Devices, Inc. and Code of Civil Procedure section 1286, et seq. Awarding attorney fees to the prevailing party is merely one additional issue the Court has addressed and determined not to disturb arbitrators’ awards.

The bottom line: attorney fees are not guaranteed to the prevailing party in arbitrations of contract disputes containing an attorney fee provision.