Ruling grapples with 998 offers, arbitration

Code of Civil Procedure Section 998 offers can have a tremendous impact on litigation. Wins can be enhanced or gutted. Losses can be transformed into spectacular victories. Scott Co. of California v. Blount, Inc., 20 Cal. 4th 1103 (1999) (plaintiff's $670,000 recovery wiped out by shift of post-offer costs and fees of $882,000). And such potency applies to contractual arbitration. But as a recent decision illustrates, while the procedural mechanics of 998 offers in the courts is well-settled, the same cannot be said for arbitration. Heimlich v. Shivji, 2017 DJDAR 5070 (May 31, 2017). And as Heimlich demonstrates, obtaining a timely ruling on such offers during arbitration can be tricky.

In Heimlich, prior to successfully compelling arbitration, the defendant made a 998 offer. In the arbitration, the arbitrator denied recovery to either side. Six days after the arbitration award was entered, the defendant first requested an award of costs pursuant to the 998 offer. But the arbitrator ruled that having issued a final award, he lacked jurisdiction to take any further action. The trial court, in turn, refused to enforce the 998 offer, concluding that the offer was untimely brought to the arbitrator's attention. Heimlich reversed, directing the trial court to enter an order partially vacating the award so that the arbitrator could address the 998 offer, and if the arbitrator refused, for the trial court to do so. As will be seen, however, Heimlich takes a circuitous route to get to that result.

In Heimlich, the 6th District Court of Appeal first discussed prior arbitration decisions concluding that absent an agreement to the contrary, Code of Civil Procedure Section 1284.2 acts as an absolute bar to any recovery of costs incurred in arbitration (those decisions did not involve 998 offers). As Heimlich further explained, decisions positing an absolute bar to cost recovery based on Section 1284.2 begged the question of whether Section 998 operates as an exception to that rule. However, Heimlich observed, in Pilimai v. Farmers Ins. Exchange Co., 39 Cal. 4th 133, 150-52 (2006), the California Supreme Court "establishe[d], at the very least, that trial courts have the authority in arbitration confirmation proceedings to award the costs of arbitration under section 998 ... [and] that whatever the true scope of section 1284.2, section 998 is a statutory exception to any requirement that parties bear their own arbitration costs."

The question then, remained one of procedure. How should an offeror ensure that the arbitrator timely consider an unaccepted 998 offer? Heimlich notes that sticky questions of timing and procedure arise because Section 998(b)(2) prevents a party from putting a 998 offer "in evidence upon the trial or arbitration." Moreover, one decision, Maaso v. Signer, 203 Cal. App. 4th 362, 369 (2012), held that a trial court lacks the power to alter a final award to account for an arbitrator's failure to address cost shifting under Section 998, putting the onus on the party to obtain a ruling on the 998 offer prior to entry of a final award. But Heimlich notes, given 998(b)(2)'s restriction, "a section 998 determination must necessarily postdate an arbitration award." Thus, Heimlich concludes, "the best practice ... would be to present evidence of a rejected section 998 offer after an arbitration award resolves the underlying dispute." (Emphasis added.)

Heimlich discusses possible approaches, such as supplemental awards. However, as Heimlich points out, supplemental awards are typically limited to situations where the arbitrator fails to rule on something that is already at issue. Given the prohibition set forth in 998(b)(2) though, the precondition for such awards would not be present. Similarly, post-award resolution cannot be reconciled with "correcting" an award due to the limited statutory grounds for correction. And while at least one decision contends that "[t]he absence of a statutory provision authorizing amendment of an award does not deprive the arbitrator of the jurisdiction to do so," A. M. Classic Const., Inc. v. Tri-Build Development Co., 70 Cal. App. 4th 1470, 1476 (1999), as Heimlich points out, Tri-Build does not cite to any particular statute or rules conveying such authority. That leaves the use of tentative/interim awards - something well within an arbitrator's powers - but requesting such a process would likely lead to the threshold of a 998(b)(2) nondisclosure violation.

So if supplemental, corrected, amended and interim/tentative awards are not the answer, what is? According to Heimlich, Maaso's conclusion - place the 998 offer before the arbitrator prior to the award being made - presents a procedural "conundrum" given the prohibition in Section 998(b)(2). Noting the tension, a leading practice guide suggests that arbitrators make sua sponte inquiries about 998 offers before issuing a final award. But Heimlich suggests a different maneuver. Relying to a significant degree on the AAA commercial rules for arbitration at play in the matter before it, Heimlich concludes that after the initial award - whatever its label - the "arbitrator is empowered to recharacterize the existing award as interim ... and proceed to resolve the section 998 request by a subsequent award."

There is a curious aspect to the opinion in Heimlich. The entire rationale of the decision is that 998(b)(2) prevents a party from so much as hinting that a 998 offer has been made until after an award has issued. Yet in an unpublished decision from 2013, two of the three panelists in Heimlich flatly rejected such a construction because "The [California Supreme] Court stated 'that language refers to the trial upon the liability which the offer proposed to compromise' ... but 'permit[s] its introduction to prove some other matter at issue.'" Watson v. Knorr, 2013 WL 1944007 *16 (quoting White v. Western Title Ins. Co., 40 Cal. 3d 870, 888-89 (1985)). Oddly, Heimlich makes no mention of White. Yet at least two other unpublished decisions appear to follow it. See Barany v. Andron, 2012 WL 1187934 (1st District, Div. 5, 2012) at *4; see also Wells Fargo Advisors, LLC v. Fernandez, 2013 WL 527381 (4th Dist., Div. 2, 2013) at *4.

What to do then about 998 offers and arbitration? It all seems to depend on White. As Heimlich points out, nothing prevents the parties from stipulating around Section 998(b)(2). But of course, one party may well have a strong reason not to stipulate. If Maaso (by implication) and the two unpublished cases are correct, then there is no prohibition on raising the 998 issue prior to the award - at least in very general terms. For the risk averse, a party could request a tentative/interim award be announced, for the purpose of bringing "any unresolved issues contingent on the award" to the arbitrator's attention. When the interim award comes down, the request to shift costs under 998 could then be presented.

Whatever happens, it may be the trial court that saves the day. Heimlich concludes that if the arbitrator refuses to resolve the 998 offer, the offeror should move to have the award partially vacated on the grounds that the arbitrator "failed to hear evidence material to the controversy." And if the arbitrator cannot or will not reconsider, Heimlich states that the trial court "is required under Pilimai to decide" the 998 issue. For those who've read all the way to here, all of this leads to another question: Who said arbitration is so much more efficient than trial?