Thursday, April 1, 2004
Court of Appeal Rules:
Fee Arbitration Victory Partly Protects Law Firm From Suit
By DAVID WATSON, Staff Writer
A lawyer who wins a binding fee arbitration is not protected from a subsequent suit by a client over the same conduct, but the client cannot seek as damages any part of the fee awarded, the First District Court of Appeal has ruled.
In an opinion Tuesday for Div. Three, Justice Stuart Pollak rejected the contention that arbitration proceedings under the mandatory fee arbitration statute, which begins at Business and Professions Code Sec. 6200, were entitled to res judicata or collateral estoppel effect if the parties agreed to be bound by the result.
But Pollak said that while it was error for San Francisco Superior Court Judge Ronald Quidachay to sustain, without leave to amend, a demurrer filed by The Arns Law Firm to the suit filed by former client George Liska, Liska could maintain his breach of contract and fraud suit only if he could allege damages other than the fees at issue in the arbitration proceeding.
The Arns firm settled Liska’s products liability suit for $600,000 before trial but after a trial date had been set, entitling it to an increased fee. Liska disputed the fees, seeking arbitration through the Bar Association of San Francisco, but an arbitration panel found in the firm’s favor.
Oral Agreement Claimed
In his suit, Liska claimed the firm’s lawyers persuaded him to settle by orally agreeing to forego the increased fee, which under the retainer agreement rose from one-third to 40 percent if the settlement came after a trial date had been set.
Quidachay sustained the firm’s demurrer and also granted its petition to confirm the arbitration award.
Pollak said proceedings under the 1978 fee arbitration law could not be given full preclusive effect, since they were intended to be informal.
Only the client’s liability for fees and costs are subject to the statuteóclaims by the client for affirmative relief cannot be consideredóand clients are not represented by counsel at the arbitration hearings, Pollak pointed out.
He added that the result of fee arbitrations under the law are binding only if both parties agree, as Liska and the firm did, and cited Sec. 6204(e), which provides:
“Except as provided in this section, the award and determinations of the arbitrators shall not be admissible nor operate as collateral estoppel or res judicata in any action or proceeding.”
Purpose of MFA
The justice characterized as “inconsistent with the language, the purpose and the legislative history of the MFA” the law firm’s contention that the provision of Sec. 6204(a) which allows the parties to agree to make the arbitration binding came within the ambit of the “[e]xcept as provided” clause of Sec. 6204(e).
“Section 6204, subdivision (a) provides only that the parties may agree to be bound ‘by the award of the arbitrators’ (italics added), not by their findings. In contrast, subdivision (e), provides that ‘the award and determinations of the arbitrators’ are not admissible for the purposes of res judicata and collateral estoppel. Moreover, the remaining portion of subdivision (a) provides that a party who ‘willfully fails to appear at the arbitration hearing’ is not entitled to seek a trial de novo even if that party did not agree to be bound by the arbitration award. In determining whether a failure to appear was willful, ‘the court may consider any findings made by the arbitrators on the subject of a party’s failure to appear.’ ([I]talics added.) Thus, where the Legislature intended to permit the court to consider the findings of the arbitrators, it said so explicitly, but it otherwise limited the binding effect to which the parties might agree to the award itselfói.e., to the amount of attorney fees (and/or costs) to which the attorney is entitled (or must refund).”
The justice continued:
“The statutory language reflects full appreciation of the difference between the award of fees and costs that the arbitrators make and issues that they determine in order to decide what the award should be.”
He noted that while in Liska’s case it was the lawyers who sought to give preclusive effect to the arbitration findings, under different circumstances the shoe could be on the other foot.
“[I]f the arbitrators reduced the reasonable value of the attorneys’ services upon a finding that the attorneys had performed below the standard of care, and collateral estoppel applied, the attorneys would be bound by the finding of negligence in a subsequent malpractice action,” he observed. “Clearly such a result was never intended.”
But Pollak said Liska could not “seek to undo” the arbitration award by claiming the same fees as a element of damages in his lawsuit.
“The arbitrators having decided the amount of fees the firm was entitled to recover, and the parties having agreed the award would be binding, Liska may not pursue either a breach of contract or fraud cause of action to recover the disputed fees based on the claim that the firm agreed to accept a lesser amount. However, to the extent that Liska is alleging that as the result of the firm’s failure to perform services it agreed to perform or as the result of some other misconduct by the firm, he incurred damages other than payment of attorney fees and costs—such as a reduced recovery from the defendant in the underlying action—that claim could not have been decided in the arbitration. Liska is entitled to pursue that claim in the present action, and he is not bound by the factual findings the arbitrators made in the course of explaining their award.”
The case is Liska v. The Arns Law Firm, 04 S.O.S. 1646.
Copyright 2004, Metropolitan News Company