ADR Case Updates
Liquidated Damages in Settlement Invalidated; Reference to FAA Makes Arbitration Clause Enforceable; Parties Can Delegate To Arbitrator Question of Arbitrability, 06/13/2014
Liquidated damages provision in settlement agreement is unenforceable.
In Purcell v. Schweltzer (2014) 224 Cal. App. 4th 969, a San Diego case, the trial court held a liquidated damages provision in a settlement agreement to be unenforceable. Defendant gave a promissory note to plaintiff for $85,000. When defendant defaulted, plaintiff filed suit. The parties signed a settlement agreement providing that defendant would pay $38,000 with 8.5 % interest in installments over 24 months. Each payment was due on the first of the month. To be considered timely, each payment had to be received by the 5th of the month. In the event that a payment was not timely made, it was considered a breach of the agreement, making the original entire amount of $85,000 due. After making timely payments for 18 months, defendant made a payment that was 6 days late. Plaintiff accepted the payment and, nevertheless, applied for entry of judgment in the amount of $58,829.35. Defendant continued making payments until the original $38,000 plus interest was fully paid, and then sought to set aside the default judgment on the ground that it was an unfair penalty for making one late payment. The trial court agreed and set aside the judgment. Plaintiff appealed.
Affirmed. Under Civil Code § 1671, a liquidated damages provision in a contract becomes an unenforceable penalty if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from the breach. Here, the default judgment was approximately $20,000 more than the agreed-upon settlement amount, and bore no reasonable relationship to the actual damages plaintiff could anticipate upon defendant's breach. Indeed, plaintiff ultimately received the full settlement amount. Therefore, the trial court was correct in setting aside the default.
Practice Pointer. This common practice — increasing the amount of any judgment in event of default to motivate a defendant to pay in full — is a pitfall for the unwary. The risk of having a judgment set aside may be reduced (but not totally eliminated) by taking the opposite approach. Provide in the settlement agreement that defendant agrees to pay the larger sum, perhaps the amount sought in the complaint, but plaintiff will accept less if timely paid based upon the time-value of money and reality that creditors will accept less if they can avoid attorney fees and costs. Instead of impermissible liquidated damages upon breach, the parties simply agree to a discounted amount if timely paid pursuant to agreed-upon terms. Since any judgment entered upon default would be for the amount sought in the complaint, a reviewing court may be less inclined to find impermissible liquidated damages.
Reference to FAA Makes Arbitration Clause Enforceable.
In Gloster v. Sonic Automotive, Inc., (2014) 226 Cal. App. 4th 438, a former employee was compelled to arbitrate his employment-related claims against his former employer, even though a third-party (Toyota Motor Sales U.S.A., Inc.) was involve. Gloster was employed by Melody Toyota, a subsidiary of Sonic Automotive, Inc. His employment agreement with Melody included a provision whereby he agreed to arbitrate under the Federal Arbitration Act (9 U.S.C. § 1 et, seq.; "FAA"). He sued Melody, Sonic, and Toyota for employment related claims, including retaliation and constructive termination. Melody sought to compel arbitration. The trial court denied the motion, concluding that Gloster's claims against Toyota were not subject to the arbitration agreement because Toyota was not a party to the arbitration agreement.
Reversed in part. Code of Civil Procedure § 1281.2(c) allows the trail court to deny a petition to compel arbitration if a party to the arbitration agreement is also a party to a pending court action with a third-party arising from the same transaction and there is a possibility of conflicting rulings. Therefore, under California law, the trial court was authorized to deny the motion in light of the potential for conflicting rulings in the arbitration with Melody and the court action with Toyota. However, Gloster's arbitration agreement specifically stated that any arbitration would be conducted under the FAA. Since the FAA does not contain any provision analogous to section 1281.2(c), the trial court erred in denying the motion to compel.
Practice Pointer. As this case demonstrates, reference to the FAA enhances the enforceability of an arbitration agreement by eliminating one basis to oppose arbitration under state law. The language in the subject agreement that was cited by the appellate court provided that arbitration "shall be submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act..."
Parties Can Delegate To Arbitrator Question of Arbitrability.
In Tiri v. Lucky Chances, Inc., (2014) 226 Cal. App. 4th 231, the appellate court held that the arbitrator, and not the trial court, must rule on the enforceability of an arbitration agreement where the parties delegated such authority to the arbitrator. Plaintiff was hired as a cook by defendant, a card-club casino and restaurant. Several years later, defendant asked plaintiff to sign a mutual arbitration agreement and she agreed. The agreement included a "delegation clause," stating that the parties agreed to delegate to the arbitrator (and not the court) any questions about the agreement's enforceability. Five years later, defendant terminated plaintiff, allegedly while she was on medical leave for heart surgery. Plaintiff sued for wrongful termination. Defendant moved to compel arbitration. Finding the agreement unconscionable, the trial court refused to compel arbitration and denied the motion. Defendant appealed claiming the delegation clause was valid and the question of enforceability was one for the arbitrator.
Reversed. Parties to an arbitration agreement may agree to delegate to the arbitrator, instead of the court, questions regarding the enforceability of the agreement. Such clauses are valid so long as they are clear and not revocable on state law grounds, such as unconscionability. An agreement is unconscionable if it leaves one party with no meaningful choice but to accept its terms, which are so unfairly one-sided or unduly oppressive that they shock the conscience. Here, the delegation clause stated unambiguously that an arbitrator, and not the court, had the exclusive authority to determine any issue regarding the enforceability of the arbitration agreement. Although the delegation clause was presented to plaintiff on a take-it-or-leave-it basis, it was not overly harsh because both sides were equally bound by it. Thus, the trial court erred in denying the motion to compel arbitration. It will be for the arbitrator to determine the conscionability of the agreement as a whole and its other severable provisions.
Practice Pointer. As this case indicates, delegation clauses in arbitration agreements are valid if they are clear and mutually applicable. For counsel representing clients who wish to arbitrate disputes, inserting such a clause in the client's arbitration agreement would enhance its enforceability.
Federal privilege law governs admissibility of documents and testimony regarding mediation privilege and enforceability of alleged settlement, where both federal and state law claims are involved.
In Wilcox v. Arpaio, 753 F. 3d 872 (9th Cir. 2014), the Ninth Circuit held that Federal privilege law governs the admissibility of documents and testimony regarding mediation privilege and the enforceability of an alleged settlement, where both federal and state law claims are involved. Plaintiffs Mary Rose Wilcox, a Maricopa County (Arizona) County Supervisor, and her husband, Earl Wilcox, sued Maricopa County and certain present and former County officials. Plaintiffs pleaded federal and state law claims alleging they were wrongfully investigated, prosecuted, and harassed. Because other claimants pursued similar claims, the County directed County Manager David Smith to establish an alternative dispute resolution program to resolve all claims. Smith appointed Christopher Skelly, a retired judge, to resolve those claims. Plaintiffs filed a motion in district court to enforce their alleged settlement with the County for $975,000. They submitted an email from Judge Skelly to their lawyer confirming the settlement. At a subsequent evidentiary hearing, Smith testified that he had authorized Skelly to communicate the settlement to plaintiffs' counsel. The court granted the motion to enforce the settlement. The County then argued that Smith's testimony and the email were privileged under Arizona's mediation privilege and, therefore, inadmissible.
Affirmed. Under Arizona's mediation privilege statute, communications made in mediation remain protected. Although Federal Rule of Evidence 501 provides that federal common law governs claims of privilege, state law controls privilege as to a claim or defense where state law provides the rule of decision. Here, the plaintiffs alleged federal and state law claims, and their testimony and the email related to both. When the same evidence relates to federal and state law claims, as here, federal privilege law governs. The County's argument that Arizona's mediation privileged applied to make the evidence inadmissible was unavailing. Therefore, the district court correctly admitted the evidence and entered judgment for plaintiffs.
Trial Court may compel parties to mediate construction defect disputes against builder under Right to Repair Act.
In The McCaffrey Group v. Superior Court (Cital) (2014) 224 Cal. App. 4th 1330, the trial court correctly compelled the parties to mediate a construction defect dispute against a builder under the Right to Repair Act (Civ. Code § 895 et, seq.; "Act"). The McCaffrey Group constructed 24 single family homes in a Fresno development. Pursuant to the Act, McCaffrey's sales agreements provided for a two-step prelitigation process for addressing alleged construction defects. First, it required homeowners to give notice of alleged defects and an opportunity for McCaffrey to repair it. Second, if a claim remained unresolved, the homeowner had to submit it to non-binding mediation. Jesus Cital and other homeowners sued McCaffrey for construction defects. McCaffrey sought to compel the contractual prelitigation process. Because the contractual provisions lacked strict deadlines, the trial court denied the motion. McCaffrey filed a petition for writ of mandate, seeking to compel the parties to proceed with the prelitigation process.
Petition granted. The Act establishes a nonadversarial prelitigation process that a homeowner must initiate before bringing a construction defect suit, and sets forth certain deadlines. Alternatively, the Act gives builders the option of including their own nonadversarial prelitigation process in a contract when the home is first sold. The builder is not required to provide a particular procedure or to comply with deadlines in the Act. Here, McCaffrey chose to include alternative procedures in its contract that were not rendered unenforceable because they differed from the statutory procedure. Moreover, the contract was not unconscionable or unenforceable. Therefore, the appellate court granted McCaffrey's petition for writ of mandate and directed the trial court to compel McCaffrey's prelitigation process.
In Addition, Arbitration Was Compelled In These Five Cases:
Casas v. CarMax Auto Superstores California LLC (2014) 224 Cal. App. 4th 1233 (Former sales consultant must arbitrate employment dispute against employer notwithstanding fact that employment agreement gave employer the exclusive right to modify the agreement, which did not make it "illusory");
Sanchez v. CarMax Auto Superstores California LLC (2014) 224 Cal. App. 4th 398 (Former employee must arbitrate wrongful termination claim against employer based on valid arbitration agreement that was not unilateral or oppressive because it was binding on both parties);
Lane v. Francis Capital Management LLC (2014) 224 Cal. App. 4th 676 (Employee must submit claims against former employer to arbitrator, except claim for failure to pay wages, which triggered Labor Code § 229 protections and must be pursued in court);
Johnson v. Consumerinfo.com, Inc., (2014) 745 F. 3d. 1019 (9th Cir. 2014)(In consumer action based upon defendant's credit report monitoring program, district court granted defendant's motion to compel arbitration and denied plaintiff's motion for class certification, which was not appealable to the Ninth Circuit under 9 U.S.C. § 16(b) that bars interlocutory appeals of orders compelling arbitration and staying of judicial proceedings); and
BG Group PLC v. Republic of Argentina, ___ U.S. ___, 134 S. Ct. 1198 (2014) (British Company may arbitrate its dispute with Argentina in U.S., despite failure to first file lawsuit in Argentina courts).
However, The Courts Refused to Compel Arbitration In These Two Cases:
Carmona v. Lincoln Millennium Car Wash, Inc., (2014) 226 Cal. App. 4th 74 (Car wash companies may not compel Spanish-speaking employees to arbitrate wage and hour claims based on arbitration agreements printed in English).
Goldman, Sachs & Co., v. The City of Reno (2014) 747 F. 3d. 733 (9th Cir. 2014) (Goldman Sachs does not need to submit dispute with city to the Financial Industry Regulatory Authority since both sides agreed to forum selection clause that superseded obligation to arbitrate).
The California opinions are posted at: click here, the Ninth Circuit opinions at: click here, and the U.S. Supreme Court case at: click here.
Steve Kruis sends periodic case updates by e-mail that summarize recent developments in the Alternative Dispute Resolution area. If you would like to be included on our distribution list, please send us an e-mail or call 619.233.1323.