By Dale Ortmann and Jennifer Tung
Last week, the California Court of Appeal held that a party’s financial status is relevant to whether or not it can be ordered to comply with a contractual arbitration clause. In Weiler v. Marcus & Millichap Real Estate Investment Services, Inc., (2018 WL2011048) plaintiff sued her real estate broker, alleging that she acquired real property for millions of dollars above fair market value based on defendants’ misrepresentations and other wrongdoing. Plaintiff claimed she sustained significant monetary losses as a result.
The broker moved to compel arbitration, which plaintiff did not oppose. However, three years (and over $15,000 in arbitration costs) later, plaintiff asserted that she could no longer afford her share of the additional arbitration costs, which were projected to total more than $100,000. As a result, plaintiff sought an order from the Court that defendants must either: 1) pay her share of the arbitration costs; or 2) waive their right to arbitration and, instead, allow plaintiff’s claims to be tried in superior court.
The Court of Appeal agreed with the financially-troubled plaintiff. The Court concluded that:
“If sufficient evidence is presented on these issues, and the court concludes the party’s financial status is not a result of the party’s intentional attempt to avoid arbitration, the court may issue an order specifying: (1) the arbitration shall continue so long as the other party to the arbitration agrees to pay, or the arbitrator orders it to pay, all the fees and costs of the arbitration; and (2) if neither of those occur, the arbitration shall be deemed ‘had’ and the case may proceed in the superior court.”
The Weiler Court recognized the long-held public policy of enforcing arbitration agreements. However, it reiterated that forcing a party to remain in arbitration when financially unable to do so will lead to “the very real possibility [that she] might be deprived of a forum” to resolve her grievances. The Court of Appeal stated that this was intolerable. “To hold otherwise would be to turn ‘and justice for all’ into ‘and justice for those who can afford it’ and ‘threaten the very underpinnings of our social contract'”.
Arbitration has its benefits, including greater expediency in many cases. However, in an era where the use of arbitration clauses only seems to increase, the Weiler decision reminds us that not only is arbitration often very expensive, but that public policy demands that parties be given their day in Court—even if the opposing side must pay for it. As the Court of Appeal indicates, a possible solution for parties who are seeking to compel arbitration against a party who claims to be financially unable to proceed is to pay the entire cost of the arbitration and claim reimbursement at the end.
Dale Ortmann is a senior shareholder and co-founder of Hunt Ortmann, with more than 30 years’ experience in construction and real estate law. If you would like additional information about the subject matter of this bulletin, please contact Dale Ortmann at ortmann@huntortmann.com
Jennifer Tung is an associate with Hunt Ortmann who’s practice includes general business litigation and contract disputes. If you would like additional information about the subject matter of this bulletin, please contact Jennifer Tung at tung@huntortmann.com