Petitioners Coopers & Lybrand, a partnership (Coopers) and Kurt S. Glassman (Glassman) (collectively, Coopers or petitioners), seek a writ of mandate directing respondent superior court to vacate an order overruling their demurrer to real party in interest Wilfred Schwartz's (Schwartz) complaint, and to enter an order sustaining their demurrer without leave to amend.
The issue presented is whether an agreement for a binding audit is included within the definition of an agreement to arbitrate (Code Civ. Proc., § 1280, subd. (a)),
We conclude agreements to arbitrate include agreements providing for valuations, appraisals and similar proceedings, including audits. A formal hearing and the taking of evidence are not essential to arbitration, which alternatively may consist of a submission of a controversy to an independent examination. Arbitral immunity is coextensive with judicial immunity and extends to arbitrators in appraisals, valuations and similar proceedings, including audits.
However, while Schwartz and Atari agreed to be bound by Coopers's audit, because we cannot say as a matter of law their agreement reflected the intent to conduct an arbitration within the ambit of the statutory
FACTUAL & PROCEDURAL BACKGROUND
On August 15, 1988, Schwartz filed a verified first amended and supplemental complaint for professional negligence, breach of fiduciary duty, breach of contract, fraud, defamation and declaratory relief. Schwartz named as defendants Coopers, Glassman, Atari Corporation, a Nevada corporation (Atari), and Does 1 to 20.
Schwartz alleged in relevant part: Coopers is a worldwide accounting firm. Schwartz was the majority shareholder and chief executive officer of The Federated Group, Inc. (Federated). On or about October 4, 1987, Schwartz sold his controlling interest in Federated to FAC Delaware Corp. (FAC), a wholly owned subsidiary of Atari, for a total purchase price of about $35 million. As a result of the transaction, FAC merged with Federated and Federated became a wholly owned subsidiary of Atari.
On October 4, 1987, Atari and Schwartz also entered into a related agreement, appended as an exhibit to the complaint, which provided the parties would retain the independent audit firm of Coopers to conduct an examination of Federated's September 30, 1987, balance sheet in accordance with generally accepted auditing standards. Coopers was to determine whether the balance sheet required certain adjustments which would affect the value of the transaction.
Paragraph 6 of said agreement stated: "The Audit shall be a conclusive determination of the matters covered thereby and shall be binding upon the parties and shall not be contested by any of them and, in the event of nonperformance by the parties hereto, the non-breaching party may obtain judgment thereon in any court of competent jurisdiction or exercise any other remedies arising therefrom (and shall be entitled to costs and attorney's fees)."
Coopers, through a staff headed by Glassman, issued its final report on February 29, 1988.
In the first cause of action, Schwartz alleged the petitioners overstated the adjustments by $19 million, so as to require Schwartz to pay Atari $5 million, and petitioners' conduct amounted to professional negligence and malpractice.
In the second cause of action, Schwartz pleaded petitioners breached their fiduciary duty, conspired against him and showed partiality toward Atari, with the expectation of receiving future business from Atari.
The trial court overruled petitioners' demurrer as to both causes of action and ordered petitioners to answer within 30 days. As a basis for the ruling, the minute order states, inter alia, that Baar v. Tigerman (1983) 140 Cal.App.3d 979 [211 Cal.Rptr. 426, 41 A.L.R.4th 1004] supported Schwartz's position on the issue of arbitral immunity. Petitioners then sought review of the ruling by way of the instant petition for writ of mandate.
This court ordinarily will not intervene to review rulings on pleadings. (See Babb v. Superior Court (1971) 3 Cal.3d 841, 851 [92 Cal.Rptr. 179, 479 P.2d 379].) However, in view of the significant questions presented with respect to the definition of arbitration and the applicability of arbitral immunity, we directed the issuance of an alternative writ.
Petitioners contend as a matter of law (1) they are entitled to arbitral immunity, and (2) that no fiduciary relationship exists.
1. Standard of appellate review.
2. Legislature broadened definition of arbitration agreement to include agreement calling for valuation, appraisal, or similar proceeding.
Section 1280, added in 1961, provides in pertinent part: "(a) `Agreement' [to arbitrate] includes but is not limited to agreements providing for valuations, appraisals and similar proceedings. ..." (Italics added.)
Section 1280.1, enacted some 24 years later in 1985, states in relevant part: "An arbitrator has the immunity of a judicial officer from civil liability when acting in the capacity of arbitrator under any statute or contract. [¶] This section shall remain in effect only until January 1, 1991, and as of that date is repealed, unless a later enacted statute, which is enacted before January 1, 1991, deletes or extends that date." (Italics added.)
Section 1280, subdivision (a), is ambiguous because it is subject to more than one interpretation. "[A]greements providing for valuations [and] appraisals" may include agreements to submit to an independent examination. Alternatively, the term may be construed as referring only to those agreements wherein the parties submit a disputed matter to a third party who will, following an adjudicatory type proceeding, render an award fixing value.
In order to put this case into perspective and to construe properly the controlling statutes, we deem it necessary to trace the evolution of section 1280, subdivision (a), and section 1280.1.
b. Historical background.
California's first arbitration statute was enacted in 1851. (Stats. 1851, §§ 380-389, pp. 111-113.) It was reenacted in 1872 as Code of Civil Procedure sections 1281 to 1290.
In the early case of M.E. Church v. Seitz (1887) 74 Cal. 287, 292 [15 P. 839], our Supreme Court stated: "a contract by which the value of property or the amount of damage is, for the purpose of the contract, to be fixed by third persons, is not a submission to arbitration, and therefore to enforce it does not trench upon the jurisdiction of the courts. Now, if this is so, — if such a proceeding is not analogous to the investigation by a court of a controversy between the parties, — why need it be conducted according to the rules which govern courts in their investigations? We think that it need not; that the proceeding is a mere appraisement or valuation, which, although binding upon the parties, is not the submission of a controversy to arbitration, and is, therefore, not subject to the rules which govern arbitrators." (Italics added; accord Dore v. Southern Pac. Co. (1912) 163 Cal. 182, 189 [124 P. 817]; Thompson v. Newman (1918) 36 Cal.App. 248, 251-252 [171 P. 982].)
Unlike an arbitration, which presupposed a controversy to be tried, an appraisal or valuation was viewed as "`a mere auxiliary feature of a contract of sale, the purpose of which [was] not to adjudicate a controversy, but to avoid one.'" (Thompson v. Newman, supra, 36 Cal. App. at p. 251.)
The historical basis for distinguishing between appraisal and arbitration was that under the common law and the pre-1927 statutes, agreements to arbitrate were not specifically enforceable. (Kagel, Labor and Commercial Arbitration Under the California Arbitration Statute (hereinafter cited as Kagel) (1950) 38 Cal.L.Rev. 799, 814.) Reasons given at the time to support this dichotomy included (1) arbitration agreements tend to oust the courts of jurisdiction and therefore should not be tolerated, and (2) such agreements are by their nature unenforceable by a court of equity because they call for personal services. (Comment, supra, 17 Cal.L.Rev. 643-645.) To avoid the doctrine barring specific enforcement of arbitration agreements, the courts held that if no "controversy" existed, or if no formal hearing and taking of evidence was intended, the arrangement was for appraisal, not arbitration, and therefore was enforceable. (Kagel, supra, at p. 815.)
In 1927, section 1280 was added and provided in relevant part: "A provision in a written contract to settle by arbitration a controversy thereafter
Although the 1927 statute provided for the specific enforcement of arbitration agreements, the distinction between arbitration and appraisal persisted. For example, in Rives-Strong Bldg. v. Bk. of America (1942) 50 Cal.App.2d 810, 817 [123 P.2d 942], the court found no arbitration agreement existed, and observed the lease agreement in issue contained "no conditions or restrictions placed upon the persons named, no method of procedure suggested and no hearings or notices mentioned. In fact, the provision is so aptly worded for the purpose of requiring a mere appraisal or valuation that if the word `appraiser' is substituted for the word `arbitrator' in the lease no serious contention could be made that the parties intended it to be a statutory arbitration agreement."
Our Supreme Court reiterated these principles in Bewick v. Mecham (1945) 26 Cal.2d 92, 97-98 [156 P.2d 757, 157 A.L.R. 1277], wherein it stated: "`Submissions to determine values are of two kinds — first, where the valuers are to examine the property and fix the value in accordance with their own opinion or judgment; second, where they are to afford the parties a hearing, and an opportunity to offer evidence, and are to adjudge the value upon a consideration of the evidence, as well as their own opinion. In cases of the first class, it is usually held that the agreement is not properly a submission to arbitration and is not subject to the rules which govern arbitrators.... Church v. Seitz, 74 Cal. 287 [15 P. 839], was [a] case of this class and it may be considered as establishing this doctrine in this state. [Citations].'"
c. 1961 revision brought appraisals/valuations within arbitration.
In 1960, the California Law Revision Commission (the Commission) submitted its recommendations to modify the arbitration law. (Recommendation and Study Relating to Arbitration (Dec. 1960) 3 Cal. Law Revision Com. Rep. (1961) (hereafter Recommendation), G-1.) The Commission's study was authored by Professor Kagel, a recognized expert in the field, who served as research consultant to the Commission. (Recommendation, supra, at p. G-25.)
With respect to the second objection, namely the lack of either a formal hearing or the taking of evidence, the Commission recognized "even in a true arbitration, the parties may dispense with either a formal hearing or the taking of evidence or both. [Fn. omitted.]" (Recommendation, supra, at p. G-35.)
The Commission recommended: "The arbitration statute should be broadened to apply to agreements for appraisals and valuations. The distinction between `appraisal' and `arbitration' agreements was created by the courts at a time when the early statutory attempts to provide for enforcement of arbitration agreements imposed cumbersome procedural requirements upon the arbitration process. If it appeared from the nature of the agreement that the parties desired a determination of a particular fact — such as the value of certain property — and did not contemplate a formal proceeding in which evidence would be received, the courts found that the proceeding was an `appraisal' and not an `arbitration' in order to hold that the cumbersome statutory formalities were inapplicable. Since neither the present California arbitration statute nor the statute recommended by the Commission requires the observance of such formalities in the conduct of an arbitration proceeding, there is no longer any reason to preserve the judicially created distinction between these proceedings." (Recommendation, supra, at pp. G-5, G-6, italics added.)
Toward that end, the Commission drafted a bill revising the arbitration law, which bill was enacted without change and signed into law on May 22, 1961. (See legislative history in Feldman, Arbitration Modernized — The New California Arbitration Act (1961) 34 So.Cal.L.Rev. 413, fn. 1.)
Thus, the inclusion in section 1280, subdivision (a), of "agreements providing for valuations [and] appraisals" within the definition of arbitration agreements was in direct response to the Commission's recommendation "that the California statute be amended to include a provision which
Based on this historical overview, we conclude the 1961 statute erased the judicial distinction between agreements to arbitrate disputes and agreements providing for independent examinations by way of valuations, appraisals and similar proceedings, such as audits, and brought such agreements within the arbitration law. As for the requirement that there exist a controversy, it is sufficient the parties contractually have agreed to resort to a third party to resolve a particular issue.
3. Arbitral immunity attaches to appraisal/valuation variety of arbitration.
In Baar v. Tigerman, supra, 140 Cal.App.3d 979, authored by this division, the arbitrator breached his contract to render a timely award. We recognized that an arbitrator enjoys immunity while acting in a quasi-judicial capacity, but held the contractual obligations of an arbitrator to the parties involved also must be given credence. We concluded the policy behind arbitral immunity would not be served by extending arbitral immunity to the failure to render a timely award. (Id., at p. 985.)
The bill resulted in section 1280.1, which codified arbitral immunity as the "immunity of a judicial officer from civil liability when acting in the capacity of arbitrator under any statute or contract." (§ 1280.1.)
The Legislature expressed some concern about the impact of such sweeping arbitral powers by providing in the statute that the "section shall remain in effect only until January 1, 1991," unless extended. (§ 1280.1.)
In determining the scope of arbitral immunity, section 1280.1 must be read in conjunction with the definition of arbitration, which is broadly defined in section 1280, subdivision (a), as including valuations, appraisals "and similar proceedings," such as audits. While section 1280.1 was intended to extend to arbitrators the same broad immunity enjoyed by judges, as we explain, the statute had the further effect of cloaking arbitrators in independent examinations with the immunity of other arbitrators.
We are mindful that an appraisal or valuation proceeding does not necessarily call for an adjudication in the sense of weighing conflicting evidence or exercising discretion. It is therefore arguable the policy underlying arbitral immunity is not served by conferring immunity upon an independent auditor-arbitrator whose sole task is to determine value in accordance with accounting or appraisal principles. However, one cannot have an arbitration of any type absent an arbitrator. Further, we must presume that in enacting the 1985 immunity provision, the Legislature was aware of the broad definition of arbitration in section 1280, subdivision (a). (Bailey v. Superior Court (1977) 19 Cal.3d 970, 977, fn. 10 [140 Cal.Rptr. 669, 568 P.2d 394].)
For these reasons, we read section 1280.1 as conferring full arbitral immunity upon arbitrators in appraisals, valuations and similar proceedings, such as audits, irrespective of the arbitrator's particular role in a given situation.
We recognize that in the instant case, it is accountants who are asserting arbitral immunity.
4. Coopers's demurrer was properly overruled due to factual question as to whether parties' agreement was for arbitration.
a. Governing principles.
b. Analysis of the allegations.
To reiterate, paragraph 6 of the October 4, 1987, agreement between Schwartz and Atari stated: "The Audit shall be a conclusive determination of the matters covered thereby and shall be binding upon the parties and shall not be contested by any of them...."
We hold a mere agreement for a binding valuation is not per se an agreement to submit to arbitration. Something more is required, particularly in view of the consequences, including immunity, which flow from the label of arbitration.
Further, if arbitration is what is intended by the parties, the entire applicable statutory scheme comes into play. Arbitration is provided for in the Code of Civil Procedure not only in sections 1280, subdivision (a), and 1280.1, but throughout title 9 of part III of the code. These sections govern, inter alia, the conduct of arbitration hearings (§ 1282.2), the time for
We recognize that section 1282 et seq. sets forth procedures for the conduct of arbitration proceedings and that parties are free to "otherwise provide by an agreement" (§§ 1282, 1282.2) and thereby dispense with a formal hearing and the taking of evidence. While parties to an arbitration are free to proceed solely by way of an audit, the mere fact parties agree to an independent binding audit does not establish they agreed to an arbitration and that they elected to dispense with the statutory guidelines.
We note that on March 4, 1988, Coopers filed suit against Schwartz for breach of contract, alleging it was a third party beneficiary of the October 4, 1987, agreement, and that Schwartz's suit against Coopers constituted a breach of the contractual term that neither party would contest the audit. Coopers therein did not plead it had acted as an arbitrator in conducting the audit.
Moreover, following the conclusion of the audit, neither Schwartz nor Atari filed a section 1285 petition to confirm, correct or vacate the purported "award."
Because there exists a factual issue as to whether Schwartz and Atari intended the audit to constitute an arbitration, the demurrer properly was overruled, although not for the reasons stated by the trial court.
c. Other issues not addressed.
As indicated, we elected to issue an alternative writ in order to consider whether an audit may constitute an arbitration, and whether an auditor may enjoy arbitral immunity. This we have done.
We decline to address Coopers's argument that an independent auditor retained to resolve a dispute between two parties is not a fiduciary, or any other remaining issues.
Section 1280, subdivision (a), eliminated the distinction between agreements to arbitrate disputes and agreements providing for valuations, appraisals, and similar proceedings, and brought the latter within the arbitration law. The parties may dispense with a formal hearing and the taking of
Further, arbitral immunity is coextensive with judicial immunity and extends to arbitrators in independent examinations, including valuations, appraisals and similar proceedings, such as audits.
While we, like the Legislature, have some apprehension with respect to a sweeping arbitral immunity, we feel compelled to reach this conclusion as it is dictated by our analysis of the controlling statutes.
However, because an agreement for a binding audit is not per se an agreement for arbitration, Schwartz's complaint is not demurrable on the ground of arbitral immunity, which defense will require a threshold factual determination that the parties' agreement was in fact for arbitration.
Where an agreement for an independent examination does not contemplate compliance with the statutory procedures for the conduct of arbitration proceedings (§ 1282 et seq.), and the parties have not agreed to alternate procedures therefor, the arrangement does not approximate a proceeding warranting arbitral immunity.
The alternative writ having served its purpose is discharged. The petition for writ of mandate is denied. Each party to bear respective costs.
Danielson, J., and Croskey, J., concurred.
Petitioners' application for review by the Supreme Court was denied October 12, 1989. Panelli, J., and Kaufman, J., were of the opinion that the application should be granted.