Garret Murai | California Construction Law Blog
Arbitration provisions are increasingly common in construction contracts. Indeed, the boilerplate AIA contract documents include a standard arbitration provision providing for arbitration before the American Arbitration Association (“AAA”) (Note: AAA isn’t the only arbitration provider, and I’ve often wondered why the AIA includes the AAA only. Some sort of deal perhaps?).
Whether you love arbitration or not – although “love” may be a bit of a strong word, and perhaps “prefer over litigation,” is more appropriate – there are strict deadlines under California law when it comes to confirming an arbitration award (if you win), challenging an arbitration award (if you lost), or seeking to vacate an arbitration award.
In Valencia v. Mendoza, 103 Cal.App.5th 427 (2024), the Second District Court of Appeals discussed those deadlines in a case involving a “flip” gone wrong.
The Valencia Case
In August 2016, Miguel Valencia, Jr. dan Lizette Valencia purchased a house in San Pedro, California from Coastal Holdings, LLC a company owned and controlled by Armando Mendoza. The broker in the transaction was Class A Realty, Inc., a company in which Mendoza owned a 50% interest, and his fiancee the other 50%.
Mendoza had purchased the home several months earlier from Fillip Tranni with the intention of flipping it. Tranni had lived in the home for many years and had started a major renovation which he abandoned because it “was too complicated.” Instead, Tranni decided to sell the home, which Mendoza purchased. During the sale, Tranni disclosed that the renovation work had been done without necessary permits, was not in compliance with building codes, and that the home had issues with water intrusion, stucco that was chipping, and improperly installed windows.
Mendoza, who had flipped 50 to 60 homes, was undeterred. After buying the home, Mendoza hired Pablo Rivas and Carlos Navarro to complete the renovations. Neither Rivas nor Navarro were licensed contractors. Although Mendoza obtained permits that were not obtained while Tranni had owned the property, a significant amount of work was performed by Mendoza and his team before those permits were issued, which resulted in the inspector being unable to see the work performed and determine whether it complied with building codes. Further, while Mendoza did obtain some permits, “[o]ther work was entirely unpermitted.”
When Mendoza listed the home for sale he did not disclose the issues previously disclosed by Tranni. Nor did Mendoza disclose that his team had done unpermitted work themselves and that they were not licensed contractors. Instead, in his listing, he described the property as “completely remodeled” with “no expense spared.” If this sounds like a recipe for disaster, bing, bing, you win a prize.
Shortly after the Valencias purchased the home they began to experience problems. After the first rain, water poured in around the windows. While they were trying to repair that problem numerous other (unspecified) problems also began to arise. In the end, the Valencias had to move out of the house for several months while extensive repairs were made.
Not surprisingly, in October 2018, the Valencias filed a lawsuit against Mendoza, Coastal Holdings, and Class A Realty asserting various causes of action all based on fraudulent concealment of defects in the home. The Mendoza defendants then filed a motion to compel arbitration, presumably based on an arbitration provision contained in the sale contract for the home. The Valencia’s agreed to move the case from litigation to arbitration. In the stipulation signed by the parties, the parties agreed to “enhanced” decision-making by the arbitrator, stating in the stipulation:
[T]he Arbitrator shall apply California substantive law to the proceeding. The arbitrator shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error. It is the explicit and unambiguous intent of the parties that any error of law or legal reasoning shall be an act in excess of the arbitrator’s powers that is reviewable on appeal. Specifically, any party may seek to vacate any award that has been made in excess of the Arbitrator’s powers, as provided for in [§ 1286.2], with a concomitant right of appeal to a court of competent jurisdiction.
Note: This is one of the primary criticisms of arbitration: That because arbitration decisions are difficult to appeal, arbitrators have a tendency to ignore the law and facts when rendering decisions. The stipulation signed by the parties includes what we attorneys call a “reasoned decision” provision and, if you haven’t already, you may want to consider including a similar provision in your construction contracts if they provide for arbitration.
The arbitration hearing was conducted over five days in June 2021. In August 2022, the arbitrator issued a 17-page final arbitration award, awarding the Valencias $432,536 in monetary damages, including $130,000 for repairs, $260,000 for impairment to the fair market value of the home, and smaller amounts for loss of use, statutory penalties, and inspection fees. The arbitrator also awarded the Valencias $438,800 in punitive damages, $364,544 in attorneys’ fees, and $52,667 in costs, for a whopping final bill of over $1.5 million.
Note: when arbitration first became a “thing” it was touted as being cheaper and quicker than litigation, and while I don’t know the details of the procedural history of the arbitration in this case, a final decision nearly four years after the original lawsuit was filed doesn’t seem to be particularly quick.
On September 2, 2022, the Valencias filed a petition to confirm the arbitration award with the Superior Court. On September 14, 2022, the Mendoza defendants filed a four-page opposition. In its opening paragraph, the Mendoza defendants stated that they were “in the process of completing drafting” a petition to vacate the arbitration award that would “likely be filed within the next 10-15 days” and requested that the court continue the Valencias’ petition to confirm so that it would be heard with their petition to vacate in April 2023.
In a reply brief, the Valencias argued that the Mendoza defendants’ opposition did not include any evidence to support vacating the arbitration award (nor did it explicitly request to vacate the award), and there was no basis for a continuance because the Mendoza defendants’ unfiled petition to vacate was already untimely under Code of Civil Procedure section 1290.6 for failure to serve the petition within 10 days after service of the Valencias’ petition to confirm.
On September 27, 2022, the day before the hearing set for the Valencia’s petition to confirm the arbitration award, the Mendoza defendants filed a petition to vacate the arbitration award.
The following day, the court heard the Valencias’ petition to confirm the arbitration award. In its three-page order, the court found that it was required to confirm the award under Code of Civil Procedure section 1286.4 because the Valencias filed and served a petition to confirm that complied with the statutory requirements, that the Mendoza defendants did not file and serve a petition to vacate the arbitration award within 10 days of service of the petition to confirm as required by Code of Civil Procedure section 1290.6, and that the Mendoza defendants had not presented any facts or evidence in their opposition demonstrating good cause to extend the time for the Mendoza defendants to file a response or to continue the hearing on the petition to vacate.
The Mendoza defendants appealed.
The Appeal
On appeal, the 2nd District Court of Appeal explained that the California Arbitration Act (Code of Civ. Proc. §§ 1280 et seq.) provides “only limited grounds for judicial review of an arbitration award” and that, under the statute, “courts are authorized to vacate an award if it was (1) procured by corruption, fraud, or undue means; (2) issued by corrupt arbitrators; (3) affected by prejudicial misconduct on the part of the arbitrators; or (4) in excess of the arbitrators’ powers.”
Note: As discussed, because arbitration decisions are difficult to appeal, as also noted by the 2nd District Court of Appeals, parties may (and increasingly are) including “reasoned decision” provisions as part of their arbitration clauses.
“However,” explained the Court of Appeals, while the appealability of arbitration decisions are limited under the Civil Code, “parties may ‘take themselves out of the general rule that the merits of the award are not subject to judicial review’ if they ‘clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts.’”
Note: The Court of Appeals referred to the California Supreme Court’s decision in Cable Connection, Inc. v. DirectTV, Inc., 44 Cal.4th 1334 (2008), in which the Supreme Court held that language included in an arbitration provision that “[t]he arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error” required the arbitrator to make a “reasoned decision” and took it out of the general rule limiting the appealability of arbitration decisions.
While the Court of Appeals acknowledged that the parties had agreed via their stipulation to require the arbitrator to render a “reasoned decision,” the Court found that the Mendoza defendants had failed to avail themselves of this “enhanced” right of review by failing to timely file their petition to vacate the arbitration decision:
A losing party’s request to vacate an arbitration award may be made by filing either a petition to vacate the award (§ 1285) or a response to a petition to confirm the award that requests vacation of the award (§ 1285.2). Section 1285 provides, “Any party to an arbitration in which an award has been made may petition the court to confirm, correct or vacate the award.” Section 1285.2 provides, in turn, “A response to a petition under this chapter may request the court to dismiss the petition or to confirm, correct or vacate the award.” Further, “[t]he allegations of a petition are deemed to be admitted by a respondent duly served therewith unless a response is duly served and filed.” (§ 1290.) “A petition to correct or vacate an award, or a response requesting such relief, shall set forth the grounds on which the request for such relief is based.” (§ 1285.8.)
Three statutory provisions address the timeliness of pleadings that challenge confirmation of an arbitration award. Section 1288 provides, “A petition to vacate an award or to correct an award shall be served and filed not later than 100 days after the date of the service of a signed copy of the award on the petitioner.” Section 1288.2 likewise provides, “A response requesting that an award be vacated or that an award be corrected shall be served and filed not later than 100 days after the date of service of a signed copy of the award….”. And section 1290.6 provides, “A response shall be served and filed within 10 days after service of the petition ….” However, “[t]he time provided in [section 1290.6] for serving and filing a response may be extended by an agreement in writing between the parties to the court proceeding or, for good cause, by order of the court.” (Ibid.)
In short, if you lost in arbitration, and want to appeal the arbitration decision, you have two choices: (1) File a petition to vacate the arbitration award within 100 days after the date of service of a signed copy of the arbitration award; or (2) if a petition to confirm the arbitration award has been filed, file a petition to vacate the arbitration award within 10 days after service of the petition to confirm the arbitration award.
“For nearly half a century,’ explained the Court of Appeals, “the Courts of Appeal have consistently held that once the prevailing party in an arbitration files a petition to confirm an arbitration award, the 10-day deadline in section 1290.6 controls when a losing party must respond, not the 100-day deadline in section 1288.2.” And, here, explained the Court of Appeals:
The Mendoza defendants filed a timely opposition (response) to the Valencias’ petition to confirm the award, but the opposition was not supported by any evidence. Only on the eve of the hearing on the petition to confirm, nearly four weeks after they had been served with the Valencias’ petition to confirm (and well after the 10 days), did they file the petition to vacate the award that included supporting declarations and evidence.
Further, held the Court of Appeal, while the Superior Court could have adjusted the hearing schedule on the Valencias’ petition to confirm to allow the Mendoza defendants’ late-filed petition to vacate to be heard, it was only required to do so upon a showing of good cause, and because the Mendoza defendants’ did not show good cause for relief from the 10-day deadline under Code of Civil Procedure section 1280.6, the Superior Court was under no obligation to do so.
Conclusion
So, there you have it. Mind those deadlines! If you lost in arbitration and want to appeal, you have to file a petition to vacate the arbitration award within the earlier of: (1) 100 days after the date of service of a signed copy of the arbitration award; or (2) 10 days after service of a petition to confirm the arbitration award.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.