From 2010 to 2020, the Launch of a New Arbitration Act in Arizona!
This is the “script” from an October 2020 presentation on the important case law developments in Arizona in the last decade. The presentation was to construction lawyers.
1. In the Arizona Legislative Session of 2010, after a nine-year campaign, the enactment of the REVISED UNIFORM ACT was finally achieved by the ADR Section of the State Bar. In order to get the RUAA “birthed,” a strange compromise had to be enacted. The old Uniform Arbitration Act (from 1962) would have to remain in force.
Per the compromise, the RUAA, effective January 1, 2011, would contain four (4) exclusions of certain matters in dispute (securities cases, employment law cases, banking cases, insurance cases), (A.R.S. § 12-3003), the old act still applies to any such cases, EXCEPT the old UAA says labor/employment cases are excluded from the UAA. (A.R.S. § 12-1517) Those cases are handled by the NLRB or some such platform.
None of this means much for us, as we daily deal in construction contracts, materials supplier contracts, liens, negligence, all easily within the purview of the RUAA.
2. What is vitally important, however, is that a U.S. Supreme Court case from 1995 can cause great mischief, now that we have adopted our bright and shiny new RUAA. Under Allied-Bruce Terminix Companies v. Dobson, 513 U.S. 265, 115, S. Ct 834, 130 L. Ed 2d 753 (1995), the Federal Arbitration Act will govern the arbitration proceedings on all disputes that have any connection, however small, to interstate commerce. The FAA preempts all State laws, to the extent incompatible with them, UNLESS the contract between the parties in the arbitration calls for the RUAA (or the old UAA) to be applicable to the dispute.
So, one of the big takeaways from this recap of Arizona cases since the January 1, 2011 effectiveness of the RUAA is that, if you want to get clear of the 100-year-old “bare-bones” FAA, you should (a) cover that issue in your arbitration clause, or (b) after a dispute arises, cover that issue by stipulating to a “Submission Agreement” saying that the parties agree they will proceed under the RUAA.
3. To illustrate how important this can be, unlike our new RUAA, the 100-year-old FAA (and the 65+ year-old UAA)
- do not provide for attorneys’ fee awards or punitive damages;
- do not provide for depositions in advance of an evidentiary hearing;
- do not provide for Motion Practice, like Motions for Summary Judgment;
- do not allow for Subpoenas which can be enforced in some 25 other States (the ones which have adopted the RUAA); and
- do not provide for interim relief or rulings, like receiverships or sequestrations or injunctions.
All of these features exist under the RUAA!
4. Before I leave the RUAA, I need to return to my favorite sport of “trashing” our transactional-brother-lawyers who write arbitration clauses into those contracts under which you and I have to resolve disputes.
I have already faulted our transaction-brother-lawyers who are ignorant of the “crying need” to choose the RUAA and to state that it will apply in place of the FAA to govern the proceedings.
I am going to discuss in a moment the hubris with which our transactional-brother- lawyers try to “stack the deck” and “slant the playing field” and how they thereby draft arbitration clauses which are substantively unconscionable and will be voided – or “blue-penciled” as partially void.
Before we leave the RUAA, which is the “arch stone” of the last decade of cases on arbitration, I want to call to your attention one of its provisions about drafting clauses. RUAA Section 12-3004(B) simply and clearly states, in effect, DRAFTERS BEWARE. There are a handful of things which the RUAA expressly says you cannot “take out” of, or strike out of, an arbitration clause. For example, among the non-waivable matters
- the right to notice of the start of arbitration;
- the right to reasonable discovery;
- the right to subpoenas,
- the right to review of an award by a court;
- the right to representation by a lawyer in the arbitration.
Mark Lassiter has given me permission to reproduce as Exhibit A hereto his color-coded copy of the RUAA as it exists today. Red text means BEWARE, as you cannot waive, alter, or negate anything in red at any time. Yellow text is stuff that can be waiver or altered after a dispute has been commenced.
All of us should look at that handy document and, whenever we are arbitrating, make sure that the clause does not “run afoul” of these statutory NO-NOs. If the clause you are stuck with presents a problem, you can solve that by a Submission Agreement
5. With this prelude, let’s turn to the lucky 13 important court decisions on arbitration since January 1, 2011, the start of this decade under the RUAA. They are all Court of Appeals decisions.
I am going to ignore the many non-published opinions and group the published 13 important decisions in five “silos.”
Let’s start with the most recent Arizona case on arbitration, Rizzio v. Surpass Senior Living LLC, Ariz. ___, ____ P.3d (App. 1/30/2020). Only months ago, our Appeals Court considered another one of the half-dozen “Retirement Center” cases decided during the last decade. A caregiver had signed her mom into a senior living facility. The contract for services from the Center stated that the patient in the event of a claim would arbitrate and would be responsible for all costs of the proceeding, whether she won or she lost. That would be all:
“[c]osts of arbitration, including [defense]’s legal costs and attorneys’ fees, arbitration fees, and similar costs.”
The trial court voided the entire arbitration clause saying it was procedurally and substantively unconscionable, and that the patient, Rizzio, would be unable to vindicate her claims due to this unfair cost-shifting clause.
The Appeals Court in the first headnote reviewed the 1995 Allied-Bruce Terminix Companies decision and declared that the process of arbitrating was subject to the FAA, not the RUAA because no one had rejected the FAA and selected our RUAA and interstate commerce was somewhat involved in this matter.
The second point in Rizzio is that under an earlier-in the-decade (2014) Arizona case, Duen᷃as, which I’ll discuss in a moment, the Appeals Court reiterated the important proposition that, unlike California, in Arizona, you do not have to prove both procedural and substantive unconscionability to void an arbitration clause. The Appeals Court explained that procedural unconscionability has to do with fine print clauses, unfair surprise, ignorance of important facts so that the process of bargaining for the terms of the arbitration clause did not proceed as it should, citing Duen᷃as. The court said adhesion contracts are not per se unconscionable and that “nothing in applicable Arizona law requires a drafter to explain the provisions of standardized contracts…” to someone signing the contract. (Emphasis added).
But the Appeals Court found that this cost shifting clause was substantively unconscionable, “so one-sided as to oppress or unfairly surprise an innocent party, an overall imbalance in the obligations and rights imposed by the bargain…” Citing Clark v. Renaissance West and Harrington v. Pulte, two (2) other important mid-decade cases, the Appeals Court said if the fees and costs provision is so excessive as to deny a litigant the opportunity to litigate his claim, then you have substantive unconscionability. DRAFTER BEWARE!
However, the court pounced on a “severability clause” in the underlying contract, severed the cost shifting provision, and voided it, noting that Rizzio had a contingent fee agreement with her counsel who was advancing all costs and fees. The court found the remainder of the arbitration clause enforceable.
The Appeals Court remanded the matter for action under the “blue-penciled” (now enforceable) arbitration clause. It is also noteworthy that the court said it was appropriate to “blue pencil” the clause in view of the statutory bias of our courts in favor of enforcing arbitration clauses.
This very recent and ample Rizzio decision cites three (3) very important cases of the last decade regarding arbitration:
- Duen᷃as v. Life Care Centers of America, Inc., 236 Ariz. 130, 140, 336 P.3d 763 (App. 2014) is to the very same effect as Rizzio, but notes that in determining substantive unconscionability one needs to ascertain if the arbitration agreement or the applicable arbitration rules allow for a waiver or reduction of costs and fees based on economic hardship (like the AAA Rules provided). Duen᷃as also established that, by using clear language, the parties may remove from the courts, the task of determining an arbitration’s existence or scope and give that task to the arbitrator, as AAA Rule 7 does. Thus, by contract, RUAA 12-3006 which gives that decision to the courts, can be “nullified” so that arbitrator makes the decision on arbitrability.
- Harrington v. Pulte Home Corp., 211 Ariz. 241, 247, 119 P.3d 1044 (App. 2006), is to the same effect as Rizzio, but notes that the “reasonable expectations” (Darner Motor Sales) doctrine in Arizona provides a third basis, besides procedural or substantive unconscionability, to invalidate an arbitration clause. This doctrine hinges on one of the two parties signing the agreement knowing that the other party would not have accepted the clause if he had realized that the contract contained that set of terms. The court carefully lists six (6) key facts regarding a reasonable expectations review and said it should have been apparent to the signing homeowner that the agreeing to arbitration meant the loss of the right to a jury trial would occur. This court found that the adoption of AAA Rules (which provided for reduction of fees and costs in the event of economic hardship) was important in a finding of no substantive unconscionability in the clause which made the homeowner go to arbitration instead of courthouse litigation. .
- Clark v. Renaissance West, L.L.C., 232 Ariz. 510, 512, 307 P.3d 77 (App. 2013) like Rizzio, but here the costs of arbitration and the absence of any rule like the AAA’s providing for an economic hardship avoidance of fees and costs led to a finding of substantive unconscionability as regards the clause.
7. There is one more case on unconscionability in this decade worth noting. Gullett v. Kindred Nursing Centers West, 241 Ariz. 532, 390 P.3d 378 (App. 2017) is like Rizzio, but it dealt with a clause’s limiting discovery in arbitration. It is not worth reciting exactly what the limits on interrogatories and requests for admission and requests for documents were. The court found the limits in this clause we not so strict as to be unconscionable. The Gullett reviews unconscionability for restrictions on the choice of arbitrator as well and contains a very thorough review of many bases for unconscionability.
The Gullett opinion cites to the California case which is the grand-daddy of all cases about unconscionability, the 70 page opinion in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 99 Cal. Reptr. 2d 745, 6 P.3d 669, 684 (Cal App. 2000)
8. The takeaway from these five blockbuster unconscionability Arizona cases in the last decade (and the eight (8) or so other unpublished decisions on this subject) this decade is as follows. When crafting your arbitration clause, do not conceal, obfuscate, or use cost-shifting measures, all of which “make the playing field not level.” Do not violate RUAA § 12-3004(B) about waiving or altering things that cannot be tampered with. If you do, your clause may get voided, or “blue-penciled.” DRAFTER BEWARE!
9. AFFIRMING AWARDS AND HALL STREET ASSOCIATES
It was no surprise, but RS Industries v. Candrian, 240 Ariz. 132, 135, 377 P.3d 329 (App. 2016) stated that an arbitrator’s decision on the facts and the law are final and “not to be disturbed” unless the arbitrator has purported to decide a matter beyond the scope of the issues submitted for arbitration. A Superior Court confirmation of an arbitration award is reviewed in the light most favorable to upholding the decision and will be affirmed unless the trial court has abused its discretion. Incidentally, the RS Industries decision says that when an arbitration agreement or rules provide for the arbitrator to award the “costs and expenses” of arbitration, that is broader than Superior Court “costs” under A.R.S. § 12-332. The RS Industries court went on to say that § 12-3025 of the RUAA allows a Superior Court ruling on an attack on an award to allow costs beyond the usual taxable costs in litigation so as to “discourage” unfounded appeals of arbitration awards. In this case, Judge Diane M. Johnson’s opinion featured two (2) points which have surfaced in other opinions this decade. First, public policy in Arizona favors arbitration as a speedy and affordable means of resolving disputes. Second, the judicial review of arbitrators’ rulings is “substantially limited by Statute.” These latter words echo in another blockbuster appellate decision of this decade by Judge Johnson, the Chang v. Siu decision.
In a very short 2014 opinion authored by Judge Johnson some two years before RS Industries, Judge Johnson dealt with a nationwide controversy. Under UAA A.R.S. § 15-1512 and RUAA A.R.S. § 12-3023, and FAA 9 USC 1, the Statutes say you can only challenge an award on six very limited grounds, as listed:
- fraud or corruption or use of “undue means” in the proceedings;
- evident partiality of the arbitrator;
- misconduct of the arbitrator prejudicing the rights of a party to a hearing;
- refusal to postpone a hearing to prepare a claim or defense;
- refusal to consider evidence material to the controversy;
- exceeding the arbitrator’s powers, for example dealing with issues not agreed to be arbitrated.
In Chang v. Siu, 234 Ariz. 442, 336, 323 P.3d 725 (App. 2014), Judge Johnson dealt with an arbitration clause regarding a divorce which stated that the Appeals Court would review any fact or law aspect of the arbitrator’s award – and that the Superior Court would not hear any appeal of an award. Judge Johnson cited to the U.S.S.Ct. decision in Hall Street Associates LLC v. Mattel, Inc., 552 U.S. 576, 1285. Ct. 1396, 170 L.Ed. 2d 254 (2008) where the Supreme Court of the U.S. held that, under the FAA (9 U.S.C. § 1), parties cannot by contract expand the scope of judicial review of an award beyond the six (6) bases listed above in the FAA. Hall Street left open the question of whether parties subject to State laws on arbitration can somehow agree to a different or more extensive judicial review. Judge Johnson carefully sidestepped ruling that Hall Street prevented contracting for judicial review, but said that this particular clause in this case did not show an intent to amplify the judicial review of the award. Judge Johnson in dicta wrote “parties may not by agreement create appellate jurisdiction where it otherwise would not exist.”
Though it is dicta, and stated in a short opinion, this seems to put Arizona in the group of States which endorse the Hall Street decision and do not permit parties to by contract alter the RUAA to provide for a court review of an award. We will only overturn an award, if it violates the six (6) statutory precepts I have outlined above.
Atreus Communities Group of Arizona v. Stardust Development Inc., 229 Ariz. 503, 506, 277 P.3d 208 (App. 2012) is another case very much like RS Industries and Chang v. Siu, but coming as it did, early in the decade, it was under the old UAA, not the RUAA. The argument was that, under the old UAA, which unlike the RUAA fails to provide for a summary judgment practice, the arbitrator “exceeded his power” because he allowed a summary judgment. Here the appellant raised the claim on appeal that the arbitrator had acted in “a manifest disregard of the law.” Judge Kessler wrote that the AAA Rules of that time (which were applicable) impliedly allowed summary judgment, even if the UAA did not expressly provide for it. Judge Kessler also ruled that “manifest disregard” did not exist as a basis for an attack on the award, saying the six (6) statutory bases for attack are all that is available in Arizona.
“Manifest disregard” these days is argued nationwide as a as a separate (not listed in the Statutes) basis for appeal. This Atreus case and the RS Industries and Chang v. Sui decisions seem to put Arizona well into the column of the States hostile to recognizing “manifest disregard” as a proper basis for attacking an award.
10. WAIVER IN ARBITRATION
One of the improvements made n the RUAA over the UAA (and the FAA) is the strong requirement that possible hidden biases of the arbitrator must be exposed by extensive disclosure of relationships, ties, and experience. RUAA § 12-3012 mandates that an appointed or prospective arbitrator must expose to the parties (and any other arbitrators) “any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator…including: (1) a financial or personal interest in the outcome… and (2) …relationship with any of the parties…their counsel or representatives, a witness or another arbitrator…”. Just as important, the arbitrator has a continuing obligation throughout the proceedings to disclose to the parties and other arbitrators any facts or relationships that come to light as the proceedings unfold.
This is serious business. An arbitrator is the “guardian of the process” and she cannot fail to take action to protect her award from an attack. AAA has an extensive questionnaire designed to surface any potentially objectionable connections and most arbitrators spend time on checking for “conflicts” and any relationships, including checking witness lists, property locations, repeated customer disclosures, etc. This is done at the start of the proceedings and thereafter, as witness lists come in. In California, there is a “cottage industry” built around finding undisclosed material facts which can be seized upon to try to overturn an arbitration award on behalf of a disappointed litigant. There are cases galore about what might/ought to have been disclosed and, since it was not, what justifies overturning an award.
We have had one reported decision on this critical matter. In Fisher v. USAA Casualty Insurance Company, 245 Ariz. 270, 276, 427 (p.3d 791 (App. 2018), the Appeals Court made three (3) key points about attacks on awards based on non-disclosure, i.e. evident partiality:
- a party is not entitled to a presumption of partiality against an arbitrator simply because a disclosure is not complete;
- an arbitrator who does not disclose trivial or casual contacts with a party or counsel is not going to have his award automatically overturned;
- when a party learns of a disclosable conflict or relationship, but proceeds without raising it, she cannot then later challenge the award on that basis. The challenge has been waived if no action has been taken upon learning of the disclosable information.
This Fisher case involved a friend of mine, Alan Goldman, Esq., a well-known personal injury arbitrator. Though the plaintiffs had learned, before the hearing, that Goldman had arbitrated a few cases involving the defense law firm, the plaintiffs never raised it until they were unhappy with the final award. The Appeals Court said that constituted a WAIVER of the right to claim partiality. The Appeals Court cited Circuit Court authority to the effect that, even if a party has “constructive knowledge” of a potential disclosable fact, if she takes no action to raise it in a “reasonable timely manner,” that potential basis for attacking the award is waived and lost. If you “knew or should have known” of a disclosable fact and you take no action, you will have waived your basis to attack an award on an impartiality basis. While the arbitrator has an obligation to disclose, the party can waive and lose its basis for an impartiality attack on the award.
Of somewhat similar effect is In re Estate of Cortez, 226 Ariz. 207, 210, 245 P.3d 892 (App. 2010), involving a different kind of waiver. There the Retirement Center began litigating in the courthouse with the survivors of a resident patient in a wrongful death case. A year into the litigation, the Center suddenly produced an arbitration agreement and moved to stay the litigation and go to arbitration. The Appeals Court said, not so fast! Even where a dispute is by contract subject to arbitration, that right may be waived by a party who participates substantially in litigation without promptly seeking an Order from the court compelling litigation. Even if a party preserves in its answer the defense that the issue is or may be arbitratable, the party “may waive that defense by its subsequent conduct in the litigation.”
The Hon. Bruce Meyerson (Ret.) has a paper which he wrote some time in 2014 entitled “But I didn’t SIGN an Arbitration Agreement!” The head topic sentence states: “there is a well-established body of law which authorizes a court [or arbitrator] to make arbitration provisions binding even on parties who never signed an arbitration agreement and also allow these non-signatories to compel arbitration with those who have signed an arbitration agreement.” Bruce Meyerson cited seven full pages of cases from around the country showing non-signatories can be and are being held to arbitration clauses on contracts that they did not sign.
Early in this decade, shortly before Bruce’s paper, the Court of Appeals decided Sun Valley Ranch 308 Limited Partnership v. Robson, 231 Ariz. 287, 294 P.3d 124 (App. 2012). The holding in Sun Valley says:
“In determining whether to compel arbitration of a dispute arising under an agreement lacking an arbitration clause when a related contract containing a broad arbitration clause that encompasses all matters in dispute, courts consider…(1) whether the agreements incorporate or reference each other; (2) whether the agreement are dependent on each other or relate to the same subject matter; (3) whether the arbitration clause specifically excludes certain claims; (4) whether the agreements are executed closely in time and by the same parties.”
Here in Sun Valley, there was a limited partnership agreement with a broad arbitration clause and a concurrent construction contract (signed by several of the signators of the partnership agreement), which construction contract had no arbitration provision. This case held the non-signators of the related partnership agreement bound by the arbitration clause.
Even more important, the Sun Valley Court declined to appoint a receiver and order an account noting that such was in the power of the arbitrator under RUAA § 12-3008(B)(1), the section that grants power to an arbitrator:
“issue such orders for interim remedies, including interim awards, as the arbitrator finds necessary to protect the effectiveness of the arbitration proceeding…as if the controversy were the subject of a civil action.”
The court endorses sequestration of property, receivership, etc., but expressly reserved the question of garnishments.
So, Sun Valley was a large step forward and Appeals Court Judge Margaret Downie’s long opinion puts Arizona in the position of being a State where it is not difficult to (a) empower non-signatories to demand arbitration, or (b) to force non-signatories to submit to arbitration, in other words, “a two-way street.”
Now to end up where we began. In Smith v. Pinnamaneni, 227 Ariz. 170, 254 P.3d 403 (App. 2011) the court considered an AIA Construction Contract which incorporated the AAA Construction Arbitration Rules. This case endorsed the principle that an attack on a contract (with an arbitration provision) will be handled by an arbitrator. The attack on the contract as a whole does not “moot” the arbitration cause – which is separable. Here Pinnamaneni had failed to appear in the arbitration and, therefore, could not raise in a Superior Court challenge to the award matters involved in the arbitration. This case also said that non-signator Pinnamaneni was liable on the contract on an alter ego theory. The court made a point of saying under the AAA Rules the parties can and do agree that an arbitrator will decide (instead of the courts as under the FAA and RUAA) whether there is a contract and an arbitration clause and whether the dispute is arbitratable.
Our last important case of the decade is Hamblen v. Hatch, 242 Ariz. 483, 398 P.3d 99 (App. 2017). It is very much like the Smith case, discussing the FAA, the courts deciding or arbitratability (instead of an arbitrator), and the separability doctrine in Smith. It notes that the FAA will govern all contracts touching in anyway upon interstate commerce.
Thus, we end where we started. GET YOUR DISPUTE UNDER THE RUAA unless there is some good reason why you don’t want the advantages of modern arbitration procedures.