Private Arbitration May Not Have Collateral Estoppel Effect on Third Parties
By Mitchell S. Ostwald
Recently, the California Supreme Court, in a published opinion, announced how far they are willing to go in enforcing a private arbitration decision on third parties. In a private arbitration that took place before a retired federal judge, the arbitrator ruled in favor of the claimant (Boyd). Among other things, the arbitrator found that the contamination stemmed primarily from the underground waste oil tanks and was caused in part by the respondent's (Vanderberg) improper installation, maintenance and use of the tanks. The arbitrator indicated the discharge of contaminants was not sudden and accidental. The arbitrator's award of over $4 million to claimant was confirmed by a superior court judgment.
The insurers rejected Vanderberg's request for indemnification. Vanderberg then filed an action against his insurers, alleging various causes of action arising out of the failure to defend, settle or indemnify in the Boyd action.
The insurers filed two motions for summary adjudication. In the first motion, Centennial and USF&G argued they had no duty to defend or indemnify because the pollution exclusion in their policies was triggered by the arbitrator's determination in the Boyd action that the contamination was not sudden and accidental. These two insurers contended that Vandenberg's relitigation of the "sudden and accidental" issue was precluded by principles of collateral estoppel. In the second motion, all insurers sought summary adjudication on the basis that the arbitrator awarded damages for breach of lease, a contractual cause of action, and contractual damages are not covered by the CGL insurance policies at issue. The court granted both motions for summary adjudication.
After consolidating the cases, the Court of Appeal issued peremptory writs of mandate reversing both summary adjudication orders. The appellate court first held that absent contrary agreements by the arbitral parties, a party to private arbitration is not barred from relitigating issues decided by the arbitrator when those issues arise in a different case involving a different adversary and different causes of action. It would not be fair to give a private arbitration decision nonmutual collateral estoppel effect without the arbitral parties' consent, the Court of Appeal reasons, because private arbitration lacks significant safeguards of court litigation, particularly the right to full judicial review.
Collateral estoppel is one of two aspects of the doctrine of res judicata. In its narrowest form, res judicata "precludes parties or their privies from relitigating a cause of action [finally resolved in a prior proceeding]. " (Teitelbaum Furs, Inc. v. Dominion Ins. Co. , Ltd. , (1962) 58 Cal.2d. 601, 604, 25 Cal.Rptr. 559, 375 P.2d 439 quoted Bernard v. Bank of America, (1942) 19 Cal.2d 807, 810, 122 P.2d 892 . But res judicata also includes a broader principle, commonly termed collateral estoppel, under which an issue "necessarily decided in?[prior] litigation [may be] conclusively determined as [against] the parties [thereto] or their privies in a subsequent lawsuit on a different cause of action. "
However, very different considerations affect the issue whether private arbitration awards should have nonmutual collateral estoppel effect. California's statutory scheme nowhere specifies that, despite the arbitral parties' failure so to agree, a private arbitration award may be binding in favor of nonparties in litigation involving different causes of action. Moreover, in our view, such a consequence is not an inherent or expected feature of private arbitration that is implicitly accepted by the arbitral parties. Thus, the California Supreme Court held that a private arbitration award cannot have nonmutual collateral estoppel effect unless arbitral parties so agree
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