Effective January 1, 1998, Code of Civil procedure Section 998 was amended. In pertinent part, the amendment provides as follows:

(b) Not less than ten days prior to commencement of trial or arbitration (as provided in section 1281 or 1295) of a dispute to be resolved by arbitration, any party may serve an offer in writing upon any other party to the action to allow judgment to be taken or an award to be entered in accordance with the terms and conditions stated at that time. (Emphasis added.)

Code of Civil Procedure Section 1271, et seq., deals with contractual arbitrations, and Code of Civil Procedure Section 1295 deals with medical malpractice arbitrations. In this amendment, the legislature specifically identified those arbitrations to which the section will not apply. (C.C.P. §998(i) indicates the section will not apply to labor arbitrations.)

I had the opportunity to serve a Statutory Offer to Compromise (C.C.P. §998 offer) on the respondent in a Kaiser arbitration in January and received an award that was in excess of the demand. Following the arbitration, I made a motion to recover my costs plus interest. In a 2-to-1 vote, the arbitrators rejected the application of Code of Civil Procedure Section 998, basically ruling that it was an unconstitutional interference with Kaiser's pre-existing contract rights. The following is a discussion of this situation, including legislative intent, and the applicable law.

Background

Prior to its amendment, Code of Civil Procedure Section 998 applied to all Superior Court actions and all judicial arbitrations. (Wagy v. Brown (1993) 24 Cal.App.4th 1). More specifically, the only areas where C.C.P. §998 had not been held to be applicable were contractual and medical malpractice arbitrations.

Kaiser arbitrations fall squarely under the provisions of both Code of Civil Procedure Sections 1281 and 1295. On numerous occasions, Kaiser has argued in the courts of this state that their arbitrations fall within the provisions of both of these code sections. (Madden v. Kaiser Foundation Health Plan, Inc. (1976) 17 Cal.3d 699; County of Contra Costa v. Kaiser Foundation Health Plan, Inc. (1996) 47 Cal.App.4th 237.) Kaiser maintains the benefits of the arbitration system. Specifically, by conforming to the language of Code of Civil Procedure Section 1295, Kaiser makes its arbitration agreement, for all intents and purposes, exempt from attack as a contract of adhesion. (Loon v. Micola (1993) 17 Cal.App.4th 1225)

Prior to the January 1, 1998, amendment to C.C.P. §998, the courts in this state had made clear that the existing version of C.C.P. §998 did not apply to Kaiser and other types of medical malpractice arbitration agreements. However, the sentiment was summed up best in Woodard v. Southern California Permanente Medical Group (1985) 171 Cal.App.3d 656. Therein, the Court noted that the public policy behind C.C.P. §998 would be equally as strong in arbitrations as in Superior Court actions and invited the legislature to make the change. Specifically, the Court stated as follows:

"The mere fact that a case ends up in arbitration, contractually or judicially, does not detract from the strong public policy favoring plaintiffs offering to settle, and defendants accepting reasonable settlement offers, thereby avoiding hearings on the merit... We deem any reconciliation in this regard, by amendment of the arbitration statutory scheme to provide for costs of suit and interest in compromise rejection situations to the prevailing parties in arbitration, to be a legislative matter." (Woodard, supra, at pages 666, 667)

Legislative Intent

In the Kaiser arbitration in which I was recently involved, Kaiser attempted to argue there was no evidence of legislative intent that this amendment to C.C.P. §998 be applicable to existing Kaiser arbitration agreements. However, there is substantial evidence that the legislature intended this amendment to C.C.P. §998 to be applicable to all contractual and medical malpractice arbitrations.⁽¹⁾ Further, there was no opposition of any kind to the amendment.⁽²⁾

Issues Raised re Application of New C.C.P. §998

Retroactivity: The courts in California place statutes concerning the awarding of costs and attorney's fees under a special subcategory of "procedural statutes." California law has been clear and unequivocal that the matter of recoverable litigation costs is subject to change by the legislature and is governed by the law in effect at the time of judgment.⁽³⁾

Interference with Vested Contractual Right: Kaiser argued that the law impairing the obligation of existing contracts is not enforceable and that vested substantial rights of contracting parties are protected from legislative impairment.⁽⁴⁾ In reply, I argued that there is no vested contractual right concerning the awarding of litigation costs and fees under California law.

In Coast Bank v. Holmes (1971) 19 Cal.App.3d 581, 596, the issue was whether or not a party could be awarded attorney's fees based upon a statute that came into existence in 1968 (Civil Code §1717), in a situation where the contract in question actually came into existence in 1966. In that case, the Court stated as follows:

"The contention that the application of the section to a pre-existing contract constitutes an unconstitutional impairment of the contractual obligation is without substance. Litigation expenses incurred in the prosecution or defense of a lawsuit are in the nature of special damages. (Citations omitted.) No one has a vested right in the measure of damages." Coast Bank, supra, at page 596.

Taking Kaiser's argument to its logical conclusion, Kaiser could provide a contract for its members indicating that in exchange for the rendering of medical services, the members of the plan could not sue Kaiser for damages.

Public Policy: It is the clear and unequivocal public policy in California to favor settlement and disposition of civil actions without the necessity of a hearing on the merits.⁽⁵⁾ The application of this public policy to arbitration situations has been expressed in several actions involving Kaiser. Specifically, in Woodard, supra, the Court stated as follows:

"Woodard's policy arguments for applying section 998 and Civil Code section 3291 to arbitration are persuasive. California has a strong public policy favoring the disposition of civil actions without the necessity of a hearing on the merits." Woodard, at page 665.

Attorneys who do litigation work in California are aware of what an effective tool a Statutory Offer to Compromise can be. There is no question that its use does implement the strong public policy of settlement before a hearing on the merits.

Discussion

Anyone involved with representing claimants in contractual arbitration situations, more specifically medical malpractice arbitrations, is painfully aware of the problems created by an inability to use Statutory Offers to Compromise. This has specifically led to a situation where these types of disputes, when settled, only settle right before the arbitration proceeding, and also leads to a larger percentage of these types of matters actually proceeding to arbitration. Further, there is no question that the inability of claimants to recover their costs has led to a substantial percentage of these types of claims not being pursued.

I would recommend that in any matter involving a contractual or medical malpractice arbitration that the claimant, through counsel, obtain or force the production of the arbitration agreement as there is always the potential that the respondent will not have a copy of the agreement, and therefore it will not be enforceable. Further, since the decision reached by one arbitration panel concerning the application of C.C.P. §998 as amended sets no judicial precedents and is not binding on other panels, I would also recommend that claimants continue to use Statutory Offers to Compromise and argue the issue to the arbitrators pending resolution of this issue in the California courts.

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(1) Refer to Senate Judiciary Committee SB73, Senator Kopp, Hearing Date May 13, 1997; Senate Rules Committee, Third Reading, SB 73, May 20, 1997; SB73 Assembly Judiciary Committee, as amended May 20, 1997

(2) Letter from Quentin Kopp, dated September 12, 1997, to Governor Pete Wilson.

(3) Hogan v. Ingold (1952) 38 Cal.2d 802, 814-815; Coast Bank v. Holmes (1971) 19 Cal.App.3d 581 594; Harbor View Hills Community Ass'n v. Torley (1992) 5 Cal.App.4th 343, 347.

(4) California Constitution, Article 1, Section 9 and Legislature v. Eu (1991) 54 Cal.3d 492, 528.

(5) Milicevich v. Sacramento Medical Center (1984) 155 Cal.App.3d 997.