Opinion
A100648.
11-25-2003
MIC PROPERTY AND CASUALTY INSURANCE CORPORATION, Plaintiff and Respondent, v. UNIVERSAL UNDERWRITERS INSURANCE GROUP, Defendant and Appellant.
Universal Underwriters Insurance Group (Universal) appeals from an order affirming an arbitration award and entering judgment. It contends the arbitrator exceeded his jurisdiction in issuing the award because the parties had not agreed to arbitrate the issues arbitrated. We will affirm the judgment.
I. FACTS AND PROCEDURAL HISTORY
A. THE UNDERLYING LAWSUIT
Beginning in December 1992, Joanne McQuagge was employed at VSGCI of Oakland, Inc. (VSGCI), which was doing business as Val Strough Chevrolet. At the time, VSGCI was owned by Select Automotive, Inc. (Select), a named insured under an insurance policy issued by Universal. On January 1, 1993, ownership of VSGCI was transferred from Select to Hendrick Automotive Group (Hendrick Automotive), a partnership of which Select was general partner. Hendrick Automotive was not a named insured under the Universal policy, but it was a named insured under an insurance policy issued by MIC.
McQuagge resigned from her employment effective March 5, 1994. In February 1995, she sued Hendrick Automotive, as well as The Hendrick Corporation, The Hendrick Management Corporation, W.R. Auto Investments of California, Inc., Rick McMaster, Kirk Hepler, and Ronald Tye, for sexual harassment and other injuries. (McQuagge v. Hendrick Automotive Group et al. (Super. Ct. Alameda County, 1997, No. 748184-6). (McQuagge).)
B. MICS AND UNIVERSALS INSURANCE POLICIES
The defendants in McQuagge tendered their defense to both Universal and MIC. Tye, McMaster, and Hepler were the only defendants who were named insureds under the Universal policy, which was effective from its inception on September 1, 1992, to its cancellation as of February 1, 1993. The MIC policy, which was effective as of February 1, 1993, identified Hendrick Automotive as a named insured.
C. NEGOTIATIONS BETWEEN UNIVERSAL AND MIC
Universal sent a reservation of rights letter to Hendrick Automotives Timothy Brewer in June 1995. In part, the letter stated: "Be advised that if the facts later develop that this matter is solely and without dispute a simple wrongful termination, Universal Underwriters will reserve its right to withdraw from the defense. This letter is merely to inform you that there may be certain claims that the plaintiff will attempt to prove for which there would be no indemnification." The letter continued: "By copy of this letter to Mr. Mayfield [of MIC], Universal Underwriters is confirming that it is agreeable to a 50/50 split in the defense duty until such time as there is a set of facts or proof that shows that there is no actionable claim or no duty to defend for events that occurred in our policy period. We hereby reserve the right to seek an equitable apportionment of fees in the future and will reserve decision on the duty to indemnify until such time as the duty may arise."
On March 8, 1996, MICs Dennis Mayfield wrote to George Fukunaga, a Universal claims representative. Mayfield stated that, for purposes of a March 8 settlement conference, MIC was willing to jointly fund a settlement of up to $100,000, sharing it equally with Universal. MIC contended the cost of settlement should ultimately be allocated based on the limits of the respective policies, and not, as Universal proposed, on the length of time the respective policies were in effect. Mayfield then referred to the arbitration of the allocation issue: "In view of the concerns that Universal has with respect to allocation of the indemnity payments, Motors Insurance Corporation still agrees to submit any disputes along these lines to arbitration." (Italics added.)
On March 11, 1996, Universals Fukunaga wrote to Hendrick Automotives Brewer, setting forth Universals position that its potential coverage exposure was only seven weeks compared to MICs potential coverage exposure of 13 months. Universal would therefore pay only 12 percent of any settlement Universal "may participate in." Fukunaga also recalled: "I had proposed to Adjuster Dennis Mayfield of MIC that we can take one of two routes to settlement participation. Universal can participate 50/50 with MIC in any settlement or payment of adverse verdict. We can then submit the dispute as to percentage participation to binding arbitration. Adjuster Mayfield, on behalf of MIC, elected [to] have the issues submitted to binding arbitration after resolution of this case by trial or verdict." (Italics added.) Fukunaga added: "I contend that this is not the correct approach; however, MIC is entitled to their understanding of the case which will be asserted in eventual binding arbitration." (Italics added.) A copy of the March 11 letter was sent to MICs Mayfield.
On March 15, 1996, Fukunaga wrote to Mayfield: "we had discussed on an earlier occasion that MIC will agree to submit to binding arbitration the issue of how Universals policy will apply to any settlement or adverse verdict which may result. Please refer to my earlier March 11, 1996 letter, original of which went to Tim Brewer of Hendrick Automotive Group. You had received a copy of that letter." (Italics added.) Fukunagas March 15 letter was copied to "Rob Ballard, Esquire," Universals claims counsel.
On March 28, 1996, Universals Ballard sent MICs Mayfield a letter confirming their agreement "to agree to disagree at a later date regarding the nature and extent of our respective indemnity and defense issues." "[A]t the current time and based on the current state of discovery," the carriers had agreed to "jointly offer $300,000, divided equally" to settle the underlying litigation. Ballard then discussed the prospect of arbitration or other form of alternative dispute resolution as to the ultimate allocation of the carriers contribution: "If indeed a verdict is rendered, it is our intention to equally divide the compensatory award and submit to `a later to be agreed on dispute resolution process regarding each partys equitable contribution to the ultimate compensatory verdict." (Italics added.) Ballard added: "I would not be adverse to exploring the possibility of an alternative dispute resolution process, perhaps by a retired judge, appellate judge, or other qualified lawyer to resolve the differences between us which are indeed, apparently, significant. [¶] . . . [¶] I dont need to belabor our position at this point, but I believe that a strong argument can be made that the [sic] no legal liability could flow from events which occurred during our policy period in that anything that happened during the time our policy was in effect would be barred by the statute of limitations, thus there is no potential for indemnity. I dont wish to limit our position or lengthen this letter by the position that will be taken in the future, but just to confirm that those arguments can be aired and resolved at a future time. If we cannot agree on a mutually beneficial or respectable alternative dispute resolution procedure[,] I assume we can always sue each other in a state or federal court." Ballard continued: "[i]f you feel that this letter is not in agreement with our discussions, please advise as I believe that we are moving toward a trial date and any difference we have should probably be resolved prior to the time a verdict is entered, in order to fully protect the insureds best interest." (Underscoring in original.) The record contains no response from Mayfield.
D. UNIVERSALS WITHDRAWAL OF ITS DEFENSE
The plaintiff, McQuagge, rejected the carriers joint settlement offer.
Shortly before trial, the plaintiff dismissed McMaster, Hepler, and Tye. Universal, contending that the only pertinent insureds under its policy had been dismissed and any potential coverage for the plaintiffs claims had thus been extinguished, withdrew its defense of Hendrick Automotive pursuant to its earlier reservation of rights. MIC continued to defend its insureds at trial.
E. VERDICT IN UNDERLYING LITIGATION
The jury returned a verdict against Hendrick Automotive, awarding compensatory damages of $500,000 for sexual harassment and $ 115,854.18 for defamation. The plaintiff was also awarded $ 1,907,758.80 for attorney fees and $149,048.22 for costs of suit. Additional prejudgment interest amounted to $327,347.80. Subsequently, MIC settled with the plaintiff for $3 million.
F. MICS PETITION TO COMPEL ARBITRATION
In May 1999, MIC demanded that Universal submit the issue of the carriers respective defense and indemnity obligations, including the allocation of the underlying settlement, to binding arbitration. Universal had agreed to such arbitration, MIC contended, based on the correspondence between Mayfield and Fukunaga. Universal refused to arbitrate, asserting there was no agreement to arbitrate the parties contribution or coverage obligations.
In September 1999, MIC filed a petition to compel arbitration. MIC maintained that the parties stipulated to share the cost of defending the underlying action and agreed to defer an agreement regarding allocation of moneys, if any, paid in indemnification until after the conclusion of the underlying case. Attached as exhibits to the petition were copies of Fukunagas March 11 and March 15 letters.
Universal opposed the petition, contending essentially that it only agreed to arbitrate the allocation of defense and indemnity on the assumption that Universal and MIC would both be responsible for the underlying judgment. In addition, Universal argued, its agreement to participate in the defense of the underlying action was subject to a reservation of rights, including the right to withdraw its defense if there was no potential coverage under its policy. Because the only defendants who could have been covered under the Universal policy had been dismissed, Universal insisted, it had no coverage liability and there was nothing to arbitrate.
In opposition to the petition to compel, Universal submitted declarations from Fukunaga and Ballard. Fukunaga stated: "During the course of my handling of this claim, I was instructed by Robert Ballard, Esquire, my immediate supervisor on the claim, to contact [MIC] and adjuster Dennis Mayfield in order to propose that the carriers consider agreeing to submit the dispute as to the percentage of participation in settlement or ultimate verdict to binding arbitration, assuming that Universal Underwriters obligation to provide a duty to defense and indemnity existed. This proposal was based upon the assumption that there would continue to be potential for coverage under the Universal Underwriters Insurance policy issued to VSGCI of Oakland, Inc. At no time did I propose nor agree to submitting Universal Underwriters ultimate coverage obligation to its respective insureds to binding arbitration." Ballard averred: "Attached hereto as Exhibit `2 is a true and correct copy of correspondence received by Universal Underwriters from Dennis K. Mayfield of MIC dated March 8, 1996. As can be seen from a review of the same, MIC and Universal Underwriters Group agreed to submit any disputes with respect to allocation of indemnity payments to arbitration."
At the hearing on MICs petition on November 29, 1999, Universal conceded there was an agreement to arbitrate, but asserted that the parties agreed to arbitrate only the issue of allocation of defense and indemnification costs, not the issue of coverage.
"The Court: Without getting into the differences and things like that, I read your papers. Mr. Scheley [Universals counsel], do you agree there was an agreement to arbitrate, without going into the particulars and specifics, in general? [¶] Mr. Scheley: Yes."
The trial court (Judge Needham) granted MICs petition. The written order directed MIC and Universal to "proceed to arbitrate the issue of their respective obligations to defend and indemnify defendants in the underlying [litigation]," and that the "arbitration be conducted pursuant to the agreement made between them."
G. THE ARBITRATION
The arbitration took place in June 2002. In his written decision, the arbitrator did not address Universals argument that it never agreed to submit the question of coverage to binding arbitration, ruling on the merits of the coverage issue instead. Based on certain provisions in Universals policy, including the insuring agreement and definition of an insured, the arbitrator found that Select was an insured under Universals policy, Select was a general partner of the general partnership Hendrick Automotive, and Hendrick Automotive was one of the defendants against whom the underlying judgment was rendered. Further, he concluded, a sexual harassment injury continuing through several policy periods is covered by all of the policies in effect during those policy periods. The arbitrator then apportioned liability for defense and indemnification costs on a time-on-the-risk basis, finding Universal was on the risk for 6.15 percent of the coverage period and was therefore responsible for 6.15 percent of the compensatory damages, attorney fees, costs, and interest. The arbitrator awarded $356,917.08 to MIC.
H. THE PETITION TO CONFIRM THE ARBITRATION AWARD AND ENTER JUDGMENT
MIC filed a petition to confirm the arbitration award and enter judgment in September 2002. (Code Civ. Proc., § 1285.) Universal objected on the grounds asserted in its opposition to the motion to compel arbitration. In addition, Universal argued that its duty of defense or indemnification was a condition precedent to the arbitration agreement, there had been no mutual assent as to the scope of issues to be arbitrated, and the agreement was voidable due to Universals unilateral mistake of fact as to the arbitrations scope. Because the order compelling arbitration was therefore erroneous, Universal contended, the arbitrator exceeded his powers by rendering a decision pursuant to the order compelling arbitration.
In response, Mayfield submitted a declaration in support of MICs petition to confirm the award. In part he stated: ". . . Mr. Fukunaga and Mr. Ballard proposed, and I agreed on behalf of MIC, that each insurer would contribute equally to any settlement or verdict and then submit the dispute to binding arbitration. . . . [¶] At no time did Mr. Fukunaga, Mr. Ballard or anyone else employed by or acting on behalf of [Universal] ever advise me that the binding arbitration agreement was conditioned on [Universal] first acknowledging that there was coverage under its policy. The first time that I heard this position was when I read a letter dated June 18, 1999, from Mr. Ballard to Ann Elston, counsel for MIC, in which he denied that there was any agreement to arbitrate the issues of contribution or coverage."
After a hearing on October 22, 2002, the trial court (Judge Richman) granted MICs petition to confirm the arbitration award and entered judgment.
Universal appealed from the October 22, 2002, "order" and "all intermediate orders, rulings, and decisions embraced within it." We note that the October 22 order was attached, as the judgment, to MICs notice of entry of judgment; we will view the notice of appeal to seek review of the judgment and interlocutory orders. (See Code Civ. Proc., § 904.1.)
II. DISCUSSION
Universal opposed confirmation of the arbitration award on the ground the arbitrator exceeded his powers in conducting the arbitration: although the arbitrator acted pursuant to the courts earlier order compelling the arbitration, Universal argued, the order was erroneous because there was no valid arbitration agreement covering the issues arbitrated. (Code Civ. Proc., § 1286.2(4); see Lindenstadt v. Staff Builders, Inc. (1997) 55 Cal.App.4th 882, 889-890 [absent valid agreement to arbitrate, arbitrator may not proceed] (Lindenstadt ); United Firefighters of Los Angeles v. City of Los Angeles (1991) 231 Cal.App.3d 1576, 1581-1582 [appellant may challenge order compelling arbitration after entry of judgment confirming the award].)
"In general, . . . courts may not interfere with arbitration awards. Courts may not examine the merits of the controversy, the sufficiency of the evidence supporting the award, or the reasoning supporting the decision. . . . A court may not set aside an arbitration award even if the arbitrator made an error in law or fact. . . . " (Lindenstadt, supra, 55 Cal.App.4th at p. 889, internal quotation marks omitted.)
The issue before us, therefore, is whether the trial court erred in deciding that the issues to be arbitrated were within the scope of an arbitration agreement between the parties. While couched in the rubric of mutual assent, condition precedent, and unilateral mistake, Universals essential assertion is that the parties arbitration arrangement, if any, was merely to determine how much the insurers would have to contribute to a settlement or judgment they paid jointly, and not the threshold question of whether their respective policies covered the asserted claims.
We consider, first, whether there was a written agreement to arbitrate, and whether an oral agreement can be the subject of an order to compel arbitration under Code of Civil Procedure section 1281.2. We then determine whether the parties agreement encompassed the issues arbitrated. In pursuing this analysis, we are mindful of the fundamental precepts of California arbitration law. "Private arbitration is a matter of agreement between the parties and is governed by contract law." (Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 313.) The right to pursue claims in a judicial forum is a substantial right and one not lightly deemed waived. (Marsch v. Williams (1994) 23 Cal.App.4th 250, 254-255 (Marsch).) On the other hand, California has a strong public policy favoring arbitration of disputes. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9.) Arbitration should therefore be ordered unless it is clear that the arbitration clause is not susceptible of an interpretation that covers the dispute. (United Public Employees v. City and County of San Francisco (1997) 53 Cal.App.4th 1021, 1026.)
A. DID THE AGREEMENT HAVE TO BE IN WRITING TO BE ENFORCED?
A petition to compel arbitration may be granted under Code of Civil Procedure section 1281.2 only if the parties agreement to arbitrate was in writing. (Code Civ. Proc., § 1281.2 [applying to a "petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy" (italics added)]; Marsch, supra, 23 Cal.App.4th at p. 255.) Here, the letters between Universal and MIC constitute written evidence of their oral understanding, but they do not, strictly speaking, comprise a written agreement to arbitrate.
The trial court may, however, enforce an oral agreement to arbitrate when the parties proceeded as if a formal writing was unnecessary to its enforcement. In Law Offices of Ian Herzog v. Law Offices of Joseph M. Fredrics (1998) 61 Cal.App.4th 672 (Herzog), for example, the parties had orally agreed to arbitration. While recognizing that Code of Civil Procedure section 1280 authorized enforcement of written arbitration contracts only, the court upheld the order confirming the arbitration award, on grounds of waiver and estoppel, because the defendant had agreed the court should order arbitration and stipulated that a written agreement was unnecessary. (Herzog, supra, at p. 675.)
Although not as extreme, the matter before us is sufficiently similar. In its written opposition to the petition to compel arbitration, Universal did not specifically object to the arbitration on the ground the agreement between the parties had not been in writing; it simply argued that the parties had never reached any unconditional agreement to arbitrate the issue of coverage. At the hearing on the petition to compel arbitration, and the hearing on the petition to confirm the arbitration award, Universal did not contend the arbitration agreement was unenforceable merely because it was oral. To the contrary, Universals counsel stipulated there was an agreement to arbitrate. Only on appeal—after receiving the arbitration award adverse to its interests—did Universal protest that the arbitration agreement was not in writing. In light of these circumstances, and the time and resources expended in conducting the arbitration, Universal cannot now avoid enforcement of its arbitration agreement with MIC on the ground the agreement was not reduced to a formal writing.
In its response and opposition to petition to compel arbitration, Universal alleged as part of an affirmative defense that it "never signed an agreement that it intended to submit the threshold question of coverage under its policy to binding arbitration." In its memorandum of points and authorities in opposition to the petition to compel, Universal argued: "the correspondence between the [parties] does not constitute a written agreement to submit the question of whether or not there was a duty to defend and indemnify the remaining defendants" in the underlying litigation. Universal repeated this assertion in its response to MICs petition to confirm the arbitration award. Universal did not, however, assert that the agreement could not be enforced because of its oral nature.
Alternatively, we note that a trial court may enforce oral agreements in other contexts. (See Civ. Code, § 3390.) The parties do not contend an oral agreement to arbitrate might not be enforced pursuant to judicial powers other than those bestowed by Code of Civil Procedure section 1281.2, particularly where, as here, the oral agreement has been confirmed in numerous letters. Thus, while we do not rule that oral agreements to arbitrate are enforceable under Code of Civil Procedure section 1281.2. (and therefore need not decide whether the statutes requirement of a writing is jurisdictional), we conclude that Universal cannot now assert any objection to the enforcement of the arbitration agreement merely because of the procedural vehicle the court and parties purported to employ.
At the hearing on the petition to compel arbitration, MICs counsel asserted that this type of exchange of letters is typically how insurers reach agreements to arbitrate.
In its reply brief, Universal refers us to Magness Petroleum Co. v. Warren Resources of Cal., Inc. (2002) 103 Cal.App.4th 901 (Magness). There, a written agreement required arbitration of disputes before the American Arbitration Association, but the parties had orally agreed to the jurisdiction of the Judicial Arbitration and Mediation Services, Inc. (Id. at p. 903.) Under Code of Civil Procedure section 1281 et seq., the court concluded, an oral modification of a written agreement to arbitrate is not specifically enforceable, just as an oral agreement to arbitrate is not enforceable. (Magness, supra, at pp. 903-904, 907-908.) However, the court also stated: "Under certain limited circumstances—demonstrating waiver, estoppel or an oral agreement reflected in a written court or other record—courts permit exceptions to the statutory rule that only written agreements to arbitrate may be enforced." (Id. at p. 909.) Finding no such circumstances in the matter before it, the court concluded the oral modification was unenforceable. (Id. at pp. 910-911.) By contrast, the record before us demonstrates not only that Universal itself confirmed the oral arbitration agreement in a number of writings, but that Universal should in any event be precluded from challenging the enforcement of the agreement due to its failure to object on the basis of the agreements oral nature. Thus, the absence of a formal written contract does not preclude judicial enforcement of the parties arbitration agreement.
We turn, therefore, to the scope of the parties agreement.
B. MUTUAL ASSENT
Mutual assent is an essential element to a contract. (Civ. Code, § 1550(2); see Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348, 358-359 [arbitration agreement] (Banner).) Universal contends mutual assent was lacking, because: "While MIC maintains that the parties agreed to submit all issues regarding coverage under the policy of insurance issued by Universal Underwriters to binding arbitration, Universal Underwriters contends that any agreement was subject to the condition that it would continue to have a potential duty to defend or indemnify the defendants in the underlying action."
Mutual assent is an issue of fact and, as such, we review the matter for substantial evidence. (Banner, supra, 62 Cal.App.4th at p. 357 [mutual assent]; see also Engineers & Architects Assn. v. Community Development Dept. (1994) 30 Cal.App.4th 644, 653 [substantial evidence rule applies to whether arbitrated issue was covered by the arbitration clause].)
Substantial evidence supports the conclusion that the parties mutually agreed to arbitrate the allocation of defense and indemnification costs—even if Universal (or MIC, for that matter) later concluded it had no coverage obligation at all. Fukunagas March 11 letter records his proposal to MIC that the parties "submit the dispute as to percentage participation [in settlement or indemnity] to binding arbitration" and MICs proposal to "have the issues submitted to binding arbitration after resolution of this case by trial or verdict." (Italics added.) His March 15 letter to MICs Mayfield confirms an agreement to "submit to binding arbitration the issue of how Universals policy will apply to any settlement or adverse verdict which may result." Ballards March 28, 1996, letter to MIC reconfirmed Universals intention to "equally divide the compensatory award and submit to `a later to be agreed on dispute resolution process regarding each partys equitable contribution to the ultimate compensatory verdict." (Italics added.) From this correspondence, the parties manifested their intent to arbitrate the allocation of defense and indemnity costs, which reasonably includes the issue of whether Universals policy afforded any coverage at all. Of course, if there were no coverage under Universals policy, Universal would not be allocated any part of the defense or indemnity costs.
The parties correspondence did not address the possibility that the named insureds of either insurer would be dismissed from the litigation. This omission can be viewed in two ways. It could be inferred, favorably to MIC, that the parties did not mention this possibility, because they never intended such a dismissal to preclude the arbitration of the parties respective obligations. (Although the dismissal of a named insured would likely affect the outcome of the arbitration, it might not preclude coverage altogether because—as the arbitrator concluded with respect to Universals policy—coverage might be owed to a person or entity who was not specifically identified as a named insured.) Alternatively it could be inferred, favorably to Universal, that the parties simply never contemplated the possibility of a dismissal of named insureds and, based on the named defendants at the time, discussed arbitration with the assumption they would both face liability and contribute jointly to any settlement or judgment. However, in reviewing the trial courts factual determination of the parties intent in their oral agreement, our role is not to reweigh the evidence or choose between two reasonable inferences, but merely to ascertain whether there was substantial evidence to support the inference the trial court made. In light of the language of the correspondence and the record before the court, we conclude such substantial evidence exists.
Universal argues the parties never reached an agreement to arbitrate, based on Ballards statements in his March 28, 1996, letter that he "would not be adverse to exploring the possibility of an alternative dispute resolution process," each partys equitable contribution would be submitted to a "later to be agreed on dispute resolution process," and, if agreement was not reached on the procedure, they could "always sue each other in a state or federal court." (Italics added.) In his subsequent declaration opposing the petition to compel arbitration, however, Ballard stated under penalty of perjury: "As can be seen from a review of the [March 8, 1996 letter from Mayfield to Fukunaga], MIC and Universal Underwriters Group agreed to submit any disputes with respect to allocation of indemnity payments to arbitration." (Italics added.) By the time of his March 28 letter, therefore, Ballard was not merely exploring the possibility of arbitration.
At oral argument, Universals counsel contended that Ballard was only confirming an agreement to arbitrate allocation disputes that might arise in connection with the parties joint settlement proposal of March 8, which the plaintiff rejected. We need not debate further the meaning of Ballards assertions, however, since Universal expressly represented to the trial court that some arbitration agreement had, in fact, been formed.
Indeed, Ballards March 28 letter not only conveys the prospect of binding arbitration, it seems to suggest the scope of arbitration would include the threshold issue of whether either insurer had any coverage at all. Ballard anticipated addressing at a later time either partys belief that it lacked any indemnity exposure: "I dont need to belabor our position at this point, but I believe that a strong argument can be made that the [sic] no legal liability could flow from events which occurred during our policy period in that anything that happened during the time our policy was in effect would be barred by the statute of limitations, thus there is no potential for indemnity. I dont wish to limit our position or lengthen this letter by the position that will be taken in the future, but just to confirm that those arguments can be aired and resolved at a future time." (Italics added.) While this assertion is subject to different interpretations, it is not unreasonable to conclude that Universals objective manifestation of intent was to reserve this issue of coverage for arbitration.
Substantial evidence supports the conclusion that the parties agreed to arbitrate their respective liability for any settlement or verdict in the underlying litigation.
C. CONDITION PRECEDENT TO FORMATION
Universal contends any arbitration agreement the parties reached is unenforceable because a condition precedent to its formation was not met. Universal asserts: "MIC and Universal orally agreed that any agreement to arbitrate was conditioned on the assumption that Universal would have a duty to defend or indemnify the underlying defendants. The correspondence sent by the claims counsel and the claims adjusters shows that they only entertained the notion of having the question of each companys responsibility for payment of an underlying judgment or settlement arbitrated, assuming that there was coverage under the policy of insurance issued by Universal Underwriters."
Universal is incorrect. Nowhere in the subject correspondence did either party state that arbitration was conditioned on Universal continuing to believe its policy afforded coverage for the underlying litigation. There was no express condition precedent to that effect.
Universal contends the condition precedent was implied by the absence of any reference to a determination of coverage in the correspondence. A condition precedent may not be implied, however, unless it is necessary to make the contract reasonable. (Civ. Code, § 1655.) The condition precedent pressed by Universal is not necessary for the arbitration agreement to be reasonable: there is nothing unreasonable about an insurers agreeing to arbitrate whether its policy affords coverage, even though its position is that the policy does not afford coverage. Universal has not shown that its arbitration agreement is unenforceable due to an unsatisfied condition precedent.
D. UNILATERAL MISTAKE
Universal next contends its arbitration agreement should not be enforced because it entered into the contract by its unilateral mistake of fact. In particular, Universal asserts, it mistakenly believed the arbitration agreement was subject to its reservation of rights, or the agreement would not be enforced if it decided it had no duty to defend or indemnify in regard to the underlying litigation.
MIC protests that Universal did not assert this theory in the trial court, and may not raise it for the first time on appeal. (See McDonalds Corp. v. Board of Supervisors (1998) 63 Cal.App.4th 612, 618; In re Marriage of Eben-King & King (2000) 80 Cal.App.4th 92, 110-111.) Universal did, however, assert this theory in its response to the petition to confirm the arbitration award, devoting about three pages to the subject. The declarations of Fukunaga and Ballard submitted in opposition to the petition to compel arbitration also asserted Universals errant understanding when negotiating the arbitration.
For example, Universal stated: "Finally, even assuming for the sake of argument that there was a contract, it is voidable given the mistake of fact on the part of [Universal]. [Universal] believed that the agreement only was to arbitrate the issue of allocation of responsibility between the two insurance companies as long as it had a potential duty to defend or to indemnify." Universal also cited Civil Code sections 1568 and 1577, pertaining to mistake of fact, contended that "under certain circumstances a unilateral mistake of fact is a sufficient basis for relief," and relied on Architects & Contractors Estimating Service, Inc. v. Smith (1985) 164 Cal.App.3d 1001 (Architects), a unilateral mistake of fact case on which it relies in this court as well.
It is true that Universal did not expressly raise the unilateral mistake issue in opposition to the petition to compel arbitration, waiting instead until its opposition to the petition to confirm the arbitration award. We need not address whether this omission waived its unilateral mistake argument, however, because the unilateral mistake theory has no merit anyway.
A party may rescind a contract if it gave its consent by mistake of fact. (Civ. Code, § 1689, subd. (b)(1); see Civ. Code, § 1577.) As expressed in the case on which Universal itself relies: "Unilateral mistake is ground for relief where the mistake is due to the fault of the other party or the other party knows or has reason to know of the mistake." (Architects, supra, 164 Cal.App.3d at pp. 1007-1008.)
Civil Code section 1577 reads: "Mistake of fact is a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in: [¶] 1. An unconscious ignorance or forgetfulness of a fact past or present, material to the contract; or, [¶] 2. Belief in the present existence of a thing material to the contract, which does not exist, or in the past existence of such a thing, which has not existed."
In the matter before us, there was no indication that MIC knew Universal was agreeing to arbitrate its potential liability with the mistaken notion that the arbitration was conditioned on Universal continuing to believe it was potentially liable. Nor, of course, was there any indication that Universals mistake was caused by anything MIC did or said. To the contrary, any "mistake" on Universals part was perpetuated by its failure to disclose, or at least clarify, its intentions. When Universals claims handler Fukunaga and claims attorney Ballard prepared their correspondence about the arbitration, there was at least some possibility that Universals insureds would be dismissed from the underlying litigation; Universal failed to spell out its understanding in regard to this potentiality.
Universals reliance on Architects, supra, 164 Cal.App.3d 1001, is unavailing. There, Smith (the defendant) entered into a contract with Noble (the plaintiff), by which Smith would provide subcontractor services. At the time, Smith understood from a third party that the contract price would afford him a 20 percent profit margin. Smith told Noble of this understanding and said he had not substantially examined the plans or specifications for the job. Noble did not disabuse Smith of his errant understanding of the profit margin. The court concluded there was substantial evidence supporting the trial courts conclusion that Smith entered into the contract by unilateral mistake of fact, noting that Smiths business acumen was "something less than sharp" and it was his first venture into such a contract. (Id. at pp. 1004-1006, 1008.)
Here, by contrast, Universal was certainly no stranger to its circumstances, and was represented in its negotiations by both a claims adjuster and claims counsel. And while in Architects Smith advised Noble of his misunderstanding, here Universal did not advise MIC of the condition it believed had been placed on the arbitration. Architects is therefore distinguishable, and it does not suggest the parties arbitration agreement should be vitiated by Universals purported mistake of fact.
E. CONDITION PRECEDENT TO PERFORMANCE
Universal contends the existence of a duty to defend or indemnify the underlying defendants was a condition precedent to any duty it owed under the arbitration agreement. As discussed ante, there was no such express or implied condition precedent to the formation of the arbitration agreement. For the same reasons, there was no condition precedent to Universals performance under the arbitration agreement.
F. EXCESS OF JURISDICTION
Lastly, Universal contends that the arbitrator acted in excess of his jurisdiction by ruling on the issues submitted for arbitration, because there was no valid agreement to arbitrate those issues. (Code Civ. Proc., § 1286.2, subd. (a)(4); Lindenstadt, supra, 55 Cal.App.4th at pp. 889-890.) As we have explained, however, the trial court did not err in concluding there was a valid agreement to arbitrate the issues submitted for arbitration. Universal has therefore failed to establish that the arbitrator exceeded its jurisdiction.
G. SANCTIONS
MIC seeks sanctions against Universal for filing and pursuing a frivolous appeal. We deferred our ruling on MICs sanctions motion pending our consideration of the merits of the appeal. We also provided Universal notice that we were considering the imposition of sanctions (Cal. Rules of Court, rule 27(e)(3)), and Universal has filed an opposition to MICs motion.
Sanctions may be imposed for appeals that are frivolous or taken solely for purposes of delay. (Code Civ. Proc., § 907; Cal. Rules of Court, rule 27(e)(1).) While Universal is wrong in its analysis of the issues, we cannot say that its position is frivolous. Nor has MIC established that Universal appealed solely for purposes of delay. MICs motion for sanctions is denied.
III. DISPOSITION
The judgment is affirmed.
We concur. JONES, P.J., GEMELLO, J.