|
Applying the doctrine of res judicata, a California Court of Appeal held that a client could not sue her accounting firm for malpractice because the retainer agreement required the client to raise any allegations of malpractice as a counterclaim at arbitration of the firm’s claims for unpaid fees.
In Federici v. Gursey Schneider & Co., No. B183945, 2006 WL 2775212 (Cal. Ct. App. Sep. 28, 2006), Kathlynn Federici (Federici) retained Gursey Schneider & Co. (Gursey) to provide accounting services in connection with Federici’s divorce from Danny Federici, longtime keyboardist for Bruce Springsteen and the E Street Band.
The retainer agreement provided for arbitration of “[a]ny controversy, claim, or dispute relating to . . . unpaid fees for professional services.” The arbitration clause further provided that in the event of arbitration, Federici was obligated to raise any allegations of malpractice “as an offset to, or reduction, discharge or complete elimination of the fees” allegedly owed.
Gursey initiated arbitration to recover unpaid fees and obtained an award of $29,884.40. Even though Federici did not raise any allegations of malpractice at arbitration, she sued Gursey for malpractice less than a year later. The trial court dismissed her claims against Gursey on the ground that they were “barred by res judicata and waiver.”
On appeal, Federici argued that the arbitration clause in the retainer agreement applied only to fee disputes and not to malpractice claims. The Court rejected Federici’s narrow interpretation of the arbitration agreement because the agreement specifically required Federici to assert any malpractice claims as a defense to Gursey’s claim for unpaid fees.
The Court was also unpersuaded by Federici’s argument that her malpractice claim was not subject to arbitration because she was unaware of the underlying facts at the time of arbitration. In rejecting this argument, the Court found “no facts that would excuse or justify [Federici’s] failure to discover the salient facts at the time of arbitration.”
As a fallback position, Federici argued that the arbitration clause was unconscionable and therefore unenforceable. The Court did not even entertain this argument, citing the rule that a party objecting to the legality of an arbitration agreement “must oppose arbitration on this basis before participating in the process or forfeit the claim.”
Finally, Federici argued that res judicata did not apply to her malpractice claim because the issue was never raised during arbitration. But as the Court observed, a “prior judgment is res judicata on matters which were raised or could have been raised, on matters litigated or litigable.”
Gursey is fortunate that Federici forfeited any objection to the legality of the arbitration agreement because one aspect of the agreement would be exceedingly difficult to justify. Under the arbitration agreement, if the arbitrator determined that Gursey was liable for malpractice in an amount exceeding the claim for unpaid fees, Federici would have to seek excess damages in court, where the arbitrator’s findings would be inadmissible. In other words, the arbitration agreement expressly provided Gursey with two bites at the apple.
Subscribe to a free weekly update on ADR case law and
legislation
|