An Appraisal Constitutes an “Arbitration” Under California Law

An Appraisal Constitutes an “Arbitration” Under California Law

Commercial agreements often provide for contingencies, or options, pursuant to which one party may sell off or convert its interest in a company, parcel of real property, intellectual property or another asset.  Unless the company, property or asset in question has an agreed-upon or readily determinable value, executing these contractual sale or conversion provisions generally requires the parties to obtain an appraisal to determine fair market value.  In the event the appraisal is disputed, litigation can be expensive and uncertain.  Expert witnesses will need to be retained and it is often hard to predict how a judge or jury will decide the valuation issue.

A little-known wrinkle of California law can dramatically alter this landscape.  Under the California Arbitration Act, an appraisal constitutes an “arbitration.”  This has several consequences.  For one thing, it means that parties have only one hundred days to challenge, correct or modify the appraisal.  That time period can expire before parties have even fully assessed the appraisal and decided how to respond.  In addition, once the 100 days are up, either party can then petition a court to confirm the appraisal as an arbitration award and have it entered as a judgment.  Once this is accomplished, the appraised value is considered a settled issue for purposes of any ensuing litigation, and the appraisal cannot be challenged or appealed on any grounds except that the appraisal process was somehow fraudulent.

While the parties may still litigate other issues pertaining to the sale or conversion of the interest in the asset, the appraised value is essentially resolved, which means the economics of the dispute are likely determined before a case has even been filed.  Thus, the simple fact that the appraisal is deemed an “arbitration” can drive the dispute toward a stunningly rapid conclusion.

The upshot:  If there is an appraised valuation, act with urgency to devise a strategy with this “arbitration” wrinkle in mind.