Parties to construction arbitrations who are disappointed with the arbitrator's award are often doubly-disappointed to learn that they have very little chance of successfully appealing in a court to overturn the arbitrator's decision. Because arbitration is intended to be a final and complete alternative dispute resolution process, judicial review of the arbitrator's award is quite limited. Ordinarily a court may not review the merits of the dispute, or overturn an arbitration award on ground that the arbitrator made legal errors or erred in applying the law to the facts. In general, a court is authorized to overturn an arbitration award only where (i) the award was procured by corruption or fraud; (ii) there was corruption or misconduct by the arbitrator, (iii) the arbitrator exceeded his or her powers, (iv) the arbitrator refused to postpone the hearing despite there being good cause to do so and that prejudices the parties, or (v) the arbitrator failed to disclose potential grounds on which he or she could be disqualified or refused to disqualify himself when there was cause to do so. See, e.g., Cal. Civ. Proc. Code 1286.2.
To expand the scope of judicial review beyond these parameters
and obtain something akin to an ordinary right of appeal, parties
have attempted to "contract around" the statutory
provisions, and have included language in their arbitration
agreements providing for appeal or judicial review of the substance
of the arbitrator's decision. In a recent decision, the
California Court of Appeal held that to be enforceable, an
agreement for expanded scope of judicial review of the
arbitrator's award must be explicit and unambiguous, and
language in the arbitration agreement stating that the arbitrator
must render an award "in accordance with substantive
California law" is not sufficient. Gravillis v. Coldwell Banker Residential
Brokerage Company, 182 Cal. App. 4th 503 (2010).
In Gravillis, the plaintiff had purchased a home using a
standard form California purchase agreement which included a clause
requiring arbitration of any disputes arising out of the agreement.
The arbitration clause stated that the arbitrator "shall
render an award in accordance with substantive California
law." 182 Cal. App. 4th at 508. Before he moved into the home,
plaintiff discovered it had extensive structural damage which left
it essentially uninhabitable. Plaintiff filed a lawsuit in court
against his real estate brokers for failing to disclose the
structural defects. Based on the arbitration clause in the purchase
agreement, the trial court ordered the case to arbitration. After a
hearing, the arbitrator issued an award in favor of the plaintiff
and awarded him damages and costs. The brokers petitioned the court
to vacate the award, contending that the arbitrator had made
substantive legal errors by (i) finding the brokers had breached a
fiduciary duty to plaintiff, (ii) awarding the plaintiff
"benefit of the bargain damages" rather than "out of
pocket expense" damages; and (iii) awarding the plaintiff his
costs incurred in the arbitration. The trial court denied the
brokers' petition, and the brokers appealed. On appeal, the
brokers asserted they were not subject to the general rule or
non-reviewability, but were entitled to have the award overturned
on the merits based on the arbitrator's legal errors because
the arbitration agreement stated that the arbitrator was required
to render an award "in accordance with substantive California
law."
The Court of Appeal first emphasized the reasoning underlying the
general rule -- because parties to arbitration have a right to
expect the arbitration will be a final and binding resolution of
their dispute, as a general matter, "the merits of the
controversy between the parties [in arbitration] are not subject to
judicial review," and the "courts will not review the
validity of the arbitrator's reasoning." 182 Cal. App. 4th
at 514. The brokers argued that because the arbitrator had made
legal errors which were "not in accord with substantive
California law," the arbitrator had "exceeded his
powers" within the meaning of Code of Civil Procedure §
1286.2, and therefore the award could be vacated under the
statutory provisions. The Court of Appeal rejected this contention,
explaining that an arbitrator exceeds his or her powers when the
arbitrator acts without subject matter jurisdiction, decides an
issue that was not submitted to arbitration, upholds an illegal
contract, issues an award that violates a statutory right or
well-defined public policy, or selects a remedy that is not
authorized by law or rationally related to the contract. 182 Cal.
App. 4th at 511. The court held that the language requiring the
award be "in accordance with substantive California law"
was not sufficient to convert ordinary legal errors of the sort
alleged by the brokers into acts in excess of the arbitrator's
powers.
The court further explained that while California law allows
parties to cases governed by the California Arbitration Act to
contract for expanded judicial review, because a main purpose of
arbitration is to avoid the judicial process, the bar for allowing
expanded judicial review of the award is high. First, the
arbitration agreement must be governed by the California
Arbitration Act rather than the Federal Arbitration Act
("FAA") -- federal law does not allow parties to contract
for an expanded scope of judicial review. 182 Cal. App. 4th at 518;
Hall Street Associates LLC v. Mattel, Inc. (2008) 552 U.S.
576. Thus, for example, if the agreement states elsewhere that it
is governed by the FAA, it will not qualify for expanded judicial
review. Second, "to take themselves out of the general rule
that the merits of the award are not subject to judicial review,
the parties must clearly agree that legal errors are an excess of
arbitral authority that is reviewable by the courts." 182 Cal.
App. 4th at 516 (quoting Cable Connection, 44 Cal. 4th at
1361). Hence, an arbitration agreement which states that
"[t]he arbitrators shall not have the power to commit errors
of law or legal reasoning, and the award may be vacated or
corrected on appeal to a court of competent jurisdiction for any
such error" is sufficient to allow for judicial review of the
substance of the award under California law. Cable Connection,
Inc. v. DIRECTV, Inc., 44 Cal. 4th 1334, 1342 n. 3
(2008).
However, language in an arbitration agreement requiring that the
arbitrator render an award "in accordance with substantive
California law" does not meet that standard. That language
does not expressly deprive the arbitrator of the power to commit
legal error, nor does it expressly and unambiguously authorize a
court to review the award for legal or other substantive error.
Id. at 518-519. PRACTICE TIP: Contractors
and developers seeking expanded judicial review of the award should
include language in their contracts stating that the arbitrators do
not have the power to commit errors of law, that the award can be
vacated for such errors, and that arbitration is to be governed by
the California Arbitration Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.