How To Limit The Arbitrary Powers Of Arbitrators, And Allow Appeal Of Arbitration Awards By The Use Of Custom Contract Provisions Under California Law

Arbitration awards have typically been held to be final, and not appealable or reviewable by the Courts even if the arbitrator's decision is legally faulty or misapplies the law or the facts, and even if there is legal error apparent on the face or in the text of the arbitration award itself.

This has led many parties to try to avoid or get out of arbitration, even if it might otherwise be quicker and less expensive than a court or jury trial.

However, recent Federal and California cases have effectively held that when parties draft arbitration clauses in certain very particular and limited ways by the use of certain specific language that would permit the courts to review or overturn an arbitrator's award for legal or other types of errors.

In one of these cases, the U.S. Supreme Court rejected one particular arbitration clause which attempted to allow for court review of the arbitrator's decision, but at the same time left the door open for other clauses allowing such review, particularly where State arbitration law applies.

In that case, the clause provided that.

"[t]he United States District Court for the District of Oregon may enter judgment upon any award, either by confirming the award or by vacating, modifying or correcting the award. The Court shall vacate, modify or correct any award: (i) where the arbitrator's findings of facts are not supported by substantial evidence, or (ii) where the arbitrator's conclusions of law are erroneous." App. to Pet. for Cert. 16a.

Hall St. Assocs. v. Mattel, Inc. (2008) 128 S. Ct. 1396, 1400-1401. (Emphasis added)

The U.S. Supreme Court held that that clause did not allow review by the Courts

In a case decided in 2008 by the California Supreme Court, however, the Court upheld such a clause and allowed court review of awards based on the very unique language of that clause.

Section 18.12 of the sales agency agreement in that case, captioned "ARBITRATION," stated:

"(a) Any dispute or claim arising out of the interpretation, performance, or breach of this Agreement, including without limitation claims alleging fraud in the inducement, shall be resolved only by binding arbitration, at the request of either party, in accordance with the rules of the American Arbitration Association, modified as herein provided. The arbitrators shall be, to the fullest extent available, either retired judges or selected from a panel of persons trained and expert in the subject area of the asserted claims. If the claim seeks damages of less than $ 250,000, it shall be decided by one arbitrator. In all other cases, each party shall select one arbitrator, who shall jointly select the third arbitrator. If for any reason a third arbitrator is not selected within one month after the claim is first made, the third arbitrator shall be selected in accordance with the rules of the American Arbitration Association. The arbitrators shall apply California substantive law to the proceeding, except to the extent Federal substantive law would apply to any claim. The arbitration shall be conducted in Los Angeles, California. An award may be entered against a party who fails to appear at a duly noticed hearing. The arbitrators shall prepare in writing and provide to the parties an award including factual findings and the reasons on which their decision is based. The 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. The decision of the arbitrators may be entered and enforced as a final judgment in any court of competent jurisdiction. The parties shall share equally the arbitrator's fees and other costs of the arbitration.

"(b) Notwithstanding the foregoing, the following shall not be subject to arbitration and may be adjudicated only by the Los Angeles County, California Superior Court or the U.S. District Court for the Central District of California:

"(1) any dispute, controversy, or claim relating to or contesting the validity of DIRECTV's right to offer DBS Service to the public or any of DIRECTV's Trade Secrets or Marks; and

"(2) the request by either party for preliminary or permanent injunctive relief, whether prohibitive or mandatory, or provisional relief such as writs of attachment or possession.

"(c) This Section and any arbitration conducted hereunder shall be governed by the United States Arbitration Act (9 U.S.C. Section 1, et seq.). The parties acknowledge that the transactions contemplated by this Agreement involve commerce, as defined in said Act. This Section 18.12 shall survive the termination or expiration of this Agreement."

Cable Connection, Inc. v. DIRECTV, Inc., (2008 Cal. LEXIS 10354) (emphasis added)

California Code Civil Proc.§ 1296 also expressly allows for such clauses in California in public construction contracts on Public Works jobs:

"The parties to a construction contract with a public agency may expressly agree in writing that in any arbitration to resolve a dispute relating to the contract, the arbitrator's award shall be supported by law and substantial evidence. If the agreement so provides, a court shall, subject to Section 1286.4, vacate the award if after review of the award it determines either that the award is not supported by substantial evidence or that it is based on an error of law." (Emphasis added)

Other possible language which might be valid, depending on how the law evolves in this area, could be:

"Notwithstanding any provision of those Rules or any law, the arbitrator(s) shall only have the power or authority to award the relief a court could award based upon the same facts, evidence and applicable substantive law, and the arbitrator's decision or award shall be supported by a reasoned opinion reciting all facts, evidence and law on which the award is based. The decision or award shall be based on only upon the applicable substantive law and substantial evidence in the record; and the arbitrators in such arbitration shall have no authority or power to order any other or additional relief, nor to award punitive or exemplary damages to or against either party hereto, and all claims therefor are hereby waived. If the arbitrator(s) shall render any award in excess or in violation of the limits on their powers in the preceding sentences, they shall be deemed to have "exceeded their powers" within the meaning of both Calif. Code of Civil Procedure § 1286.2(a)(4) and 9. U.S.C. § 10(a)(4) any such award shall be subject to vacation and shall be vacated upon those grounds. In any such arbitration or dispute between them, the parties hereto shall each bear their own attorneys fees and arbitration and court costs. The parties hereto further agree, and shall and do hereby stipulate, that this arbitration agreement and the attached Attorney Client Retainer Agreement are both and each "a contract evidencing a transaction involving commerce" within the meaning of section two of the Federal Arbitration Act (9 U.S.C. § 1, et seq), and that this arbitration agreement shall be governed, interpreted and enforced only pursuant to the provisions of that Federal Act, and not any state law."

(Emphasis reflects a possibly valid response to Hall Street and Cablevision decisions).

N.B. No legal advice is intended or given by this information, as the case law is new and still very unclear and unsettled, and could still change or evolve very substantially. Please consult a competent arbitration attorney before preparing or signing any arbitration agreement.

For further information on the subject of this article or for legal questions on Mechanics Liens and other Construction Law issues on Private and Public construction jobs, please call George Wolff at (415)788-1881, x 222, or Contact us via email.