After what seems like an eternity, you finally get the arbitration award that you have been waiting for. Your eyes focus and you begin to comprehend the written words, filling you with either elation, disappointment, or, perhaps, a mixture of both.  If the result is favorable, your instinct is to preserve the award, have it confirmed at the appropriate trial court, and then hopefully collect.  If the result is unfavorable, you begin thinking of how to get the award corrected or vacated altogether.  Whether the award is ultimately confirmed, corrected, or vacated depends on the standard of review agreed upon by the parties.

 

This article focuses on the selection and drafting of the standards of review for arbitration awards in California.

 

Standards Of Review For Arbitration Awards

  • General Rule: No Judicial Review Unless Narrow Statutory Bases Apply

 

The general rule in California is that arbitration awards are binding and final, that is, not subject to judicial review, except on narrow statutory grounds. This general rule is set forth in the case Moncharsh v. Heily & Blase 3 Cal. 4th 1 (1992).

 

In Moncharsh, an attorney terminated employment with his firm and continued representing some clients who had signed retainer agreements with his former firm.  A dispute arose between the attorney and his former firm regarding fee-splitting, and the dispute was submitted to arbitration. The arbitrator ultimately found in favor of the law firm, and the attorney who had left the firm sought judicial review on the basis that the fee-splitting was allegedly illegal. The California Supreme Court concluded that in the absence of some limiting clause in the arbitration agreement, the merits of an arbitration award, whether questions of fact or law, are not subject to judicial review except on the grounds set forth in the California Code of Civil Procedure (“CCP”) sections 1286.2 and 1286.6. Id. at 33.

 

The narrow statutory grounds for reviewing an arbitration award largely relate to circumstances involving fraud, corruption, or the arbitrator exceeding his or her powers.  Under section 1286.2, an award may be vacated if: (1) the award was procured by corruption, fraud, or other undue means; (2) there was corruption in any of the arbitrators; (3) the rights of the party were substantially prejudiced by misconduct of a neutral arbitrator; (4) the arbitrators exceeded their powers; (5) the arbitrator substantially prejudiced the rights of a party by refusing to hear material evidence, or postpone the hearing upon sufficient cause, or by “other conduct” contrary to the provisions of Title 9 [Arbitration]; or (6) the arbitrator making the award either failed to timely disclose a ground for disqualification of which he was aware or failed to timely disqualify himself, if applicable, under section 1281.91. CCP § 1286.2(a).  Pursuant to CCP section 1286.6, an arbitration award may be corrected only if: (1) there was an evident or patent “miscalculation of figures” or “mistake in the description of any person, thing or property referred to in the award;” (2) the arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision; or (3) the award is “imperfect as a matter of form, not affecting the merits of the controversy.” CCP § 1286.6.

 

As a matter of practice and experience, most arbitrators identify, timely disclose, and request a waiver of potential conflicts.  Similarly, almost all arbitrators freely allow the parties to present evidence. (This occurs much to the chagrin of the party who receives previously requested documents half-way through the arbitration hearing.)  Consequently, a party’s chances of vacating an arbitration award under section 1286.2 or correcting the award under section 1286.6 are minimal in the absence of credible evidence of fraud or corruption, or where the arbitrator’s award somehow violates a statutory right or a well-defined public policy. See, e.g., Kelly Sutherlin McLeod Architecture, Inc. v. Schneickert, 194 Cal. App. 4th 519, 534 (2011).

 

Likewise, although it is certainly possible for an arbitrator to exceed his or her power under CCP sections 1286.2 and 1286.6, parties should understand that the grounds for judicial review of an arbitration award on that basis are indeed narrow. Under existing case law, arbitrators do not “exceed their powers” merely by rendering an erroneous decision on a legal or factual issue, so long as the issue was within the scope of controversy submitted to the arbitrators. See Moshonov v. Walsh, 22 Cal. 4th 771, 775-76 (2000).  This is true even where an arbitrator renders a legally incorrect decision that explicitly contradicts the parties’ agreement. Safari Assoc. v. Superior Court, 231 Cal. App. 4th 1400 (2014).

 

  • Exception: Parties May Agree To Expanded Judicial Review

 

Notwithstanding the general presumption of non-reviewability under Moncharsh, the California Supreme Court recognized in Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal. 4th 1334 (2008), that parties may contract out of the presumption by agreeing to an expanded or heightened judicial review.

 

DIRECTV involved a dispute between a television provider (DIRECTV) and a class of dealers over wrongfully withheld commissions and assessment of improper charges. The underlying agency agreement required arbitration and the matter was submitted to an arbitration panel.  The panel determined that arbitration on a class-wide basis was permitted, and DIRECTV petitioned to vacate the award on the basis that, among other things, “the award reflected errors of law that the arbitration clause placed beyond their powers and made subject to judicial review.” Id. at 1342. The trial court vacated the award and the court of appeals reversed, holding such provisions unenforceable. The California Supreme Court reversed the appellate court with directions to instruct the trial court to vacate the award. Ultimately, the DIRECTV court determined that the parties’ agreement clearly evidenced an intent for expanded judicial review because the language stated that: (1) the arbitrators would apply California substantive law; (2) the arbitrators would articulate a basis for the award; (3) the arbitrators shall not have the power to commit legal errors; and (4) the award was reviewable by the courts for any such legal error. Id. at 1361-62.

 

Similarly, the California legislature has recognized that parties to a public construction contract may agree to an expanded judicial review of arbitration awards, subjecting an arbitration award to vacation if it is based on legal error or not supported by substantial evidence. CCP § 1296.

 

Selection And Drafting Considerations

 

In light of Moncharsh and DIRECTV, parties should keep in mind the following when selecting and drafting the appropriate standard of review.

 

First, decide what standard of review should apply. While this may seem obvious, the obvious is sometimes overlooked. Experience has shown that many arbitration provisions are either silent on the issue or, potentially worse, contain ambiguous language arguably supporting either review standard.

 

There is a general belief that resolving disputes through arbitration is cheaper and quicker than court-based litigation. This is at least in part based on the appeal process being effectively eliminated by the default standard of review under Moncharsh, which, as previously discussed, presumes non-reviewability. As a result, parties desiring finality of an award may wish to select the Moncharsh review standard. On the other hand, parties wishing to avoid the risk of liability for an arbitration award based on legal error or unsupported by substantial evidence may wish to select an expanded review as recognized in DIRECTV.

 

Second, the drafting party should expressly identify the desired standard of review. Parties choosing presumptive non-reviewability under Moncharsh technically do not have to draft anything concerning the standard of review because Moncharsh applies in the absence of a clear intent to an expanded review. Regardless, the drafting party should still draft its agreement with language expressly stating that any arbitration award is exclusively reviewable under CCP sections 1286.2 (for vacation) and 1286.6 (for correction), and that an expanded review under DIRECTV (and section 1296 if applicable) is expressly rejected.  Although not required, by doing so the drafting party likely eliminates the other side from arguing post-award that an expanded review applies.

 

Although it is not entirely clear what is the minimal type and amount of language to sufficiently evidence an agreement for an expanded review, the case law does provide some guidance. As previously discussed, the arbitration provision at issue in DIRECTV, which evidenced an agreement for an expanded review, included language stating that: (1) the arbitrators would apply California substantive law; (2) the arbitrators would articulate a basis for the award; (3) the arbitrators shall not have the power to commit legal errors; and (4) the award was reviewable by the courts for any such legal error. Id. at 1361-62.  Notably, the DIRECTV court made it a point to state it was not deciding whether one or more of the subject clauses alone or some different formulation would be sufficient to confer an expanded scope of review. Id. at 1361. It simply found that the facts of the case were sufficient to evidence an intent for an expanded review, and advised parties seeking to allow judicial review of the merits of an arbitration award to provide for that review “explicitly and unambiguously” in order to “avoid an additional dispute over the scope of review.” Id. at 1361.

 

In case law subsequent to DIRECTV, California courts have clarified that a provision requiring an arbitrator to render an award in accordance with California substantive law does not constitute an agreement to an expanded review. See Gravillis v. Coldwell Banker Residential Brokerage Co., 182 Cal. App. 4th 503, 518 (2010).

 

Based on Moncharsh, DIRECTV, and Gravillis, parties desiring an expanded review should be sure to draft their agreements using express, positive language both restricting the arbitrator to issuing a decision based on law and supported by substantial evidence, and making the award judicially reviewable on those grounds.  Although not required, drafters seeking to eliminate any shred of doubt should simply mirror the language found in the DIRECTV arbitration provision.

 

Parties to a public construction contract desiring expanded judicial review should draft their agreement to, at a minimum, expressly state that the arbitrator’s award “shall be supported by law and substantial evidence pursuant to section 1296,” and reviewable by the courts.  Ideally, the provision would also include language explicitly rejecting section 1286.2 as the standard of review so as to eliminate the other side from arguing post-award against a heightened review.

 

Finally, the best time to choose the standard of review for an arbitration award is at the time of drafting the underlying agreement—long before any dispute arises.  The same contractual provision agreeing to submit any disputes to arbitration can, and should, also identify the applicable standard of judicial review. Although the parties can jointly agree to an expanded review in a submission to the arbitrator, this may not be a viable option once the dispute resolution process has commenced as the parties at that point are less likely to agree to anything, let alone the applicable standard of review.

 

Conclusion

 

An arbitration award in California is presumptively non-reviewable under Moncharsh, subject to narrow statutory exceptions.  Only if the parties have expressly and unambiguously agreed to an expanded review may a court review an award on the merits. Which review standard should be selected is, like most things in life, a matter of tradeoffs—finality (avoiding lengthy and expensive appeal process) versus ensuring that the award is consistent with the rule of law (avoiding an award based on legal error).  Regardless of the desired standard, the agreements should be drafted to clearly identify the chosen standard and expressly reject the other. By doing so, the parties are more likely to avoid a post-award dispute concerning the applicable standard of review.  Simply stated, before the agreement is finalized, determine the appropriate standard of review and draft accordingly.