November 14, 2008

Although the use of arbitration instead of trial has become commonplace, it probably comes as a surprise to some that arbitrators are not required to follow the law.  In a series of cases over the last 20+ years, California courts have consistently limited the parties’ right to have the arbitrator’s award reviewed by a court.  The California Supreme Court recently held that trial court judges have the power to review certain arbitration decisions for legal error.  The state high court’s ruling flies in the face of three California appellate rulings, and may conflict with a recent decision of the United States Supreme Court.

On August 25, 2008, the California Supreme Court held 5-2 that a trial court judge may review the decision of an arbitrator for legal error – but only if the parties to the arbitration contractually agreed to allow such review prior to the arbitration.

This ruling expands the court’s previous position on judicial review of arbitration awards.  In 1992 the court ruled in Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1that California courts cannot review an arbitrator’s decision for error, and that the only grounds for review are those set forth in Code of Civil Procedure section 1286.2 [grounds for vacation of award].

In August the court held that such review is available provided that prior to arbitration the parties agree that the arbitrator’s decision must conform to the rule of law and “make plain their intention that the award is reviewable for legal error.”  In such a situation, the court stated, the parties’ agreement has displaced the “general rule of limited review” as the parties’ expectation is that the decision of the arbitrator is not “final and conclusive, but rather that it will be reviewed on the merits at the request of either party.”

The California Supreme Court’s decision creates what appears to be a conflict between the California Arbitration Act and the Federal Arbitration Act.  In a March ruling, the United States Supreme Court held in Hall Street Associates LLC v. Mattel Inc. (2008) 128 S.Ct. 1396 that the Federal Arbitration Act doesn’t permit parties to expand judicial review by agreement.

But, the California high court pointed to specific language in Hall Street that states federal law doesn’t preclude “more searching review” of arbitration decisions based on authority outside the Federal Arbitration Act, including “state statutory and common law.”  The court reasoned that this language shows that the U.S. Supreme Court did not intend to create a uniform national policy precluding review of arbitration decisions.

So, is this development good or bad?  Should someone who is negotiating a contract or agreement require arbitration and allow a court to review the arbitrator’s decision for legal error?

Not surprisingly, it depends on the situation.  If it’s a “bet the company” case in which it’s more important for you or your client to be sure the decision is correct rather than fast, the option to have a court review the arbitrator’s ruling could be invaluable.

Some clients who experience a higher volume of litigation, however, may place more value on the finality of an arbitrator’s decision.  Those clients may be willing to sacrifice being right in order to avoid delay of a year or longer for their appeal to be heard.

No matter whether you would rather get it fast or get it right, it may be time to review your arbitration provision in light of the Supreme Court’s new ruling.

(See Cable Connection Inc. v. DIRECTV Inc. (2008) 44 Cal.4th 1334.)

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Daniel W. Ballesteros is a member of Hoge Fenton’s Litigation Group.  He and his legal team focus on all forms of commercial dispute resolution, from mediation, arbitration and early neutral evaluation to trial and appellate work.  Dan serves in active leadership roles in the State Bar of California’s Real Property Law Section and the Santa Clara County Bar Association, and he is a member of the Santa Clara County Chapter of the American Inns of Court.  For several years, Dan has been recognized by Law and Politics magazine as a “Northern California Super Lawyer.”
Click here to access Dan’s bio. 
Contact Dan at 408.947.2416 or dwb@hogefenton.com.