Morgan Miller Blair

Planning For Conflict In An Uncertain World:
Judicial Review of Arbitrators’ Decisions in California After Moncharsh

By Steven N. Holland and Katherine Wisinski

Arbitration agreements are an invaluable tool for homebuilders, mortgage lenders, and others involved in the business of building, financing, and selling homes.  Given this, it comes as no surprise that the drafting of arbitration agreements is a task that requires some deftness.  Equally important is a close acquaintance with the current law in this area.  For, as the following cases from the Summer of 2006 illustrate, the arbitration landscape in California is one that can be fraught with uncertainty.

California’s Arbitration Act (Code of Civ. Proc. § 1280, et seq.)

The California Arbitration Act (“CAA”) establishes the statutory framework by which parties may agree to avoid our often costly, time consuming and unpredictable court system by contracting to arbitrate their disputes.  Although arbitration agreements are, by definition, a creature of contract, the CAA nonetheless sets parameters within which such contracts must be drafted in order to be enforceable. 

Under the CAA, parties to an arbitration agreement may only seek to correct or vacate an arbitrator’s award in very narrowly enumerated circumstances.   What happens, then, when an arbitrator issues a decision that is erroneous?  What if he or she uses the wrong law?  Or doesn’t rely on any recognized law at all?  Does the aggrieved party have the right to seek correction from the court?  Does the answer depend on whether the parties foresaw such a possibility and agreed on a mechanism to address it?  Answers to these questions can seem elusive, undermining the certainty and correctness of the result often sought when crafting an arbitration agreement.

Judicial Review of an Arbitrator’s Decision Is Limited

Judicial review, as used in this context, is shorthand for asking a court to correct or vacate an arbitrator’s decision.  The CAA lays out specific grounds for challenging an arbitrator’s award.  But frequently grounds for such a challenge might also include questioning whether an arbitrator (a) used the correct law when deciding the issues presented, (b) properly applied such law, and/or (c) issued a monetary award commensurate with the verdict reached. 

The California Supreme Court’s most comprehensive discussion of the scope of permissible judicial review of an arbitrator’s award is found in Moncharsh v. Heily & Blase.   There, the Court found that “[i]t is the general rule that, ‘The merits of the controversy between the parties are not subject to judicial review.’  More specifically, courts will not review the validity of the arbitrator’s reasoning.”   The plaintiff in Moncharsh sought judicial review of an arbitrator’s finding, even though the arbitration agreement in question specifically stated that “[t]he decision of the arbitrator shall be final and binding on Firm and Employee-attorney,”  and did not expressly provide for judicial review of that decision.  Finding that “[e]nsuring arbitral finality … requires that judicial intervention in the arbitration process be minimized,” in Moncharsh, the California Supreme Court refused to allow judicial review of the arbitrator’s decision.   In so doing, it set the stage for 13 years of efforts to avoid falling into such a trap.

Trying to Find a Way Around Moncharsh:  Courts Generally Reject Arbitration Provisions That Provide for Judicial Review

In its wake, the Moncharsh decision left some justifiable apprehension about the use of arbitration agreements.  Yes, parties want finality in their dispute resolution, but don’t they also want to maintain avenues of redress in the face of clear error by an arbitrator?  What about freedom of contract?

Because the Moncharsh arbitration agreement did not explicitly provide for judicial review, it seemed logical, if the parties agreed that they wanted such a review, to insert such a provision in post-Moncharsh agreements in order to preserve that right.  The enforceability of this logic was tested in 1993 in Pacific Gas & Electric Co. v. Superior Court.  In that case, the Second Appellate District implied that judicial review of an arbitrator’s decision would be allowed if the arbitration agreement specifically provided for expanded judicial review.   Suddenly, the door to the courthouse appeared to open:  parties could indeed fashion a contract to protect their right to appeal a bad arbitration decision.

This door slammed shut in 2002 when a different appellate court handed down its decision in Crowell v. Downey Community Hospital Foundation.   There, the arbitration provision in question specifically stated that (a) the arbitration would be conducted in accordance with the CAA, and that (b) judicial review would be allowed if either party believed that the award was “not supported by substantial evidence or [was] based upon an error of law.”   Despite this language, the Crowell court referred back to Moncharsh and found that the California Supreme Court had determined that the statutory grounds for vacating or correcting such awards were “exclusive” and that any attempt to expand the grounds for review – even if agreed to by both parties in a signed contract – was unenforceable.

Recent 2006 Decisions Confirm Crowell:  Allstate Insurance, Cable Connection, and Baize Continue the Trend of Prohibiting Judicial Review

This summer, rulings in three cases confirmed the limits of judicial review of arbitration awards even if the parties try to agree otherwise, though one decision revived the possibility of the door to the courthouse opening as the PG&E court predicted.  In a nutshell, this summer’s cases went as follows:

• Allstate Insurance Co. v. Superior Court of L.A. (Jessel):  No judicial review was allowed even where the arbitrator admitted to committing an error in his award.
• Cable Connection, Inc. v. DirecTV, Inc.:  No judicial review was allowed even where an arbitration agreement provided 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.”
• Baize v. Eastridge Companies:  No judicial review was allowed even where the arbitration agreement required the arbitrator to apply California law, and he failed to do so.  However, the Baize court implied that there may be some room for parties to draft contract language to allow for judicial review of an arbitration decision as the PG&E court anticipated.   This implication is not the current state of the law, however, and must be viewed with caution.

What Do Recent Arbitration Decisions Mean For You?

If the California Courts of Appeal continue to struggle with these concepts, what can the rest of us do when drafting arbitration agreements today?  A complete answer to this question will require a thorough analysis of the particular circumstances and objectives at play.  Nonetheless, there are a few rules of thumb to follow:

• Anticipate disputes and plan for them.  Evaluate and decide up front where you want to be when a dispute arises (note that we did not say “if” a dispute arises, as disputes will arise).  In each circumstance you need to decide which forum is best for you.  Is court best, with its sometimes lengthy process, jury system and appellate rights?  Is judicial reference best, which avoids a jury, but has appellate rights?  Is arbitration best, with its anticipated efficiencies, but no guaranteed right of appeal?  Each situation will be different.  It is prudent to plan ahead so you will be in the best possible place to protect your interests when a dispute comes up.
• Make your intentions clear.  If you want a third party to review an arbitrator’s decision for errors of law or fact, say so in your arbitration agreement.  California courts may allow a court to undertake this review, as the PG&E and Baize courts predict.  Alternatively, you may want to provide for an arbitration appellate panel, which is permissible under the Federal Arbitration Action (“FAA”), and enforceable in California under Kyocera Corp. v. Prudential-Bache Trade Services, Inc.   Regardless of your intent, the clarity of your intentions and the language you use to articulate them will give you the best opportunity to enforce your position.
• Draft thoughtfully.  The opinions summarized above highlight the importance of careful, precise drafting.  Arbitration is an area fraught with pitfalls for the unfamiliar and the unwary. 
• Ensure you’re staying abreast of developments in the law.  The law in this area is an ever-changing landscape, and keeping up on the evolution of case law and statutory law can be a daunting task.  For your protection, however, it is essential to do just that.

With a sophisticated clientele spanning a range of industries and interests, Morgan Miller Blair prides itself on its ability to offer legal counsel that both reflects the current legal environment and keeps an eye on what tomorrow may bring.  Please do not hesitate to contact us if we can be of assistance to you.

Steven N. Holland and Katherine Wisinski are members of Morgan Miller Blair’s Construction/ Risk Management team.  They can be reached at (925) 937-3600.