May 10, 2018

As most of us know, generally an arbitrator’s decision is final in contract arbitration cases meaning the decision cannot be overturned by a trial court or court of appeal even if it is wrong. This principle is commonly stated and generally accepted. It is frequently the basis upon which decisions are made to agree, or to not agree, to arbitrate a dispute.

Yet, a case decided this last year, Harshad & Nasir Corp v. Global Sign Systems, Inc.,[1] https://caselaw.findlaw.com/ca-court-of-appeal/1870918.html set aside an approximately 3 million dollar arbitrator’s award on the basis it was not supported by substantial evidence. This might cause you to pause and wonder just how final is an arbitrator’s decision. The case law discussed in Harshad is not new or ground breaking, but it does highlight the need to look at arbitration deeper than is often done.

Before reviewing the Harshad decision, let me briefly review the issue of arbitration finality as reflected in modern case law and statutes.  The California Supreme Court’s 1992 decision in Moncharsh v. Heily & Blase[2] https://law.justia.com/cases/california/supreme-court/4th/3/1.html is a good place to start. The Moncharsh decision held that an arbitrator’s decision cannot be reviewed for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties (at p. 6). The Moncharsh decision received a lot of attention, and perhaps some scrutiny, because to some practitioners, the notion that an arbitrator’s award could be allowed to stand when it was conspicuously in error was somewhat unsettling. The Moncharsh decision changed a line of case law that had previously applied a judicial exception to arbitration finality where an error in law or fact plainly appeared on the face of the decision and the error caused an injustice.

Moncharsh is a lengthy detailed decision that reviews contract arbitration principles as they evolved in statutes and case law since the mid-1800’s. It concludes that modern contract arbitration is controlled by statute; specifically Code of Civil Procedure section 1280 et seq. https://codes.findlaw.com/ca/code-of-civil-procedure/ccp-sect-1280.html, and notably section 1286.2 which states the sole grounds for vacating an arbitration award.  Judicially created exceptions may no longer be applicable. The grounds listed in the current version of section 1286.2 include corruption, fraud or undue influence, misconduct of the arbitrator, arbitrators exceeded their powers, failure of the arbitrator to postpone a hearing or admit evidence that is substantially prejudicial and/or that the arbitrator failed to disclose a ground for disqualification. These grounds do not allow an arbitration award to be vacated simply because it is unsupported by the evidence or is contrary to law.

In 2008 the California Supreme Court issued its decision in Cable Connection, Inc. v. DIRECTV, Inc.[3]  https://scocal.stanford.edu/opinion/cable-connection-inc-v-directv-inc-33121

The Cable Connection decision addresses the issue of whether the parties’ arbitration agreement may address finality and judicial review (at p. 1339). In addressing this issue the decision focuses less on the statutory proscriptions and more on the parties’ contractual agreement.  The arbitration agreement in question was included in a dealer agreement between DIRECTV and a regional dealer of DIRECTV products and broadcasts. An arbitration award  was in favor of the dealers. The trial court vacated the award on several grounds, including DIRECTV’S argument that the arbitrator’s award included errors in law. The Court of Appeal, on its own, raised the question whether a contract provision that limited judicial review was enforceable, and following two other Court of Appeal decisions it concluded that such a contract provision is unenforceable (at p. 1343). The Supreme Court reversed.

In discussing its prior decision in Moncharsh the Cable Connection decision found that the parties’ arbitration contract can and will control the scope of judicial review where it is expressly called for. In Cable Connection the Supreme Court explained that while its decision in Moncharsh established dominance of the statutory finality imposed on arbitrator’s decision, it also confirmed that the underlying foundation for contract arbitration is the arbitration contract itself.

The Harshad decision is based in large part on Cable Connection. The arbitration agreement in Harshad was entered into after a lawsuit was filed and only a few weeks before the case was set to commence trial. The dispute involved commercial dealings between the owner of several Carl’s Jr. franchises and a provider of signage. The arbitration agreement expressly stated that the arbitrator’s decision shall be reviewed on appeal to the trial court and to the court of appeal (at p. 536). The trial court concluded that this language was not sufficiently clear to provide for the court’s review of the arbitrator’s decision for errors at law. The Court of Appeal in Harshad disagreed and held that ‘what matters is that the parties ‘make plain their intention that the award is reviewable for legal error” citing Cable Connection (at p. 536).  The Court of Appeal reviewed the arbitrator’s decision applying the substantial evidence test. It found insufficient evidence to support the arbitrator’s findings.[4]

Harshad is significant because of its focus on the language of the parties’ arbitration contract. While it is not creating new law, it is shining a bright light on the significance of the arbitration contract in view of Cable Connection and related decisions. One cannot, should not, merely assume that an arbitrator’s decision is final, subject only to the limited judicial review set forth in CCP section 1286.2.  https://codes.findlaw.com/ca/code-of-civil-procedure/ccp-sect-1286-2.html The contract language may in fact allow for judicial review.

In drafting an arbitration agreement (pre or post controversy) one can see that there is an opportunity to craft the scope of review suitable to the parties. Perhaps they want a high level of judicial review, but perhaps they do not. Either way, the language of the agreement can be used to reflect the parties’ intentions.

Likewise, if an arbitration agreement has already been executed, and a controversy arisen, it is very important to look at the language in the agreement to understand from the outset the nature and extent of judicial review. And, one should not look merely to the contract itself, one should also consider the language of “rules” promulgated by providers, such as AAA, that are frequently referred to, and perhaps incorporated, in the contract.

Given the length and complexity of the decisions discussed above, it is apparent that the issue of judicial review is very complicated and nuanced. In some circumstances, such as arbitration clauses in consumer contracts, it may be unlikely that the contracting parties have a reasonable opportunity to understand what they are getting into. The courts may view these situations differently. But for the situations where the parties are knowledgeable and of equal bargaining strength the contract language is critical to defining finality and the possibility of judicial review.

[1]   14 Cal.App.5th 523; August 15, 2017, Second Appellate District, Division One.

[2]   3 Cal.4th 1 (1992).

[3]   44 Cal.4th 1334 (2008)

[4]   In a somewhat related issue, Harshad addressed the scope of the arbitrator’s decision. The arbitrator concluded that the issue of lost profits was within the issues to be decided by the arbitrator. This issue was reviewed de novo.