Parties to Arbitration Agreements May by Express Agreement Alter Usual Scope of Judicial Review and Provide for Review of Merits of Arbitration Award

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In Cable Connection v. Directv (2008) 44 C.4th 1334, 82 C.R.3d 229, 190 P.3d 586, arbitration agreements, contained in sales agency agreements between plaintiff and defendant, provided in part 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." The agreements did not mention classwide arbitration. Thus, when plaintiff filed a class action to recover commissions and charges, the matter was submitted to arbitration to determine whether class arbitration was authorized by the agreements. The majority of the arbitration panel found that, although the agreements were silent regarding classwide arbitration, classwide arbitration was authorized under California decisional law. Defendant sought vacation of the award, contending that, even if the arbitrators had not exceeded their authority, the award reflected errors of law, which the arbitration agreements placed beyond their powers, and thus, the award was subject to judicial review. The trial court vacated the award. The Court of Appeal reversed, holding that the trial court exceeded its jurisdiction by reviewing the merits of the award. In so holding, the Court of Appeal relied on Crowell v. Downey Community Hosp. Foundation (2002) 95 C.A.4th 730, 115 C.R.2d 810, and Oakland-Alameda County Coliseum Authority v. CC Partners (2002) 101 C.A.4th 635, 124 C.R.2d 363, 6 Cal. Proc. (5th), Proceedings Without Trial, §576, for the proposition that the parties to an arbitration agreement may not expand the scope of judicial review. Held, reversed; Crowell, Oakland-Alameda County Coliseum, and other "Court of Appeal opinions refusing to enforce specific provisions for judicial review of the merits are disapproved." (44 C.4th 1361.)

(a) The Federal Arbitration Act (FAA) contains criteria for review and vacation of arbitration awards that are similar to those in C.C.P. 1286.2 (see 6 Cal. Proc. (5th), Proceedings Without Trial, §569 et seq.). Hall Street Associates, L.L.C. v. Mattel (2008) 552 U.S. __, 128 S.Ct. 1396, 170 L.Ed.2d 254, declared that the FAA provides the exclusive criteria for the review of arbitration awards and that an arbitration agreement that provides for vacation of an award where the arbitrator's findings are not supported by substantial evidence or if the arbitrator's conclusions of law are erroneous is not enforceable. (2008 WL 3891556, p. 6.) However, it is doubtful that Hall Street Associates declared a policy with preemptive effect on all cases involving interstate commerce. It "was a federal case governed by federal law; the court considered no question of competing state law. It reviewed the application of FAA provisions for judicial review that speak only to the federal courts. The court unanimously left open other avenues for judicial review, including those provided by state statutory or common law." (44 C.4th 1353.)

(b) The general rule in California is that, in the absence of some limiting provision in an arbitration agreement, the merits of an award may not be reviewed except as provided by C.C.P. 1286.2 (see Moncharsh v. Heily & Blase (1992) 3 C.4th 1, 6, 10 C.R.2d 183, 832 P.2d 899, 6 Cal. Proc. (5th), Proceedings Without Trial, §574.) And although Courts of Appeal have rejected claims that review of the merits of an award may be authorized inferentially from various contract provisions, the courts have suggested that an expanded scope of review would be available under a provision that was "specifically tailored for that purpose." (44 C.4th 1345.)

(c) Although rejecting a claim that an award was reviewable for error of law on its face, the court in Moncharsh centered not on statutory restrictions on the contractual options, but on the parties' intent and the powers of the arbitrators as defined by the agreement. In that light, agreements for an expanded scope of review should be enforced. "If the parties constrain the arbitrators' authority by requiring a dispute to be decided according to the rule of law, and make plain their intention that the award is reviewable for legal error, the general rule of limited review has been displaced by the parties' agreement. Their expectation is not that the result of the arbitration will be final and conclusive, but rather that it will be reviewed on the merits at the request of either party." (44 C.4th 1355.)

(d) To avoid the general rule restricting judicial review, "the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts. Here, the parties expressly so agreed, depriving the arbitrators of the power to commit legal error. They also specifically provided for judicial review of such error." (44 C.4th 1361.)

(e) Enforcing agreements that expand the scope of judicial review provides benefits for the parties, the courts, and evolving law. Incorporating "traditional judicial review by express agreement preserves the utility of arbitration as a way to obtain expert factual determinations without delay, while allowing the parties to protect themselves from perhaps the weakest aspect of the arbitral process, its handling of disputed rules of law." In addition, when reviewing courts function merely to enforce or deny an arbitration award with no opportunity "to discuss the reasoning for the arbitral decision, the advancement of the law is stalled, as arbitral decisions carry no precedential value. Thus, expansion of judicial review gives the courts of first instance the opportunity to establish a record, and to include the reasoning of expert arbitrators into the body of the law in the form of written decisions." (44 C.4th 1363.)

Four justices concurred, with one justice writing separately to highlight the majority's point that arbitration agreements are as enforceable as other contracts, but not more so. (44 C.4th 1366.)

One justice, joined by a second justice, concurred and dissented, agreeing that parties may define an arbitrator's powers in a way to broaden "somewhat the scope of judicial review," but arguing that parties are not permitted to require courts to undertake "fullscale judicial review of legal error in arbitration awards." (44 C.4th 1367.)

Witkin References

On scope of judicial review, see 6 Cal. Proc. (5th), Proceedings Without Trial, §574 et seq.

On nature of contractual arbitration, see 6 Cal. Proc. (5th), Proceedings Without Trial, §499 et seq.

On Federal Arbitration Act, see 6 Cal. Proc. (5th), Proceedings Without Trial, §506 et seq.

On form and construction of agreements to arbitrate, see 6 Cal. Proc. (5th), Proceedings Without Trial, §513 et seq.

On procedures for enforcing arbitration agreements, see 6 Cal. Proc. (5th), Proceedings Without Trial, §523 et seq.

On defenses to enforcement of arbitration agreements, see 6 Cal. Proc. (5th), Proceedings Without Trial, §531 et seq.

On vacation of arbitration awards, see 6 Cal. Proc. (5th), Proceedings Without Trial, §569 et seq.