Court Authority

Arbitrators must take care to respect statutorily protected rights or else find themselves overturned by justices.

by Lawrence C. Waddington

Several federal courts have set aside arbitration awards in Federal Arbitration Act under the rubric of "manifest disregard" of the law, a judicially devised doctrine to vacate awards issued by an arbitrator violating a well-defined public policy (Greenberg v. Bear Stearns & Co., 220 E3d 222 (2nd Cir. 2000); Williams v. Cigna Financial Services Advisors Inc., 197 F.3d 752 (5th Cir. 1999), although neither California nor the 9th Circuit has adopted this doctrine (Siegal v. Prudential Insurance Co. of America, 67 Cal.App.4th 1270 (1999).
In California, the state Supreme Court has eroded the general rule that arbitrators can file conclusions and unsupported statements in their awards. Armendariz v. Found. Health Psychcare Servs. Inc., 4 Cal.4th 83 (2001). The justices have mandated a written award in contractual nonunion employment arbitration and are likely to follow the federal lead in requiring arbitrators to comply with state statutory remedies. Torrez v. Consolidated Freightways Corp. of Delaware, 58 Cal.App.4th 1247 (1997).

To avoid misunderstanding, counsel can jointly submit a proposed order (minute order) confirming agreement of all parties to waive a written award and request a final decision without explanation. Or the parties can circulate a proposed stipulation requesting only a "bare" award from the arbitrator at the conclusion of the hearing.

"Arbitrability" and Awards
In ruling on a petition to compel contractual arbitration, the court initially must determine "arbitrability," i.e., whether the parties agreed to arbitrate, the identity of the parties encompassed in the arbitration clause, the issues for resolution, and the scope of the issues.

Not all contracts include an arbitration clause for every kind of dispute; in some cases, specific statutes may limit arbitration (Code of Civil Procedure Section 1285), or parties may elect to exclude specific issues. Ajida Technologies Inc. v. Roos Instruments Inc., 87 Cal.App.4th 534(2001).

On occasion, the court does not rule on these issues at the hearing and summarily orders the case to arbitration. In the absence of a court order, counsel should identify arbitrable issues and confirm their scope with the arbitrator to assure the ultimate award conforms to the terms of the arbitration clause. Absent this congruity, an award based on a nonsubmitted issue is subject to (possible) correction by the arbitrator (Section 1284) or the court on a motion to correct (Section 1286.6) or vacate (Section 1286.2). Bd. of Educ. of Round Valley Unified Sch. Dist. v. Round Valley Teachers Assn., 13 Cal.4th 269 (1996).
In similar scenarios, if a complaint has been filed and the case ordered to arbitration, or the parties subsequently stipulate to arbitration or enter arbitration under a self-executing agreement in a contract mandating arbitration in lieu of litigation, counsel may presume that the causes of action pleaded, affirmative defenses and crosscomplaints form the boundaries of the case. In arbitration, the pleadings are functus officio and the case proceeds on a basis of claim(s) and counter-claims. Dodd v. Ford, 153 Cal.App.3d 426 (1994).

In preparing for arbitration, counsel can track the pleadings, but this practice does not necessarily alert the arbitrator to the issues, the parties and their legal capacity or remedies sought. The better practice is to submit a joint statement of issues or, if the parties cannot agree, to obtain a ruling from the arbitrator.

Rules and Awards
In contractual arbitration, procedural law is statutorily governed by Section 1280 et. seq. (or 9 U.S_C. 1 et. seq. of the Federal Arbitration Act). Parties can agree to draft their own rules of procedure tailored to the context of the dispute, although this option potentially inhibits the efficiency of arbitration. Volt Info. Servs. Inc. v. Bd. of Trustees/Leland Stanford at University, 489 U.S. 468 (1989).

In the absence of an agreement by the parties on procedure or process, an institutional organization managing a self-executing arbitration clause may incorporate its own rules consistent with the Code of Civil Procedure. Application of these rules not only governs evidence and remedies but also applies when the arbitrator crafts an award. Case managers submit these rules to counsel before arbitration, and counsel can review their content with the arbitrator.

Remedies and Awards
Arbitration awards insulated substantially from judicial review. Glass v. Kidder Peabody & Co Inc., 114 F.3d 446 (4th Cir. 1997); Section 1286.2. But remedies must bear a rational relationship to the contract and breach. Advanced Micro Devices Inc. v. Intel Corp., 9 Cal.4th 362 (1994).

Lawyers often select arbitration on the assumption that an arbitrator will draft an award in conformity with California substantive law despite judicial and statutory authorization for a broader remedial scope. To avoid an "unbounded" award, counsel can require the arbitrator to comply with statutory and decisional law, thereby cabining the decision.
Case law has confirmed the authority of an arbitrator to draft an award applying "equitable principles" in lieu of statutory and decisional case law. Moncharsh v. Heily & Blase, Cal.4th 1 (1992).

Absent exclusion of specific remedies in the arbitration clause or legislation prohibiting an award of specific remedies, a court of equity can prepare a judgment not only confirming an award but also supplementing it with an order compelling a party to perform in conformity with the award, i.e., specific performance. Hall, Goodhue, Haisley & Barker Inc. v. Marconi Conf Ctr. Bd., 41 CalApp.4th 1551 (1996).

An arbitration clause in a contract silent on the authority of an arbitrator to impose remedies invites the potential of unexpected results. But one of the advantages of arbitration is the opportunity for an arbitrator to create an "equitable" or "creative" award unrecoverable in litigation. The parties should agree in advance, if possible, on the scope of arbitral award authority.

If the arbitrator fails to adhere to an agreement or the terms of an appropriate limiting arbitration clause, the nonprevailing party may file a motion to vacate the award on grounds "the arbitrators exceeded their powers." Section 1286.2[d].

Attorney Fees and Awards
Section 128&2 prohibits an award of fees or costs "incurred" in arbitration unless the contract otherwise provides. Moore v. First Bank of San Luis Obispo, 22 Cal.4th 782 (2000), and Moshonov v. Walsh, 22 Cal.4th 771 (2000), have held that the arbitrator enjoys considerable latitude in ignoring a fees provision absent a finding by the arbitrator of a "prevailing party."

To confirm the authority of the arbitrator to award fees, the arbitration agreement should specifically require the award to find a "prevailing party" and award fees. If a predispute arbitration clause does not contain this proviso, the parties can insert an amendment (or stipulate) to achieve this result.

Interest and Awards
None of the provisions of Sections 1280 et. seq. specifically refers to the authority of an arbitrator to award interest, either pre-judgment interest or post-award, post-judgment interest. Pierotti v. Torian, 81 Cal.App.4th 17 (2000), and Britz Inc. v. Alfa-Laval Food & Dairy Co., 34 Cal.App.4th 1085 (1995), hold that in contractual arbitrations, as distinguished from statutorily ordered interest in judicial arbitrations, the court can award interest. Civil Code Section 3287(c).

Finality of Award
One characteristic of arbitration is a statutory requirement that the arbitration will result in a "final" decision. Most arbitrators submit the issue of liability and damages at the conclusion of the hearing, reserving a ruling on fees, costs and interest for subsequent resolution. In Hightower v. Sup. Ct., 86 CalApp.4th 1415 (2001), the appellate court approved splitting these issues and concluded that the practice did not affect the requisite "finality" of arbitration.

Hightower allows the arbitrator to write a "decision," or "tentative award," on the merits and reserve the resolution of issues unrelated to the merits.

Third Parties and Awards
To avoid an unanticipated application of an award on third parties, counsel should consider the effect of collateral estoppels or res judicata asserted in a collateral arbitration, collateral litigation on mixed arbitrable and nonarbitrable claims, or subsequent arbitration or litigation.

The California Supreme Court in Vandenberg v. Sup. Ct., 21 Cal.4th 815 (1995), has limited severely the twin doctrines of claim and issue preclusion to mutual parties, but not all federal courts share this restriction in arbitrations conducted under the auspices of the Federal Arbitration Act. Thomson-CSFSA v.AAA 64F3d 773 (2nd Cir 1995).

Included in potentially affected third parties are assignees, guarantors, sureties and subtenants. An arbitrator can confine an award only to the parties included in the arbitration, but the decision may result in unintended effects on nonsignatories.
Legislation limits judicial intervention in arbitration, but courts increasingly are scrutinizing the process. Written awards are useful in deflecting challenges, particularly as "judicializalion" of arbitration increases. The court unquestionably has insulated arbitration awards from wholesale attack despite errors of law or fact committed by an arbitrator.
But federal and state decisional law confirms that judicial limitations on unaccountable arbitrator discretion are emerging. A written award confirms the integrity of the arbitration process to conform to the recommendation of the United States Supreme Court.

***