Archives: November 2007
Tue Nov 13, 2007
Vacating Awards
Vacating Awards: 11/12/2007
The recent Second Circuit case vacating an arbitration award on the federal non-statutory ground of “manifest disregard” is likely to result in no immediate effect on arbitrators but may harbor seeds of the future in writing awards. The case involved an NASD arbitration. The appellate court, recounting the NASD arbitration award and limited record of the proceedings between the parties, recites the intransigence of the arbitrators in refusing to apply “settled law.” Under Second Circuit case law, this conduct qualified as “manifest disregard”of the law.
Although this case is arguably an exception to the general rule of appellate deference to arbitrators and to the federal statute limiting grounds for appeal, challenges to an award under the FAA continue; 9 U.S.C. 16. The Supreme Court has granted cert. in a Ninth Circuit case and will hear argument on whether the FAA forecloses the right of parties to expand the right to appeal an award on grounds the parties lack authority to confer jurisdiction on the courts (See, Arbitration Alert, www.ArbitrationAdr.com
Challenges to awards suggest that arbitrators write awards with an eye to 9 U.S.C. 16 or comparable state statute. The most common argument to the trial or appellate court reviewing a petition to confirm an award alleges the arbitrators “exceeded their powers” under either federal or state law; (9 U.S.C. 10 (a) (4).
In a recent California Court of Appeal case, the arbitration clause read: “Scope of Power: [T]he arbitrators shall not have the power to change, modify or alter any expressed condition, term or provision of this [C]ontract . . . and the scope of their authority is so limited.” The warranty in the underlying contract, disclaiming any responsibility for injury, loss, or lack of merchantability from use of the seller's product, was obviously suspect.
The parties submitted their commercial dispute directly to the arbitrator who subsequently found the warranty unconscionable and unenforceable, a decision clearly violating the directions in the arbitration clause and the warranty not to alter any terms and conditions. The Court of Appeal reminds counsel that “. . . courts look both to the contract and to the scope of the submission to determine the arbitrator’s authority; Shoenduve Corp. v. Lucent Techs., Inc., 442 F.3d 727 (9th Cir. 2006); Executone Information Systems, Inc. v. Davis, 26 F.3d 1314 (5th Cir.1994). Although counsel for the manufacturer reminded the arbitrator of the “terms and limitations” contained in the contract, the court said that at no time in its briefing or argument did counsel contend the issue of “unconscionability” exceeded the arbitrator’s authority.
A thin judicial resolution of the right of parties to compel the arbitrator to write an award within the terms of the agreement, but the court was unwilling to enforce a clearly unconscionable arbitration clause. Probably a “public policy” argument would have been more effective. One party cannot contract away the other party’s statutory protection against injury from defective products.
See, www.ArbitrationAdr.com Text, Ch. V-D-4: Vacating Awards
Consumer Remedies & Mortgages: 11/12/2007
Most federal and state courts have recognized the doctrine of "unconscionable" arbitration clauses in contracts. Further judicial refinement includes "procedural" unconscionability and "substantive" unconscionability" Both these subjects in federal and state courts are discussed in the Text; Ch. IV-G-2-a; XVII-B.
The courts have held that consumer contracts, employment contracts, franchise contracts, and some residential real estate arbitration clauses unconscionable & unenforceable attributable to disproportionate bargaining power between the parties; hidden clauses; absence of mutuality. But the Third Circuit reviewed an arbitration clause in a lender-borrower residential real estate contract allocating to the former a variety of legal,equitable, and provisional remedies not available to the borrower.
The court said "...[T]here is a facially apparent business justification for [these remedies] as the safeguards thereby preserved assure regularity and consistency for the benefit of both lender and borrower, and accordingly, there are sound pragmatic and policy reasons why foreclosure proceedings should be pursued in a court of law."
The court warned, however, that the borrower could pursue the merits of his allegations of predatory and deceptive lending practices in arbitration.
See, www.ArbitrationAdr.com Text, Ch. IV-G-2-a: Unconscionable Clauses (Federal Courts)
Fri Nov 09, 2007
Non-Signatories & Arbitration
Non-Signatories & Arbitration 11/9/2007
Although the courts have repeatedly enforced the right of parties to compel arbitration pursuant to a dispute resolution provision included in their written contract, that policy does not warrant including third parties who have not signed the agreement; Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co., 6 Cal.App.4th 1266 (1992). Nonetheless exceptions exist, as discussed by the Court of Appeal in a recent case involving a deceased actor See, www.ArbitrationAdr.com: Text.
All non-signatories in cases compelled by the courts to arbitrate are grounded on the basis of whether the signatories conferred a benefit on them as a result of the contract, or a “pre existing relationship between the signatory and non-signatory exists making it equitable to compel the non-signatory to be bound by the arbitration agreement;” Co. of Contra Costa v. Kaiser Foundation Health Plan, Inc., 47 Cal.App.4th 237 (1996); NORCAL Mutual Ins. Co. v. Newton, 84 Cal.App. 4th 64 (2000). In most cases this “benefit” or “relationship” includes agents, third party beneficiaries, fiduciaries, and partners.
Third party beneficiary status is determined by interpreting the language of CC 1559. And assignees who received benefits from the assignor qualify as a third party beneficiary; Recorded Picture Co. Ltd. v. Nelson Entertainment, Inc., 53 Cal.App.4th 350 (1997).
The court also notes that determination of whether an arbitration clause is operative against a non-signatory is a question of “substantive arbitrability” and an issue for the court, citing Boys Club.
The Court of Appeal cites several categories of cases involving non-signatories and is a valuable resource for counsel.
See, www.ArbitrationAdr.com, Text, Ch. XVI-F-5-f;g: Non-Signatories & Signatories
For the case on Non-Signatories under the FAA, See, Text, Ch. IV-F-2-a.
Party Arbitrators
Party Arbitrators 11/9/2007
Non-neutral arbitrators are not subject to vacating an award under FAA 10 (a) (2).
In some cases, parties select non-neutral arbitrators aligned with their side in the arbitration. Typically, these arbitrators select a third party neutral arbitrator. The Eighth Circuit confirmed the right of parties to select a method of resolution that incorporates that provision. The non- prevailing party in an arbitration cannot move to vacate an award under FAA 10 (a) (2) on grounds of "evident partiality" of the party arbitrator.
There is no requirement that party arbitrators submit disclosures and any citation to the leading Supreme Court case on disclosure is inapposite. Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968) involves non-disclosure of a neutral arbitrator.
See, www.ArbitrationAdr.com, Text, Ch. III-B-10-b; Party Arbitrators