California Supreme Court Expands Judicial Review of Arbitration Awards

In March, 2008, the United States Supreme Court in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. __, 128 S.Ct. 1396, 1404-1405 (2008), ruled that contracting parties may not by their agreement obtain expanded judicial review of an arbitration award under Section 9, 10 and 11 of the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. ("FAA").  However, the Court left the door open to parties agreeing to more expansive judicial review of arbitration awards under other circumstances.

The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement understate statutory or common law, for example, where judicial review of different scope is arguable. But here we speak only to the scope of the expeditious judicial review under §§ 9, 10, and 11, deciding nothing about other possible avenues for judicial enforcement of arbitration awards.

Following Hall's lead, the California Supreme Court in Cable Connection, Inc. v. DIRECTV, Inc., No. S147767, 2008 Cal. LEXIS 10354 (August 25, 2008) confirmed contracting parties' right  to use California contract law to create a right to judicial review of arbitration awards, there allowing courts to review arbitration awards for errors in law.  

At first glance, these decisions seem incongruous given that both the FAA and the California Arbitration Act, Cal. Code Civ. Proc. §§ 1280 et seq. ("CAA") do not allow judicial review for errors of law.  Instead, review is limited to instances where the award is: (1) in excess of the arbitrator's power; (2) produced by corruption fraud or undue means; or (3) issued by arbitrators that are corrupt or engage in prejudicial misconduct.  See Cal Code Civ. Proc. § 1286.2 (a); 9 U.S.C. § 10(a).

These cases can be reconciled because Hall Street suggests that state courts are free to construe their own arbitration acts in a manner inconsistent with the FAA.  As the Supreme Court explained, the FAA does not preclude a "more searching review based on authority outside the [FAA]," including "state statutory or common law."  Hall Street, 128 S.Ct. at 1406.

The California Supreme Court anchored its departure from Hall Street on three grounds.  It first concluded that California law applied because the parties' contract so provided and because Sections 10 and 11 of the FAA limit judicial review only by "the United States court in and for the district where the award was made."  See 9 U.S.C. §§ 10(a), 11(a).  Thus, cases pending in state courts are not necessarily subject to the Supreme Court's construction of Sections 9 & 10 of FAA, and these provisions do not preempt inconsistent state law.

The Court also gave great deference to the parties' freedom to contract, and their agreement that "the 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," which the court found was explicit and unambiguous.   

It reasoned that the CAA and California public policy favoring arbitration without the complications of traditional judicial review are based on the parties' expectations as embodied in their agreement.  Thus, "policies favoring the efficiency of private arbitration as a means of dispute resolution must sometimes yield to its fundamentally contractual nature, and to the attendant requirement that arbitration shall proceed as the parties themselves have agreed." 

The Court also reasoned that allowing parties to define the scope of judicial review in arbitration agreements allows for predictability in the business world because parties are best situated to weigh the advantages of traditional arbitration against the benefits of court review for the correction of legal error.

In the wake of Cable Connection and Hall Street, the enforceability of arbitration agreements providing for expanded judicial review will largely depend on the agreement's choice of law and venue provisions.   Clauses broadening judicial review beyond the grounds stated in the FAA will not likely be enforceable in cases pending in federal court.  However, after Cable Connection, state courts in California (and presumably other states that follow suit) will enforce such clauses so long as the arbitration agreement is explicit and unambiguous, the agreement is to be arbitrated under the CAA, and the scope of review accords with the statutory grounds for review. 

Thus, rather than adopting an arbitration provider's form clause, careful consideration should be given to the contours of the arbitration clause to be used in an agreement, particularly when California law is to apply.  Clauses that allow for judicial review by a state court for errors of law could eviscerate the efficiencies of arbitration, but protect both parties from results that fail to do justice.

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