Great Result or "Great Mischief:" Erroneous Evidentiary Rulings and Substantial Prejudice In California Arbitrations

In Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334 (Cable Connection), the California Supreme Court held that under California contract law, the parties to an agreement providing for arbitration may agree to permit judicial review of an arbitrator's award.  In reaching that result, the Court reiterated what has been said in many places and in many ways:  without such a provision, judicial review of arbitration awards is extremely limited.  Id. at 1354-1355.  Generally, courts may not review the merits of an arbitration or the arbitrator's reasoning, even when an error of law appears on the face of an award. Id. at 1334.

Notwithstanding that limitation, the California Court of Appeal's recent split decision following rehearing in Burlage v. Superior Court (2009) 178 Cal.App.4th 524, explores the statutory grounds to obtain review of arbitration awards in California.  In the process, it staked out the positions parties will take when seeking (and seeking to prevent) judicial review of arbitration awards based upon the exclusion of evidence.

The Lot-Line Adjustment That Fixed The Problem

Burlage arises out of the sale of a parcel next to a country club. After escrow closed, the Burlages learned their swimming pool and fence encroached upon the club's land, and so sued the seller for fraud.  Arbitration ensued.  Two years after the purchase, but before the arbitration, the Burlages' title company paid the club $10,950 for a lot-line adjustment that cleared title. 

Nevertheless, the Burlages sought damages in the arbitration for the diminution in value of their property and for the cost of moving the pool and fence off of land that they now owned as a result of the lot-line adjustment.  They moved in limine to exclude evidence of the lot-line adjustment, arguing that damages must be measured from the date escrow closed without respect to the subsequent clearance of title.  The seller unsuccessfully argued that the arbitrator could and should consider the fact that the Burlages now owned the property in measuring damages.

Despite the correction of the alleged problem for a little more than $10,950, the arbitrator awarded over $1.5 Million in compensatory and punitive damages, and attorneys' fees and costs.

Fixing the Arbitrator's Exclusion of Evidence

Cross-motions to confirm and vacate the award were filed in the Superior Court.   The motion to vacate was based upon California Code of Civil Procedure Section 1286.2, subdivision (a)(5), which requires an arbitration award to be vacated when a party's rights are "substantially prejudiced" by the arbitrator's refusal to hear "evidence material to the controversy."  The trial court held that the arbitrator's refusal to admit evidence of the lot-line adjustment substantially prejudiced the seller's "ability to dispute the amount of damage suffered by" the Burlages, and vacated the arbitration award. 

The Court of Appeal affirmed. First it reiterated that courts may not review the merits of an underlying controversy, nor may they review arbitration awards for errors of law.[1]  However, in the Court's words, "tolerance for fallibility has its limits."  

The Court turned its analysis to Code of Civil Procedure Section 1286.2(a)(5) which requires a court to vacate an arbitration award when a party's rights "were substantially prejudiced ... by the refusal of the arbitrator[] to hear evidence material to the controversy...."   The Court concluded that the facts of Burlage presented a case of an arbitrator preventing a party from fairly presenting its case. (Citing Hall v. Superior Court (1993) 18 Cal.App.4th 427, 439.)

The Court acknowledged that the arbitrator's exclusion of the evidence was likely based upon his prior determination that "damages are fixed at the date escrow closed," and noted that that determination was not reviewable.  The dissent would stop the analysis there; it concluded that the arbitrator's exclusion of evidence was nothing more than an extension of its ruling on an issue of law - i.e. when damages were fixed.  It also offered numerous examples of its observation that "Virtually every ruling on a ‘legal issue' at trial results in limiting the admissibility of evidence."[2] 

However, the majority explained that the error was "more than a mere erroneous evidentiary ruling. ... [The] arbitrator's ruling substantially prejudiced Spencer and undermined the fundamental principle ... that an arbitrator must consider material evidence."  In the court's words, "What could be more material than evidence that the problem was ‘fixed' and there are no damages?"

The Burlage Court's salvo confirmed its belief that arbitrators will "conduct themselves according to the canons of ethics and the high degree of integrity their profession demands," and not simply "let in everything" to avoid the award from being reviewed.  However, the court concluded that when a party bargains for arbitration, but the arbitrator deprives a party of "the opportunity to present material evidence, [the party does] not receive the benefit of that bargain."

Great Results or Great Mischief in the Future

Burlage will likely be cited as creating a basis to contest an arbitration award where evidence is excluded that is, for lack of a better term, really material.  However, the majority observed (almost as an afterthought) that the JAMS Comprehensive Arbitration Rules and Procedures required the arbitrator to afford all parties "the opportunity to present material and relevant evidence."  Although not articulated by the Court in this way, proponents of vacatur will read Cable Connection and Burlage together, to argue that they did not get the arbitration they bargained for as a matter of contract interpretation.  The argument will be based, in part, upon the authorities holding that the incorporation of a specific arbitration provider's rules incorporates those rules into the contract as if they were set forth expressly.

In addition to the Court's express holding, Burlage illustrates the critical importance of carefully deciding whether to include an arbitration clause in a transaction and, if so, the scope of disputes to be covered, and the scope of judicial and appellate review to be permitted.  Otherwise, the parties to a transaction may be subjected to the great mischief foreshadowed by Burlage's dissent.[3]