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Contractual Arbitration


By Sarah K. Hofstadter

By allowing their disputes to be settled through an arbitrator, parties have elected to avoid often lengthy and expensive litigation in the courts. Nonetheless, courts are often called on to enforce and review contractual arbitration provisions.

The objective of this article and self-study test is to provide judges and lawyers with an introduction to the judicial enforcement and review of contractual arbitration. Readers will learn about the policy limiting judicial involvement, the governing statutory schemes, the procedure for compelling arbitration, review of the scope and validity of arbitration clauses, and judicial proceedings following an arbitration award.

When parties of equal bargaining power agree through their contracts to resolve disputes through a neutral arbitrator, both the parties and courts stand to greatly benefit. Disputes that would otherwise lead to court litigation are settled quickly and much more cheaply by submitting the decision to a privately-hired fair and impartial arbitrator.

"The decision to arbitrate grievances evinces the parties' intent to bypass the judicial system and thus avoid potential delays at the trial and appellate levels." Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992). "Courts are spared not only the burden of conducting a trial, but also the complications of discovery disputes and other pretrial proceedings." Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334 (2008).

Completely insulating disputes from courts, however, would violate public policy and often undermine the parties' own expectations when entering into their agreement. The State has an important interest in barring the enforcement of unconscionable or otherwise improper arbitration agreements and awards. Parties themselves commonly spell out the degree that courts can become involved, and both state and federal statutes regulate judicial involvement.

"National policy favor[s] arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process." Kyocera Corp. v. Prudential-Bache T Servs., 341 F.3d 987 (9th Cir. 2003). The courts' challenge when it comes to deciding the level of judicial intervention needed is to strike the right balance so as to enforce valid agreements to arbitrate, yet preserve the traditional role courts enjoy in ensuring procedural fairness and public policy.

Both federal and state statutory schemes govern contractual arbitration in California. The federal law is the Federal Arbitration Act (FAA), 9 U.S.C. Sections 1 et seq. The state law is the California Arbitration Act (CAA), Code of Civil Procedure Sections 1280 et seq.

Both the CAA and FAA have provisions geared towards limiting judicial involvement in private arbitration agreements. They both provide that that "arbitration agreements are "valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract." Code of Civil Procedure Section 1281; 9 U.S.C. Section 2.

In the years prior to the FAA and CAA's enactment, arbitration and especially arbitration awards, were subject to thorough judicial review. Provisions in the acts limiting judicial involvement were intended "to overcome an anachronistic judicial hostility to agreements to arbitrate, which American courts had borrowed from English common law." Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985).

Consistent with this purpose, the CAA and the FAA provide only limited grounds for judicial review of an arbitration award. Courts are authorized to vacate an award if it was procured by corruption, fraud, or undue means; issued by corrupt arbitrators; affected by prejudicial misconduct on the part of the arbitrators; or in excess of the arbitrators' powers. Code of Civil Procedure Section 1286.2(a); 9 U.S.C. Section 10(a). An award may be corrected for evident miscalculation or mistake; excess of the arbitrators' powers; or imperfection in form. Code of Civil Procedure Section 1286.6; 9 U.S.C. Section 11.

To the extent that there are differences between the FAA and CAA, the federal act preempts the state provisions. See Giuliano v. Inland Empire Personnel, Inc., 149 Cal.App.4th 1276 (2007). However, when a contract is entered into and performed exclusively in one state, the parties are free to provide in the contract that the law of that state will govern arbitration. For example, where parties agree that state law will govern resolution of disputes under a contract, applying state statutes governing arbitration is not precluded by FAA, even if the result is that arbitration is stayed where the FAA would permit it to go forward. Best Interiors, Inc. v. Millie and Severson, Inc., 161 Cal.App.4th 1320 (2008).

When one party refuses to submit a dispute to arbitration and the opposing party petitions the court to order arbitration under the agreement, Code of Civil Procedure Sections 1290-1209.3 provide the procedures that must be applied.

"[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable. Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence. If the party opposing the petition raises a defense to enforcement-either fraud in the execution voiding the agreement, or a statutory defense of waiver or revocation...that party bears the burden of producing evidence of, and proving by a preponderance of the evidence, any fact necessary to the defense." Rosenthal v. Great W. Fin. Sec. Corp., 14 Cal.4th 394 (1996).

A party has the right to an evidentiary hearing, but no right to a jury trial, on questions of fact regarding existence or validity of an agreement to arbitrate. Hotels Nevada v. L.A. Pacific Ctr., Inc., 144 Cal.App.4th 754 (2006). Even when an arbitration agreement is subject to the FAA, state law governs the issue of the right to jury trial, and under California law, factual disputes relating to a petition to compel arbitration are resolved by the judge without a jury. Strauch v. Eyring, 30 Cal.App.4th 181 (1994).

A party may waive its right to compel arbitration by taking steps inconsistent with the intent to invoke arbitration, such as conducting discovery in litigation, unreasonably delaying in seeking arbitration, or acting in bad faith or committing willful misconduct, if such actions result in prejudice to other party. Berman v. Health Net, 80 Cal.App.4th 1359 (2000). On the other hand, a defendant's filing of a demurrer will not waive its right to enforce an arbitration agreement when the plaintiff is not prejudiced. Groom v. Health Net, 82 Cal.App.4th 1189 (2000). And a party can seek provisional equitable relief without waiving the right to compel the other party to arbitrate. Davenport v. Blue Cross of Calif., 52 Cal.App.4th 435 (1997).

When litigation involves arbitrable and non-arbitrable issues, the court may delay arbitration while deciding nonarbitrable issues first, but if arbitrable issues remain, arbitration must proceed; the court cannot resolve arbitrable issues. Parker v. Twentieth Century-Fox Film Corp., 118 Cal.App.3d 895 (1981). If the court has ordered arbitration involving a given issue, the court must issue a stay of litigation involving that issue on motion of any party to the litigation, even if the movant is not party to the arbitration agreement. Heritage Provider Network, Inc. v. Superior Court, 158 Cal.App.4th 1146 (2008).

With very limited exceptions, someone who was not a party to a contract containing an arbitration clause normally cannot be compelled to arbitrate. See Best Interiors; cf. Turtle Ridge Media Group, Inc. v. Pacific Bell Directory, 140 Cal.App.4th 828 (2006).

Courts are often called on to decide not only whether there should be any arbitration at all, but which claims are covered by arbitration and which are not. "To determine whether a contractual arbitration clause requires arbitration of a particular controversy, the controversy is first identified and the issue is whether that controversy is within the scope of the contractual arbitration clause." In re Tobacco Cases I., 124 Cal.App.4th 1095 (2004). For example, someone who was not a party to a contract containing an arbitration clause normally cannot be compelled to arbitrate. See Best Interiors; but see Turtle Ridge Media Group.

Once the existence of a valid arbitration clause has been established, "[t]he burden is on the party opposing arbitration to demonstrate that an arbitration clause cannot be interpreted to require arbitration of the dispute." Buckhorn v. St. Jude Heritage Medical Group, 121 Cal.App.4th 1401 (2004).

With respect to the validity of arbitration clauses, one common ground that is alleged is that there was fraud in the inducement of the overall contract. If proved, such fraud will vitiate an arbitration clause. Bruni v. Didion, 160 Cal.App.4th 1272 (2008).

Another ground that often arises, especially in disputes involving consumers, is that enforcement of an arbitration clause would be unconscionable. For example, an arbitration clause buried under "miscellaneous" at the end of lengthy agreement may be found by a court to be unconscionable and unenforceable. Higgins v. Superior Court (Disney), 140 Cal.App.4th 1238 (2006). Arbitration agreements in the employment context also often receive special scrutiny by the courts. See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000).

Unless a contract clearly and unmistakably reserves the issue of unconscionability for the arbitrator, it is the court's job to determine this issue. Baker v. Osborne Development Corp., 159 Cal.App.4th 884 (2008). Moreover, where the provision that refers the unconscionability defense to the arbitrator is contained in contract of adhesion and is thus itself unconscionable, it will be for the judge, not the arbitrator, to decide whether the arbitration provision as a whole is unconscionable. Murphy v. Check 'N Go of Calif., Inc., 156 Cal.App.4th 138 (2007).

After an arbitrator has issued an award, courts may be called on in a variety of situations ranging from disputes over the terms of the award, to requests to wholly vacate an award. A party may petition a court to confirm, vacate, or correct an arbitration award, and a responding party may seek dismissal of the petition, or ask the court to confirm, vacate, or correct the award as well. Code of Civil Procedure Section 1285.2. The court "shall confirm the award as corrects the award and confirms it as corrected, vacates the award or dismisses the proceedings." Code of Civil Procedure Section 1286.

If an award is confirmed, judgment must be entered in conformity with the award. The judgment so entered has the same force and effect as, and is subject to all the provisions of law relating to, a judgment in a civil action of the same jurisdictional classification. The judgment may be enforced like any other judgment of the court in which it is entered. Code of Civil Procedure Section 1287.4.

Grounds for vacating awards include the invalidity of the arbitration agreement, that the arbitrator exceeded his or her authority, and procedural errors made by the arbitrator. See generally, SWAB Financial, LLC v. E*Trade Securities, LLC, 150 Cal.App.4th 1181 (2007). "[B]oth because it vindicates the intentions of the parties that the award be final, and because an arbitrator is not ordinarily constrained to decide according to the rule of law, it is the general rule that, the merits of the controversy between the parties are not subject to judicial review." Moncharsh, at p. 11. Under federal law, parties may not contract for a broader scope of judicial review of the merits, Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008), but under California law, they may do so if the agreement is crystal clear, Cable Connection.

Sarah K. Hofstadter of the 1st District Court of Appeal educates on judicial enforcement and review of contractual arbitration.

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