California Supreme Court Allows Judicial Review Of Arbitration Awards For Errors Of Law

A recent case decided by the California Supreme Court has added a new option for arbitration – parties can now contract for judicial review of an arbitration award for errors of law. “Errors of law” can include such things as an erroneous interpretation of a contract, an erroneous award of attorneys’ fees, or an erroneous application of a case or statute.

In Cable Connection, Inc. v. DirectTV, Inc. (Cal. Sup. Ct. Aug. 25, 2008), the Court considered the enforceability of an arbitration agreement that stated that “[t]he 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.” Although the Court recognized that its decision was contrary to a line of cases going back to at least 1992, the Court nonetheless found that if the parties to a contract explicitly and unambiguously agree – as they did here – to expanded judicial review of an arbitration award, the Court will enforce that agreement.

There are a few important caveats to note about the Cable Connection decision. First, if the arbitration is governed by the Federal Arbitration Act – as opposed to the California Arbitration Act – the rule is different. According to a recent decision by the U.S. Supreme Court, the FAA does not allow parties to contract for judicial review of the arbitration award. Second, the Court emphasized that for judicial review to be available, the parties’ agreement has to be unambiguous and explicit. The arbitration clause must provide clearly and expressly that legal errors are an excess of arbitral authority that are reviewable by the courts. Third, the Cable Connection decision addressed the enforceability of an arbitration clause that was agreed to by sophisticated parties in a commercial context. Whether a court will enforce a similar clause in a consumer context remains to be seen.

The Court’s rationale in the Cable Connection decision was expressly on freedom of contract grounds, emphasizing that contracting parties should be free to pick whatever process suits their dispute, within reason. (The Court was careful, though, to say that it would not enforce some “bizarre mode of decision” like flipping a coin.) The Court seemed to recognize that more and more parties are uncomfortable with arbitration because of the experience of being stuck with an arbitrary decision by the arbitrator. The Court praised arbitration as a good way to resolve a factual dispute quickly, while saying that it thought that the weakest part about arbitration can be that a legal error is not reviewable. The Court emphasized that it wants to encourage people to use arbitration since it helps a congested court system manage its calendar, and that the parties themselves know the best menu options that work for them in terms of ADR. Sometimes arbitration is needed for the finality – in which case the parties will not agree to appellate review – and sometimes arbitration is just an attempt to get a factual dispute resolved quickly, while preserving review for legal errors. Since the parties know best, the Court is going to enforce the contract.

Now that Cable Connection has clarified that parties can contract in an arbitration clause for judicial review of errors of law by the arbitrator, the question becomes whether a contracting party should take advantage of this ability and include such a clause in the operative agreement. On the one hand, one of the main advantages of arbitration is its finality. Obviously if the parties agree to appellate review of legal errors by the arbitrator, then the arbitration process becomes that much more similar to regular litigation in court, and loses the cost-effectiveness that comes with finality. On the other hand, more and more litigants have become uncomfortable with arbitration because the arbitrator has such wide latitude and discretion. The Cable Connection decision allows a contracting party who truly does want to be governed by legal as well as factual concepts to bring some appellate review back into the process. As with any other type of ADR, the decision of whether to use arbitration plus judicial review of errors of law is a deal point and a decision that depends on the particular circumstances of the contracting parties’ relationship, the types of disputes that could arise between the parties, and the parties’ respective comfort level with ADR. However, all forms of arbitration agreements currently being used should be reexamined to determine whether or not to take advantage of this important new development.