Beyond Boilerplate Language: How Non-standard Arbitration Clauses Can Cause Different Results

• Jurisdiction: California,United States
• Author: By Joel M. Grossman
• Publication year: 2017
• Citation: Vol. 31 No. 6

Beyond Boilerplate Language: How Non-standard Arbitration Clauses Can Cause Different Results

By Joel M. Grossman

Joel M. Grossman is a mediator and arbitrator with JAMS in Los Angeles. He has been selected four times as one of the Top Neutrals in California by the Daily Journal. For more information please contact www.grossmanmediation.com.

Lawyers who practice in California are familiar with the notion, set forth by the California Supreme Court in Moncharsh v. Heily & Blase,¹ that an arbitrator's determination of a case before him or her is subject to very limited judicial review, and will not be vacated because of the arbitrator's errors of fact or law. As the court later stated in Cable Connection, Inc. v. DIRECTV, Inc.,² this rule is "consistent with the usual expectations of parties to arbitration agreements, who accept the risk of legal error in exchange for the benefits of a quick, inexpensive, and conclusive resolution."³ In other words, parties who submit a dispute to the arbitrator for resolution must hope he or she gets it right, because courts will vacate the award under only narrow and limited circumstances.

But what if the parties want the benefits of arbitration, but are unwilling to live with the risk that the arbitrator could reach an incorrect conclusion that they would be helpless to appeal? Should they decide to do so, the parties may include additional, non-standard terms in the arbitration agreement to protect themselves from such a risk. For example, in Cable Connection, the court held that terms of an arbitration agreement that go beyond the standard boilerplate by requiring the arbitrator to follow the law and allowing for judicial review of the arbitrator's award for legal error, are valid and enforceable: "If the parties constrain the arbitrator's authority by requiring a dispute to be decided according to the rule of law, and make plain their intention that the award is reviewable for legal error, the general rule of limited review has been displaced by the parties' agreement."⁴

The exception to limited review of arbitration awards recognized by the supreme court in Cable Connection was central to the court of appeal's recent holding in a commercial case called Harshad & Nasir Corp. v. Global Sign Systems, Inc.⁵ The facts of the case are much too long to summarize here, but the issue on appeal was whether the court could review the matter on its merits. The court paid attention to the specific and unique language of the arbitration agreement. Specifically, the agreement stated: "[T]he arbitrator shall apply California law as though he were obligated by applicable statutes and precedents and case law . . . and shall endeavor to decide the controversy as though he were a judge in a California court of law." The agreement went on to say that either party may object to the award "on the basis that the statement of facts and the conclusions of law do not support the decision and award, and/or that the law was incorrectly determined or applied." This language would allow for a result far different than the Moncharsh rule that an arbitration award cannot be vacated even if the arbitrator was wrong on the facts or the law.

In addition to requiring the arbitrator to follow the law, the Global Sign Systems arbitration clause directly provided for an appeal: "The parties agree that the decision of the arbitrator and/or the findings of fact and...