Moncharsh and the Risk of Arbitration

• Publication year: 2023
• Author: Written by John P. McGill*

MONCHARSH AND THE RISK OF ARBITRATION

(LONG PAST) TIME TO RECONSIDER LETTING ARBITRATORS MAKE MISTAKES

Written by John P. McGill*

I. INTRODUCTION

Moncharsh v. Heily & Blase⁰¹ has been on the books for 30 years and the obstacles it poses to review and vacatur are so firmly established⁰² and so well known that if a party seeks to appeal an arbitration award because it contains error and/or results in substantial injustice, the first response by any appellate attorney is to advise against it. The reason: Moncharsh denies review and vacating for errors of law or fact in an arbitrator's decision. Indeed, Moncharsh and its progeny acknowledge and implicitly authorize arbitrators to make such errors and allows them to do so with impunity.⁰³ Consequently, fairness, equity, and a consistent application of the law are compromised.

Because Moncharsh is a California Supreme Court decision, it limits discretion for arbitral review by the lower courts. Moncharsh also restricts any review by those courts to specific statutory exceptions⁰⁴ that the Court relied on as the permissible scope for such review. According to the Moncharsh Majority, the statutory language does not allow vacating an arbitrator's decision for legal or factual error that results in substantial injustice. Rather than encouraging review and vacating incorrect arbitration awards, Moncharsh allows only restricted and/or perfunctory review limited to the statutory exceptions, with any review predisposed to favor the arbitrator's decision, notwithstanding any injustice. Under Moncharsh, courts can and must confirm arbitral error, as well as the arbitrator's right to make such error. The lower courts excuse their inability to correct an unfair result by insisting they are powerless under Moncharsh to do anything else.

The Moncharsh Majority's interpretation of the California statutes allowing for arbitral review and the Majority's interpretation of the legislative purpose in drafting those statutes, means any expectation of a fair hearing and legally correct decision is left entirely to the arbitrator and is a matter of luck, not law. It also means the lower courts are unable to perform their role of correcting unfairness and inequity (e.g., applying the law in a uniform and consistent way so that fairness and justice may result).

Arbitration is an alternative dispute resolution process, not an alternative application of law. The benefits the Moncharsh Majority identified for cost and efficiency would still exist if an arbitrator's decision was reviewed for error under the same standards as a trial judge, and it would encourage arbitrators to be diligent and attentive to the correct application of the law. There would be the additional benefit of a correct, fair, and error-free decision so

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the parties actually do receive the benefit of their bargain, which is exactly why Moncharsh should be reconsidered.

II. MONCHARSH-GOOD FACTS MAKE BAD LAW

Moncharsh was a simple case with uncomplicated facts and few serious legal issues, but the California Supreme Court granted review anyway. The Court's decision upholding the arbitrator's award was unanimous. How the Court reached its holding was not unanimous however, as the Majority and dissent expressed diametrically opposed understandings of the law and the issues surrounding review for arbitral error. If good facts can make bad law, then Moncharsh is the poster case for that proposition.

Phillip Moncharsh was an attorney hired by the firm Heily & Blase. When he was hired, he signed an employment contract that included arbitration as the dispute resolution procedure. Moncharsh decided to leave the firm and when he did, six of the firm's clients decided to go with him. The employment agreement provided that fees generated by any departing attorney related to any clients he took with him would be split 80% to the firm and 20% to the departing attorney.

The firm demanded payment of its share of the fees from Moncharsh. Moncharsh objected to the split, refused to pay, and offered Heily & Blase a quantum meruit amount, which the firm rejected. When the parties could not resolve the dispute, they invoked the arbitration clause. After two days of hearings, followed by briefing, the arbitrator ruled. The arbitrator affirmed the employment contract terms and ordered Moncharsh to pay to Heily & Blase the proportionate share (80%) of fees he collected, but from only five of the six clients. The arbitrator determined the sixth client started working with Moncharsh within a month of his leaving the firm and therefore the 80-20 split would be unfair and, thus, no fees were awarded.

The parties filed their respective petitions to confirm and to vacate in the trial court. The trial court ruled in favor of Heily & Blase because "[t]he arbitrator's findings on questions of both law and fact are conclusive. A court cannot set aside an arbitrator's error of law no matter how egregious."⁰⁵ Moncharsh appealed the trial court ruling.

The court of appeals affirmed the trial court's decision noting that while an exception exists when "an error of law appears on the face of the ruling and then only if the error would result in substantial injustice,"⁰⁶ no such error existed here.

Moncharsh appealed to the Supreme Court and review was granted on the "limited issue of whether, and under what conditions, a trial court may review an arbitrator's decision."⁰⁷

III. MONCHARSH-A HOLDING IN SEARCH OF A REASON

Moncharsh held:

We conclude that an award reached by an arbitrator pursuant to a contractual agreement to arbitrate is not subject to judicial review except on the grounds set forth in sections 1286.2 (to vacate) and 1286.6 (for correction). Further, the existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review.⁰⁸

It is the inability to obtain judicial review and reversal (vacatur) based on an arbitrator's error of law that is the most disturbing, significant, and consequential result of the Moncharsh decision. Courts continue to struggle with the correct application of Moncharsh review and whether vacatur is available. When does an arbitrator's decision exceed his/her authority, when and what constraints limit arbitral review, and more fundamentally, why can an arbitrator make errors that a trial judge cannot? If there is to be a consistent application of the law, then error should not be tolerated in one forum when it is not tolerated in the other, especially error causing substantial injustice. The justifications presented by the Moncharsh Majority for disallowing review are neither realistic nor logical; and without them, the decision lacks any reasoned or legal foundation.

The Majority reached its conclusion after reviewing, among other things, the 1956 Legislative Report and concluding that the Legislature intended only very limited arbitral review and that review went to only the statutory exceptions incorporated in Code of Civil Procedure sections 1286.2 and 1286.6.⁰⁹ Those exceptions do not include judicial review for legal or factual error. A fair reading of the legislative report, however, does not support the Majority's conclusion. What the report stated was that there was no need for legislative action because the courts had already addressed judicial review for error.

On the subject of the scope of judicial review, the 1956 Legislative Report explained:
Nothing in the California statute defines the permissible scope of review by the courts. Numerous

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court rulings have, however, developed the following basic principles which set the limits for any court review: [¶] ... [¶] (2) Merits of an arbitration award either on questions of fact or of law may not be reviewed except as provided for in the statute in the absence of some limiting clause in the arbitration agreement. [¶] ... Statutory provisions for a review of arbitration proceedings are for the sole purpose of preventing misuse of the proceedings where corruption, misconduct, gross error or mistake has been carried into the award to the substantial prejudice of a party to the proceedings.¹⁰

The report, fairly read, indicates the Legislature is leaving the scope of arbitral review for legal error to the courts. Consequently, the statutes do not need to, and therefore do not, codify any judicial review standard other than for procedural issues. The reason there is "no mention of the rule permitting judicial review for errors apparent in the face of the arbitration award causing substantial injustice"¹¹ in the statutory language is because the Legislature understood this was already part and parcel of the court's review process and within limits the courts had already imposed on themselves. The courts had created and implemented a review standard for legal and factual error, so the Legislature did not need to address it.

Further, it would not be for the Legislature to tell the judiciary how to interpret a statute to assure the substantive rights of the parties are protected. The Legislature presumably expects courts will perform their judicial role correctly. The Legislature would not legitimately intrude into the judiciary's authority by telling the courts what they can and cannot do as they exercise their judicial review authority. The separation of powers doctrine, if nothing else, precludes such interference.¹²

The Majority also referenced and relied on unsubstantiated and outdated assumptions preserved in earlier case law¹³ to justify conclusions about why parties choose arbitration, what they expect, what benefits they understand will flow from their choice, and what sacrifices are understood and agreed to as acceptable when arbitration is the dispute resolution choice. Nothing the Majority relied on specifically addressed or documented those assumptions; instead, they are just included as "fact." Furthermore, and, as Justice Kennard pointed out, the Majority ignored all the prior case law...