Second District, Division Eight So Holds In Unpublished Decision Showing the Deference Given to Arbitral Decisions.
Any practitioner dealing with binding contractual arbitration will have read, many times we believe, the California Supreme Court’s decision in Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992). Moncharsh gave broad deference to arbitration awards, establishing such principles as (1) arbitrators have the power to resolve the entire merits of the contested issues of law and fact submitted to them for decision (id. at 28); (2) arbitrators do not exceed their powers by making legal or factual mistakes or giving erroneous reasons for their decisions (id. at 12, 28); (3) arbitrators may base their decisions upon “broad principles of justice and equity,” rejecting claims that a party may have successfully asserted in a judicial action (id. at 10-11); and (4) reviewing courts will not review the validity of the arbitrator’s reasoning or the sufficiency of the evidence supporting an arbitral award (id. at 11). This seminal decision establishes that arbitrators under contractual arrangements have very broad powers and discretion in what standards they use in deciding a case. The next decision exemplifies the breadth frequently conferred upon arbitrators under broadly worded contractual arrangements, cautioning that practitioners may want to more narrowly circumscribe the issues which are submitted to the arbitrator for decision.
In Patel v. Sagar, Case No. B200230 (2d Dist., Div. 8 July 14, 2008) (unpublished), partners in a bitter partnership dispute, including a cross-complaint by Mr. Patel that prayed for “attorney fees as permitted by law and/or equity,” participated in a mediation and, while there, agreed in writing that “[t]heir disputes will be resolved in binding arbitration.” Mr. Patel won $10,402.98 in the arbitration, with the arbitrator determining he was entitled to $42,145.75 in fees as a result of his opponents’ breach of partnership fiduciary duties. The trial court confirmed the award, and the losing parties appealed.
The Second District, Division Eight affirmed, following the principles laid out in Moncharsh. Because Mr. Patel’s cross-complaint prayed for fees, the arbitrator could award them based on the broadly worded arbitration agreement that “did not impose any restrictions on the arbitrator.”
However, the appellate panel went even further. It all but came out and indicated that there may have been no contract or cross-claim legal theory entitling Mr. Patel to recover attorney’s fees. A problem? Not when reviewing a contractual arbitration award. Given that an arbitrator can base his decision on equitable “just and good” precepts, it was immaterial if no contractual or legal entitlement to fees existed. The arbitrator had broader authority to decide an award “reached by paths neither marked nor traceable and not subject to judicial review.” (Slip Opn., at p. 8, quoting Moncharsh, supra, 3 Cal.4th at 11.)
The penultimate paragraph of the opinion provides a sobering reminder to parties that they need to delineate with precision the ambit of issues being submitted for arbitration:
“If appellants wanted to preclude the arbitrator from awarding attorney’s fees to Patel, they should have taken steps to exclude the issue from the scope of arbitration, e.g., by moving to strike the allegations in the cross-complaint seeking fees or by so specifying in the arbitration agreement. Given several requests for attorney’s fees in the cross-complaint and the broadly worded arbitration agreement, the arbitrator had the power to decide the issue. He did not exceed his powers by deciding it adversely to appellants.”
(Slip Opn., at p. 8.)
Additionally, if the parties want the arbitrator to follow the law or follow certain evidentiary procedures, those directives should be spelled out in the arbitration agreement. Otherwise, a broadly worded arbitration agreement might result in the same type of decision that the appellants found surprising in Patel.