Legal Update

THERE IS NO APPEAL OF AN ERRONEOUS ARBITRATION AWARD

  • March 14th, 2002
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The California Court of Appeal ruled on March 21, 2002 that an arbitration award of a real estate contract dispute will not be reversed on appeal even if it contains significant legal or factual errors which result in substantial injustice. Harris v. Sandro 96 Cal.App.4th 1310 (2002).

FACTS: The plaintiff Buyer held an option to purchase land owned by the defendant Seller. A dispute arose over whether the Buyer had properly exercised the option to purchase. Buyer sued for specific performance to compel the Seller to sell the property to Buyer. Seller counterclaimed to quiet title to the property. The option contract contained a clause requiring the parties to resolve the dispute by binding arbitration. The case was decided by an arbitrator who denied the Buyer’s claim for specific performance, finding he had “no estate, title or interest in the property. However, the arbitrator also denied the Seller’s action to quiet title, but awarded attorney fees to the Seller. The judgment entered on this seemingly contradictory arbitration award was appealed by the Buyer to the Court of Appeal.

ISSUES: The Buyer contended the arbitrator exceeded his powers by ruling the Buyer had no rights in the property, by failing to compel specific performance of the option agreement and by awarding attorney fees to the Seller. Buyer further contended the arbitrator committed misconduct by failing to provide any basis for the award. The issue before the Court of Appeal was whether or not such arguments provided sufficient basis for appellate review of an arbitration award.

DECISION: The Court of Appeal stated that the courts of this state have repeatedly emphasized, the merits of a controversy that has been submitted to arbitration are not subject to judicial review. The Court stated that an arbitrator “is not ordinarily constrained to decide according to the rule of law and does not exceed his or her powers by making a legal or factual error or by giving erroneous reasons for an award.  In other word, a court will not reverse an arbitrator’s decision no matter how bad or obviously wrong it is.

Code of Civil Procedure Section 1286.2 permits an arbitration award to be vacated for substantial misconduct by the arbitrator, or where the arbitrator exceeds their powers. Neither was present in this case. The Court of Appeal affirmed the judgment, affirmed the award of attorney fees against the Buyer and then went further to impose $11,000 in sanctions against the Buyer for a fritvolous appeal saying the Buyer’s arguments were transparently without merit. The sanction award also required the Buyer’s attorney to be reported to the State Bar for possible disciplinary proceedings

ADVICE: The clear message in this opinion is the courts want arbitration awards to be final and non-reviewable, no matter how erroneous the ruling may be. Appealing an arbitration award without more, is sanctionable conduct. Parties to a contract must carefully consider this attitude of the courts before agreeing to a binding arbitration clause. Justice dispensed by an arbitrator is theoretically faster and cheaper, but so is flipping a coin. If the arbitrator does not know the law, does not understand the law or does not follow the law, the losing party is stuck with the faulty ruling. As a result of these shortcomings, we typically advise our clients not to agree to a binding arbitration clause in a contract. A dispute which involves more money than a small claims award is worthy of being resolved in a court of law where an experienced trial judge will decide the law, and a jury of your peers will decide the facts.