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Be Careful of Arbitration Provisions

Most business people, and some consumers, are aware that many of the contracts into which they enter contain arbitration provisions. Such provisions typically provide that, should a dispute arise under the contract, the parties must utilize arbitration to resolve their differences instead of resorting to the civil courts. Although these provisions are so common that they may be accepted without much thought, there are significant differences between arbitrating a matter and litigating it in court, and those differences should be well understood before signing a contract that requires arbitration. It is also important for business people who use such provisions in their standard contracts to ensure that they are written to protect their interests appropriately.

Beware the Differences Between Arbitration and the Courts

Many people prefer arbitration to civil courts because they believe that arbitration is a quicker and less expensive way to resolve their contractual disputes. What they may not realize is that in order to achieve these goals, vast power is placed in the hands of the arbitrator, or arbitrators in a three-arbitrator panel, with virtually no recourse to the courts if the arbitration result is unsatisfactory. The opportunity to reverse a bad decision is sacrificed for the presumed speed and convenience of the arbitration process.

The courts understand that this is the purpose of arbitration and heartily endorse it. They recognize that “[T]he fundamental purpose of contractual arbitration is to finally resolve all of the issues submitted by the parties as expeditiously as possible [citation], without the time and expense burdens associated with formal judicial litigation.” (Century City Medical Plaza v. Sperling, Isaacs & Eisenberg, 86 Cal.App.4th 865, 879-882 (2001) (emphasis in original)). For instance, the California Supreme Court has recognized that contracting parties expect that their disputes will be resolved without the need for any contact with the courts. (See, e.g., Blanton v. Womancare, Inc., 38 Cal. 3rd 367, 396,402 (1985) (emphasis added)).

Given this recognition of the parties’ desire for efficiency, therefore, the courts and Legislature refuse to interfere with an arbitrator’s determination except in the most egregious situations. “An award may be vacated only for fraud, corruption, misconduct, an undisclosed conflict, or similar circumstances involving serious problems with the award itself, or with fairness of the arbitration process.” (Moncharsh v. Heily & Blasé, 3 Cal.4th 1, 12 (1992); California Code of Civil Procedure § 1286.2(a)).

While this definition may seem to offer the losing party some basis for appeal of an adverse ruling to the courts, the opportunities for success in any such appeal are exceedingly limited. They arise only when the arbitrator’s error is so serious that it constitutes misconduct or so profound as to render the process itself unfair. For example, in a recent case decided by the California Supreme Court, Shiraz Shivji, a party to an arbitration proceeding, was entitled under California law to an award of the costs he had incurred during the arbitration. He applied to the arbitrator for those costs to be awarded, but the arbitrator refused. The Court upheld a lower court’s determination that the scope of judicial review does not extend even to such blatant errors of law made by an arbitrator. (Heimlich v. Shivji, 7 Cal.5th 350, 367 (2019).) If this had been a court case, and the erroneous ruling had been made by a trial court, Mr. Shivji would have had recourse to the appellate courts but, because this was an arbitration, he had none. Id.

Reviewing an Arbitration Provision

For business people who include arbitration provisions in their contracts, and for everyone who considers entering into a contract that contains one, there are some important considerations of which to be mindful:

  • Arbitration is a matter of consent between the parties to a contract;

  • The parties’ agreement therefore defines the scope of the arbitrator’s power;

  • A general provision to arbitrate “all disputes or claims of any nature arising under or in connection with this contract,” or similar language, which is common in many arbitration agreements, will be interpreted to give the arbitrator expansive powers to resolve the matter;

  • Therefore, unless there is an express and unambiguous limitation in the contract, an arbitrator has the authority to find the facts, interpret the contract and award the relief as he or she sees fit; and

  • Whether preparing or deciding whether to agree to an arbitration provision, a careful person should consider whether to limit the powers to be given to the arbitrator.

Arbitration can be a quicker and less expensive way than court litigation to resolve contract disputes. Providing an arbitrator with broad powers to decide matters as he or she sees fit and which can only be reviewed in the most limited circumstances may not always be in a person’s best interest however.

The decision to include an arbitration clause in a contract, and the content of such a clause, should be made on a case-by-case basis, depending on the particular facts of each transaction. Mere repetitive use of a form provision may not be the wisest course. Counsel can assist in reviewing all options.