Arbitration may not allow for an appeal even if the arbitrator commits an error of law
March, 2009
By
Ronald L. Richman
The California Court of Appeal in Christensen v. Smith, 2009 WL 205078 (Jan. 28, 2009) held unless the parties specifically agree in the arbitration agreement to allow for an appeal, the arbitration award is final, regardless of whether the arbitrator or arbitrators committed an error of law.
Background
The Christensens sold their Newport Beach home to the Smiths for $8.35 million. The home included two boat docks. After the sale, the Smiths received notice that the home's second dock actually belonged to a neighbor and would be torn down. The Smiths and Christensens agreed to resolve by binding arbitration the issue of whether the Christensens failed to disclose to the Smiths that the second dock belonged to a neighbor, not the Smiths.
The arbitrator found the Christensens failed to disclose the true ownership of the second dock and awarded the Smiths $543,451. The Christensens appealed the arbitration award on the grounds the arbitrator made a mistake of law in awarding the Smiths damages.
No Right to Appeal
The Court of Appeal refused to hear the appeal, holding the parties did not agree, in writing, to allow for an appeal even if a mistake of law were made. The Court noted that as a general rule, "[i]n an arbitration, the parties do not get to appeal an adverse decision." In order for parties to an arbitration agreement to retain the right to appeal, they must state in their arbitration agreement that legal errors committed by an arbitrator are deemed to be beyond the authority of the arbitrator and therefore subject to appeal. For example, in 2008, the California Supreme Court in Cable Connection, Inc. v. DIRECTV (2008) 44 Cal. 4th 1334 held the following wording in an arbitration clause clearly allowed for an appeal in the event the arbitrator committed an error of law: "The arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error."
The main purpose of arbitration is to avoid the time and expense of litigation. Absent such clear written language in the arbitration agreement to the contrary, the Court in Christensen held even if the arbitrators make an error in the law, there is no right to appeal: "A provision requiring arbitrators to apply the law leaves open the possibility that they are empowered to apply it 'wrongly as well as rightly'." Simply stated by the Court, what the parties bargain for in an arbitration agreement is the arbitrator's authority to resolve the dispute, right or wrong. The parties to an arbitration agreement accept the risk of an error of law "in exchange for the benefits of a quick, inexpensive, and conclusive resolution."
The decision to allow for an appeal is up to the parties. To preserve the right to an appeal, the arbitration agreement must expressly provide for the right to appeal an error of law or faulty legal reasoning.
Ron Richman is the Shareholder-In-Charge of the San Francisco Office of Bullivant Houser Bailey PC. Mr. Richman's practice covers construction, real estate, general business, and commercial litigation issues. Please e-mail him at ron.richman@bullivant.com or visit www.bullivant.com for more information.