Judicial Review of Arbitration Awards

Arbitration is a form of alternative dispute resolution, in which disputes are submitted to a neutral arbitrator(s) based on prior agreement between the parties, rather than resolved through litigation. The point and goal of arbitration is to secure an efficient, less formal and less costly method for resolving disputes (compared to litigation). Historically, arbitration awards were not subject to judicial review, meaning that such awards were final, and not “appealable” to the courts. California Code of Civil Procedure section 1286.2 was narrowly interpreted, essentially limiting judicial review of arbitration awards to instances of arbitrator misconduct. The reasons given for precluding judicial review were to prevent automatic appeals by the losing party (which would render arbitration pointless to begin with), and because the parties had accepted a certain level of risk (of an “incorrect” ruling by the arbitrator) by agreeing to arbitration. Recently however, several cases seem to have greatly expanded the scope for judicial review of arbitration awards. In 2008, the California Supreme Court held
that if the arbitration agreement between the parties contained language such as “arbitration of any dispute will be governed by the law” or “the arbitrator shall have no power to commit errors of law or legal reasoning,” then the award could be reviewed by an appropriate court. The Supreme Court reasoned that because arbitration agreements are contracts, and parties are (generally) free to determine the terms of a contract, then parties could agree that any arbitration award would be free of legal errors (and if the arbitrator committed such an error, one or more of the parties could seek judicial review). Furthermore, in 2009, a California appellate court held that an arbitrator’s failure to hear material evidence related to the dispute constituted grounds for judicial review, citing Code of Civil Procedure section 1286.2(5), which allows for review if the arbitrator’s conduct “substantially prejudices” one or more of the arbitrating parties. This interpretation of section 1286.2 greatly expanded upon prior interpretations, as parties could now attempt to argue that any evidence excluded by the arbitrator was “material” (in an effort to vacate the award). Finally, in 2012, a CA appellate court held that an arbitration award based on an agreement that states “resolution of the dispute shall be based solely upon the law governing the claims and defenses set forth in the pleadings” was subject to judicial review, based on similar reasoning found in Cable. This case will soon be reviewed by the California Supreme Court. The trade-off here is between efficiency and cost savings versus legal “accuracy,” and is further compounded by freedom of contract principles. The recent trend seems to favor “accuracy.” What effect this may have on the use of arbitration remains to be seen.