California Mediation and Arbitration

Arbitration/Vacatur: “Manifest Disregard Of The Law” Is Manifestly Not A Ground For Vacating Arbitration Award Under California Law

 

Second District Division 2 Concludes That Arbitrator Did Not Disregard Choice Of Law Provision

     Roller Bearing Company of America (RBC) manufacturers roller bearing assembly parts and Honeywell International use them in engines it manufacturers.  Roller Bearing Company of America, Inc. v. Honeywell International, Inc., Case No. BS127074 (2nd Dist. Div. 2 August 23, 2012) (Chavez, J.) (unpublished) is a contract dispute between the two companies.  The arbitrator issued a ruling in favor of Honeywell in this breach of contract dispute, the judgment confirmed the award, and RBC appealed.

    

Inspector at the Fafnir Bearing Company inspecting large roller bearing which will probably end up in an Army tank.  1943.  Gordon Parks, photographer.  Library of Congress.

      The main issue in the case was whether the arbitrator disregarded a New York choice of law provision in order to consider inadmissible parol and extrinsic evidence to contradict the terms of the contract.  Honeywell argued that the arbitrator’s disregard of the parties’ contractual choice of law provision constituted “manifest disregard of the law.

     We posted on August 21, 2012 about Comerica Bank v. Howsam, et al. Case No. B232749 (2^nd Dist. Div. 5 August 20, 2012) (Turner, P.J., author)(partially published) , explaining that “manifest disregard of law” is not a ground for vacating an arbitrator’s award in California.  The grounds for vacatur are set forth in Cal. Code Civ. Proc. section 1286.2, and “manifest disregard of the law” is not one of those grounds.  The court concluded the same here, but then treated the argument as one that the arbitrator “exceeded the scope of his authority” by refusing to apply New York law governing parol evidence and integrated contracts.  The different label placed on the argument allowed the court to consider whether it provided a basis for vacating the award.  However, the court then concluded that the argument the arbitrator had disregarded New York law was “flatly contradicted” by the record.  The arbitrator had considered extrinsic evidence to interpret ambiguity, something permitted under New York law and the law of most states.

    RBC’s argument that the arbitrator admitted inadmissible parol and extrinsic evidence was “simply another way of saying that the arbitrator committed legal error.”  But legal error is not a ground for vacating an arbitration award. 

     Judgment affirmed.

    

Arbitration/Fees/Rules/Scope: Trial Court Affirmed in Case Involving Arbitrator’s Authority, Rules, Sanctions, and Fees

Plus We Learn Some Legal Arcana

    The next case, though unpublished, covers several interesting issues concerning the arbitrator’s authority, rules, sanctions, and fees. Prime Associates Group, LLC v. NAMA Holdings, LLC, Case No. B226167 (2nd Dist. Div. 4 June 19, 2012) (Suzukawa, J., author) (not for publication). 

     The case involved a messy dispute arbitrated among participants in a real estate project.  After 26 days of arbitration, the panel ordered, among other things, that Claimant Alliance Network pay NAMA $12,750,405.  NAMA was also granted monetary relief against Claimants Alliance Network, Alliance Holdings, and Network as sanctions for discovery misconduct. Another party, Crescent, prevailed against NAMA, entitling it to recover fees, costs, and expenses in the amount of $350,000 from NAMA. Appeals followed  How did it all shake out?

    First, the Court of Appeal held that the arbitration panel did have authority to order Alliance Network to pay damages to NAMA, though Alliance was not named as a counterrespondent.  Alas, Alliance forfeited its argument by failing to raise it with the arbitration panel.

     Second, the Court held that the $12M award to NAMA did not exceed the scope of the panel’s authority pursuant to the rules under which it was operating.  The issue here was that the panel was proceeding under the rules of the International Centre for Dispute Resolution (ICDR), which rules provide:  “The tribunal shall not decide as amiable compositeur or ex aequo et bono unless the parties have expressly authorized it to do so.”  “Ex aequo et bono” means “according to what is just and good.” Arbitrators, acting as “amiables compositeurs”, are authorized to disregard legal technicalities and strict constructions, and not required to hew closely to the contract.  We note, as did the Court of Appeal, that generally “arbitrators are not bound to award on principles of dry law” – unless the rules require otherwise.However, if the panel strayed from the cold and harsh ground of law into the warm and fuzzy domain of equity, this issue too had been forfeited. 

     Third, the Court held that the award of sanctions for discovery misconduct was not subject to judicial review, citing Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992):  “Absent a clear expression of illegality or public policy undermining this strong presumption in favor of private arbitration, an arbitral award should ordinarily stand immune from judicial scrutiny.”  Id. at 32.

    Fourth, the fact that NAMA did not fully prevail in the arbitration was irrelevant to its claim of post-arbitration fees to correct or vacate the award.  The arbitration provision was broadly written to include the post-arbitration fees, and the determination of the prevailing party in a post arbitration proceeding is a judicial function distinct from the arbitrator’s decision to award fees in the arbitration.

      The judgment was affirmed.

Incorporation of Rules/CCP section 1281.2: Arbitration Agreement is Self-Executing Where Arbitration Clause Incorporates Existing Rules of AAA

 

“Self-executing” Means Party Does Not Have to File Petition Pursuant to CCP 1281.2 to Compel Arbitration

     In Tutti Mangia Italian Grill, Inc. v. American Textile Maintenance Co., 197 Cal.App.4th 733, 128 Cal.Rpr.3d 551 (2011) a dispute arose between ATM, a supplier of restaurant lines, and TMIG, a restaurant. ATM commenced an arbitration pursuant to an arbitration agreement. TMIG refused to participate, taking the position that an arbitration clause incorporating rules of the AAA is unenforceable, and citing Gilbert Street Developers, LLC v. La Quinta Homes, LLC, 174 Cal.App.4th 1185, 94 Cal.Rptr.3d 918 (2009) (Gilbert Street.)

     Above: Chef in North Beach Italian Restaurant. 1941. John Collier, photographer. Library of Congress.

     The arbitrator disagreed, and rendered an award, entered as a judgment, and affirmed by the Court of Appeal. Gilbert Street was distinguishable, for in that case, the arbitration provision incorporated by reference future rules of the AAA, rendering that agreement unenforceable.

     The Court of Appeal also addressed whether the arbitration provision was self-executing, or whether a petition had to be filed with the Court under CCP section 1281.2 to get the arbitration ball rolling. Section 1281.2 was "designed to afford a remedy where the parties have not provided for the contingency that has arisen or where the contractual scheme has failed." Brink v. Allegro Builders, Inc.,58 Cal.2d 577, 25 Cal.Rptr. 556 (1962). Section 1281.2 is not the exclusive means for starting an arbitration. Where the arbitration provision was sufficiently specific, as was the case here, no petition needed to be filed. The provision was indeed self-executing.