Arbitrator Acted Beyond Powers Because Award Violated Party's Statutory Rights And Clearly Defined Public Policy.
Instead of initiating arbitration, a party subject to an arbitration agreement chooses to file a lawsuit when a dispute arises. Has the party breached the arbitration agreement? And if the arbitrator issues an award by holding that the party has breached, is it reviewable on the merits? Those are the issues the Court of Appeal confronted in Sargon Enterprises, Inc. v. Browne George Ross LLP, B271718 (2/3 9/26/17) (Edmon, Lavin, Johnson) (published).
After "long-running litigation" involving a patented dental implant, Sargon sued its attorneys, Browne George Ross LLP (BGR), for legal malpractice, BGR successfully petitioned to compel arbitration, and BGR pressed a claim in arbitration against Sargon for breach of contract. The arbitrator found Sargon's malpractice claim to be barred by a release, concluded that Sargon breached the arbitration agreement by filing the malpractice action in superior court instead of initiating arbitration, and awarded BGR damages of $200,000. Sargon appealed the judgment and order granting the petition to confirm the arbitration award.
Ordinarily, judicial review of the merits of an arbitration award is limited. However, an exception allowing for review exists when the arbitrator exceeds his powers. Here, the exception to limited review applied, because an award must be vacated if it violates a party's statutory rights or clearly defined public policy.
Cutting to the chase, the Court of Appeal concluded that a party subject to an arbitration agreement has a statutory right in California to initiate litigation in court. Indeed, the California Arbitration Act (CAA) anticipates that a party to an arbitration agreement may file a lawsuit, because it provides that the defendant may respond by filing a petition to compel arbitration instead of filing an answer. There are public policy reasons for such a procedure, because a plaintiff may believe the arbitration clause is unenforceable, its claims are not within the scope of an arbitration agreement, arbitration has been waived, it prefers to have a jury trial, and the defendant may not assert a right to arbitrate.
Because the CAA provides parties with a statutory right to file a lawsuit testing the validity and enforceability of an arbitration agreement, the arbitrator exceeded his powers by awarding damages for breach of the contract to arbitrate after Sargon chose to file a complaint rather than to initiate arbitration.
The Court of Appeal corrected the award by striking the portion finding Sargon breached the contract and ordering Sargon to pay damages, while confirming as a judgment the part of the award finding in favor of the law firm on the issue of malpractice.
COMMENT: As a published opinion, Sargon Enterprises is important, because it makes it clear, under the CAA, that a party subject to an arbitration agreement does not breach the contract by filing a lawsuit instead. It is also important, because it applies California's violation of statutory rights/clearly defined public policy exceptions to expand what would otherwise be limited review of an arbitration award.
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