Research on decisions to overturn arbitration award and refund of all fees paid

Author: LegalEase Solutions 

Question: Research on decisions to overturn aribitration award and refund of all fees paid.

Answer:

Under 9 U.S.C. § 10, a district court may vacate an arbitration award in the following instances:

(1) where the award was procured by corruption, fraud or undue means;

(2) where there was evident partiality or corruption on the part of the arbitrators;

(3) where the arbitrators were guilty of misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10. Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir. 2007).

However, majority court decisions state that, “Broad judicial review of arbitration decisions could well jeopardize the very benefits of arbitration, [i.e., speed and informality,] rendering informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.” Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir. 2007). However

Although § 10 does not sanction judicial review of the merits of arbitration awards, the courts have adopted a narrow “manifest disregard of the law” exception under which a procedurally proper arbitration award may be vacated. This standard was first articulated in dicta in Wilko v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 98 L.Ed. 168 (1953) where it was observed that,“[T]he interpretations of the law by the arbitrators in contrast to manifest disregard, are not subject, in the federal courts, to judicial review for error in interpretation.” (emphasis added)).  In addition, it was held that manifest disregard exception requires “something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand and apply the law.” Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir. 2007). But, to demonstrate manifest disregard, the moving party must show that the arbitrator “underst[oo]d and correctly state[d] the law, but proceed[ed] to disregard the same.” Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir. 2007).

Further, “federal courts of appeals have repeatedly held, ‘manifest disregard of the law’ means something more than just an error in the law or a failure on the part of the arbitrators to understand or apply the law. According to the court, it must be clear from the record that the arbitrators recognized the applicable law and then ignored it. Therefore, the “manifest disregard of law” standard needs more than mere allegations of error. Id. In another case, the court held that, “ ‘Manifest disregard of the law’ means something more than just an error in the law or a failure on the part of the arbitrators to understand or apply the law.” Lagstein v. Certain Underwriters at Lloyd’s, London, 607 F.3d 634, 641 (9th Cir. 2010). In the same case, the court made clear that “legally dispositive facts are so firmly established that an arbitrator cannot fail to recognize them without manifestly disregarding the law.” Id.

According to the court in Lagstein, an arbitration award “draws its essence from the agreement if the award is derived from the agreement, viewed in light of the agreement’s language and context, as well as other indications of the parties’ intentions.” Id. at p.642. In which case an award is said to be completely irrational “only ‘where the arbitration decision fails to draw its essence from the agreement. Id. Therefore, “In the absence of an express agreement to the contrary, procedural questions are submitted to the arbitrator, either explicitly or implicitly, along with the merits of the dispute.” However, the Supreme Court has explained that, “ ‘procedural questions which grow out of the dispute and bear on its final disposition’ are presumptively not for the judge, but for an arbitrator, to decide.” (internal quotation and citation omitted). Id. at p. 644.

In a case where there is “evident partiality”, the party must establish specific facts indicating actual bias toward or against a party or show that the arbitrator failed to disclose to the parties information that creates “[a] reasonable impression of bias.” Id., p. 645-46. Under the Federal Arbitration Act, vacatur of an arbitration award is not required simply because an arbitrator failed to disclose a matter of some interest to a party. Instead, arbitrator was required to disclose only facts indicating that he “might reasonably be thought biased against one litigant and favorable to another.” For that reason, “[V]acatur is appropriate where the arbitrator’s failure to disclose information gives the impression of bias in favor of one party.” Id. p. 646.

Moreover, the court shall vacate, modify or correct any award:

  • based upon any of the grounds referred to in the Federal Arbitration Act,
  • where the arbitrators’ findings of fact are not supported by substantial evidence, or
  • where the arbitrators’ conclusions of law are erroneous.

Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987, 990-91 (9th Cir. 2003).  In addition, if vacatur is not warranted, 9 U.S.C.A. § 11 allow a court to modify or correct an award on the following:

  • [w]here there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award[;]
  • [w]here the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted[; or]
  • [w]here the award is imperfect in matter of form not affecting the merits of the controversy. 9 U.S.C. § 11 (emphasis added).

To sum up, the Federal Arbitration Act allows a federal court to correct a technical error, to strike all or a portion of an award pertaining to an issue not at all subject to arbitration, and to vacate an award that evidences affirmative misconduct in the arbitral process or the final result or that is completely irrational or exhibits a manifest disregard for the law. According to the court, these grounds afford an extremely limited review authority and it is considered as a limitation that is designed to preserve due process but not to permit unnecessary public intrusion into private arbitration procedures. Id. at p. 997-98. However, the court also stated that, “Unless the award was procured by fraud, or the arbitrator had a serious conflict of interest-circumstances that invalidate the contractual commitment to abide by the arbitrator’s result-his interpretation of the contract binds the court asked to enforce the award or set it aside. Here, the court is forbidden to substitute its own interpretation even if convinced that the arbitrator’s interpretation was not only wrong, but plainly wrong. Id. at p. 999.

In case of refund of paid fees, pursuant to section 6203, subdivision (a) of California Business and Professions Code, evidence of malpractice and professional misconduct is admissible only to the extent that it relates to the fees or costs to which the attorney is entitled, and any refund to the client may consist only of “unearned fees, costs, or both previously paid to the attorney.” Fagelbaum & Heller LLP v. Smylie, 174 Cal. App. 4th 1351, 1360-61, 95 Cal. Rptr. 3d 252, 260 (2009).

In another case the court held that, “even though the arbitrator is immune from liability for quasi-judicial acts, she nonetheless has contractual duties that may form the basis for a valid cause of action.’ Goodrich & Pennington Mortg. Fund, Inc. v. Am. Arbitration Ass’n, A11 4940, 2007 WL 4385489 (Cal. Ct. App. Dec. 17, 2007). The court explained the scenario as follows: “Suppose [the plaintiff] had paid the full $9,200 the AAA specified, and the Association had pocketed the money without arbitrating the dispute; it is unlikely that the AAA could claim ‘immunity’ in response to a demand for a refund.” Id. Moreover, it seems that a refund of the arbitration fees is allowed only in case of a cancellation of the arbitration proceedings within a specified period and that there is a written policy stating the terms of such refund in cancellation. In Goodrich & Pennington Mortg. Fund, Inc. v. Am. Arbitration Ass’n, A114940, 2007 WL 4385489 (Cal. Ct. App. Dec. 17, 2007) it was held that, “If cancellation was less than 14 days prior to the hearing, [G & P] understood that the arbitrator was entitled to retain the full deposit unless he was able to fill the dates he had blocked off for the parties cancelling or postponing the hearing.”

In view of the above discussion, generally, an arbitration award could be set aside on the “manifest disregard of law” standard. Further, a correction or modification of the award under 9 U.S.C. § 11 is designed to preserve due process. However, affording a judicial review of the merits of the award is very limited. Nevertheless, any refund of the arbitration fees is seen afforded only in cases where there is a cancellation policy within which period the arbitration is cancelled. In which case also the arbitrator presumably will be entitled to compensation for time spent preparing for the hearing or conducting other preliminary matters prior to the cancellation.

Research on basic fairness in the arbitration process and on unconscionably?

Generally, unconscionably is a reason for refusing to enforce contracts and therefore, it is also a valid reason for refusing to enforce an arbitration agreement under Code of Civil Procedure section 1281, which, as noted, provides that arbitration agreements are “valid, enforceable and irrevocable, save upon such grounds as exist [at law or in equity] for the revocation of any contract.” Armendariz v. Found. Health Psychcare Services, Inc., 24 Cal. 4th 83, 114, 6 P.3d 669, 689-90 (2000).  The United States Supreme Court, in interpreting the same language found in section 2 of the FAA (19 U.S.C. § 2), recognized that “generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements….” Id.

“Unconscionability has both a ‘procedural’ and a ‘substantive’ element,” the former focusing on “oppression” or “surprise” due to unequal bargaining power, the latter on “overly harsh” or “one-sided” results. (Id. at pp. 486–487, 186 Cal.Rptr. 114.) “The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.” Armendariz v. Found. Health Psychcare Services, Inc., 24 Cal. 4th 83, 114, 6 P.3d 669, 690 (2000).

Settlement agreements are governed by contract principles. (Nicholson v. Barab (1991) 233 Cal.App.3d 1671, 1681, 285 Cal.Rptr. 441; Roe v. State of California (2001) 94 Cal.App.4th 64, 73, 113 Cal.Rptr.2d 900.)  A contract or contract term is unenforceable if it is “unconscionable.” Lanigan v. City of Los Angeles, 199 Cal. App. 4th 1020, 1035, 132 Cal. Rptr. 3d 156, 168-69 (2011), review denied (Jan. 11, 2012).

It is the general rule that, with narrow exceptions, an arbitrator’s decision cannot be reviewed for errors of fact or law. In reaffirming this general rule, the court recognizes there is a risk that the arbitrator will make a mistake. By voluntarily submitting to arbitration, the parties have agreed to bear that risk in return for a quick, inexpensive, and conclusive resolution to their dispute.  The parties to an arbitral agreement knowingly take the risks of error of fact or law committed by the arbitrators and that this is a worthy ‘trade-off’ in order to obtain speedy decisions by experts in the field whose practical experience and worldly reasoning will be accepted as correct by other experts.” “In other words, it is within the power of the arbitrator to make a mistake either legally or factually. When parties opt for the forum of arbitration they agree to be bound by the decision of that forum knowing that arbitrators, like judges, are fallible.”Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 11-12, 832 P.2d 899, 904 (1992)

The risk of an erroneous decision has been reduced by providing for judicial review in circumstances involving serious problems with the award itself, or with the fairness of the arbitration process.  Private arbitration proceedings are governed by title 9 of the Code of Civil Procedure, sections 1280–1294.2. Section 1286.2 sets forth the grounds for vacation of an arbitrator’s award. It states in pertinent part: “[T]he court shall vacate the award if the court determines that:  (a) The award was procured by corruption, fraud or other undue means; (b) There was corruption in any of the arbitrators;  (c) The rights of such party were substantially prejudiced by misconduct of a neutral arbitrator; (d) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted; or (e) The rights of such party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.” Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 12-13, 832 P.2d 899, 905 (1992).

Additionally, section 1286.6 provides grounds for correction of an arbitration award. That section states in pertinent part: “[T]he court, unless it vacates the award pursuant to Section 1286.2, shall correct the award and confirm it as corrected if the court determines that:  (a) There was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; (b) The arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision upon the controversy submitted; or (c) the award is imperfect in a matter of form, not affecting the merits of the controversy.” Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 13, 832 P.2d 899, 905 (1992)

The Legislature has thus substantially reduced the possibility of certain forms of error infecting the arbitration process itself (§ 1286.2, subds. (a), (b), (c)), of an arbitrator exceeding the scope of his or her arbitral powers (§§ 1286.2, subd. (d), 1286.6, subd. (b)), of some obvious and easily correctable mistake in the award (§ 1286.6, subd. (a)), of one party being unfairly deprived of a fair opportunity to present his or her side of the dispute (§ 1286.2, subd. (e)), or of some other technical problem with the award (§ 1286.6, subd. (c)). In light of these statutory provisions, the residual risk to the parties of an arbitrator’s erroneous decision represents an acceptable cost—obtaining the expedience and financial savings that the arbitration process provides—as compared to the judicial process. Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 13, 832 P.2d 899, 905 (1992).

When an employee subject to a mandatory employment-arbitration agreement is unable to obtain a hearing on the merits of his Fair Employment and Housing Act (FEHA) claims, or claims based on other unwaivable statutory rights, because of an arbitration award based on legal error, the arbitrator has exceeded his or her powers within the meaning of the California Arbitration Act (CAA), and the arbitrator’s award may properly be vacated. Pearson Dental Supplies, Inc. v. Superior Court, 48 Cal. 4th 665, 229 P.3d 83 (2010).  By failing to raise the argument that employment-arbitration agreement was unconscionable because it allegedly precluded administrative remedies for violations of Fair Employment and Housing Act (FEHA), in resisting employer’s petition to compel arbitration, employee forfeited the argument on a motion to vacate the arbitration award that the entire arbitration agreement should be vacated as unconscionable and that the case should proceed in court. Pearson Dental Supplies, Inc. v. Superior Court, 48 Cal. 4th 665, 229 P.3d 83 (2010).

Several California decisions rendered since the 1961 statutory amendments have inexplicably resurrected the view in Utah Const., supra, 174 Cal. 156, 162 P. 631, that an arbitration award may be vacated when an error appears on the face of the award and causes substantial injustice. Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 27, 832 P.2d 899, 915 (1992).  The review had not become so narrow that courts were obliged to confirm awards containing obvious error causing substantial injustice. Indeed courts review arbitration awards to prevent “ ‘misuse of the proceeding, where corruption, fraud, misconduct, gross error, or mistake has been carried into the award to the substantial prejudice of a party to the proceeding. Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 37, 832 P.2d 899, 922 (1992).

Moreover, courts are not bound by such awards when it finds an award to be unconscionable or unjust.  It was observed that even if the parties were to do what is virtually inconceivable by expressly agreeing that the arbitrator’s award would be binding even if substantially unjust, the agreement would not bind the judiciary.  The exercise of judicial power cannot be controlled or compelled by private agreement or stipulation. Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 35, 832 P.2d 899, 921 (1992) KENNARD, Justice, concurring and dissenting.  A court will vacate an arbitration award when error appears on the face of the award and causes substantial injustice. Id at p.922.