This article originally appeared in The Recorder on September 18, 2020.
The last-place Golden State Warriors were having a rough year on the basketball court even before the coronavirus pandemic shuttered the NBA during their shiny new San Francisco stadium’s debut season. Now, they’re having a rough year in the Court of Appeal, too. But the team’s $50 million loss in the First District last month includes a valuable tip for lawyers who draft contracts with arbitration clauses.
The conventional wisdom is that contracts include arbitration clauses because arbitration adds a level predictability and cost-control to litigation that the court system doesn’t necessarily offer. But in the last decade or so, as arbitration has become more and more common, that conventional wisdom has come into question. Some arbitrators, it turns out, are not nearly as predictable as litigants hope. Arbitrators’ time can also be very costly, too. Their decisions can run the gamut from the best the traditional judicial system has to offer to runaway verdicts with illogical rulings no court would ever issue.
Because arbitrators are by default given extraordinary discretion to decide cases entirely as they think best as long as they act within the scope of their authority under the arbitration clause, there’s very little they can’t, or must, do. Unless procedural rules are written or incorporated into the arbitration agreement, from the perspective of courts, most arbitrator decisions are unreviewable. That means arbitrators have legal authority to admit and reject evidence based on recognized rules of evidence — or not. They can enforce discovery laws, impose reasonable time-limits, and entertain pre-trial motions — or not. They can apply the correct laws of the jurisdiction and award carefully calculated damages — or not.
Accordingly, some arbitration awards seem untethered from law or logic. Last year, for example, a Connecticut court confirmed an arbitration award with punitive damages 25 times economic damages, refusing to review the merits of an award well beyond the due process limits that would have applied to a jury verdict. A New York arbitrator issued a $2.5 million judgment that included no reasoned basis whatsoever; a court remanded for clarification but didn’t vacate the award. Another arbitrator issued a $40 million award on an employment law claim worth at most $3 million under the jurisdiction’s law, and while that dispute eventually settled during confirmation proceedings, no doubt the defendant regretted ever taking the case out of court.
But California is one of a handful of states with a net: if you word your arbitration clause in just the right way, you can leave open a route to judicial review of an arbitrator’s legal rulings. The Court of Appeal recently reminded readers how to shoot for that net and score in Oakland-Alameda County Coliseum Authority v. Golden State Warriors LLC.
The case arose out of the Warriors’ move from Oakland to San Francisco in 2019. During renovations to the Oakland Coliseum in 1996, the Warriors had agreed to pay back the Oakland and Alameda County-backed Coliseum Authority for the renovation expenses over the next 30 years. The Warriors’ lease at the Coliseum, however, ran only for 20 years, with options to renew. When the Warriors decided not to renew their lease following their decision to move across the Bay, they took the position that they no longer needed to pay the renovation debt — an outstanding balance of nearly $50 million through 2027.
The relevant contracts included an arbitration clause. Over the course of about a year and a half, an arbitrator took legal arguments and extrinsic evidence concerning the disputed portions of the contracts, ultimately issuing a decision that interpreted the agreement in the Authority’s favor.
The Warriors went for 3 and moved to vacate the award in the superior court on the ground that the arbitrator misinterpreted the meaning of the contract’s terms. But that’s a foul! most litigators will now instinctively say. You can’t do that — that’s the price of arbitration!
And most of the time, they’d be right: An arbitrator’s determinations about law and fact are generally subject to absolute discretion. Unless the arbitrator decides something beyond his or her authority entirely, or hides a conflict, the path to a judicial challenge on the merits is vanishingly narrow.
The relevant arbitration clauses, at first, seemed to support such a limit, stating that “The decision of the arbitrator shall be final and binding upon the parties without appeal or review except as permitted by California law.” But then, the provision changes tune, providing that “either party may file an application to correct or vacate the arbitration award or an application for de novo review on all questions of law based on the arbitrator’s finding[s] of fact . . . under California Code of Civil Procedure Section 1285 et seq.,” the California Arbitration Act.
The trial court considered the Warriors’ arguments but still confirmed the award, and the Warriors appealed.
At the outset, the Court of Appeal explained that unlike federal law, under California law, if the parties expressly provide in their arbitration agreement that errors of law are subject to judicial review, courts may indeed review the arbitral award for legal errors as long as the California Arbitration Act governs the arbitration.
The court then explained that in an appeal turning on a question of contractual interpretation, the threshold question of whether the contractual language is reasonably susceptible to both parties’ proposed constructions is always a question of law potentially subject to judicial review. It then explained that judicial review also lies from legal questions in the determination of which construction is the correct one, though no review lies from the arbitrator’s factual findings about the parties’ intent.
Ultimately, the Court of Appeal found that both the Warriors and the Authority proposed reasonable constructions of the contractual language. The court then found that weighing the extrinsic evidence submitted to the arbitrator was a factual question, and therefore deference was required, but that even considering only the undisputed evidence, the arbitrator correctly interpreted the disputed contract clauses in the Authority’s favor. Accordingly, the court affirmed.
So, although the decision marked yet another loss for the Warriors, the inclusion of an errors of law clause along with invocation of the California Arbitration Act at least got the Dubs a rebound — judicial review, including an appeal.
That could be a valuable lesson for California attorneys who draft contracts with arbitration clauses: If you want the certainty of law while still keeping the other potential benefits of arbitration, making sure you use the right language will get you a lot closer than you may have thought possible.
On Appeals is a monthly column by the attorneys of the California Appellate Law Group LLP*, an appellate boutique with offices in San Francisco, Los Angeles, and San Diego. Ben Feuer is the chairman of the firm. He handles civil and business appeals in the Ninth Circuit and California Courts of Appeal. You can email him at email@example.com or find him at www.calapplaw.com.
*In July 2022, the California Appellate Law Group was renamed the Complex Appellate Litigation Group.
This article is copyright © in the year of publication above.