Agreement Between The Parties That Award Could Be Reviewed For Legal Error Made The Difference.

        In Harshad & Nasir Corporation v. Global Sign Systems, Inc., and related appeals, B269427, B275942, B275947 (2/2  8/15/17) (Rothschild, Chaney, Lui), the Court of Appeal considered three related appeals of parties fighting over allegedly unpaid invoices amounting to $114,823.72, arising from plans to put up signs at Carl's Jr. restaurants.  The Court of Appeal, in a published opinion penned by Justice Rothschild, concluded "that the trial court prejudicially erred when it failed to apply the correct standard in reviewing the arbitrator's award."

        This is a case in which the parties' agreement that the award could be reviewed for legal error made all the difference.  Unlike the typical situation in which errors of fact or law will not provide a basis for vacating an award, here, the parties took advantage of the California rule set forth in Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334 (2008), allowing the  parties to agree to limit the arbitrators' authority by providing for review of the merits.

        The results of review on the merits were severe.  The Court of Appeal held substantial evidence did not support the award for damages, and an alleged contract to be performed over a three-year period violated the statute of frauds.  Also, the arbitrator exceeded his authority by deciding a claim for lost profits the parties had not agreed to arbitrate.  As a result of this reversal of fortune, the formerly prevailing party did not prevail, and a fee and cost award in the amount of $1,142,596.20 was reversed.

        COMMENT:   A successful arbitration can be efficient and cost effective.  This arbitration is a stunning counter-example.  It took five years to get an arbitration award.  The arbitration and subsequent trial court rulings resulted in three related appeals.  Significant damage and attorney fees/cost awards, each in excess of $1 million, were reversed.   And this all started with an effort to recover $114,823.72!

        An interesting aspect of the opinion is the interaction of delegation of authority to the arbitrator with the standard of review.  Global argued that under JAMS rules, the decision about the scope of authority is delegated to the arbitrator, and the arbitrator had decided that the substantial lost profits claim was within his authority to decide.  Because, however, the parties agreed that the standard of review allowed for review of legal error, the Court of Appeal did not need to rule whether the decision about scope had been delegated to the arbitrator.  Whether or not JAMS rules allowed for a delegation of decision-making authority, the arbitrator had ruled incorrectly as a matter of law.

        NOTE:  California Attorney's Fees, the website Mike Hensley and I contribute to, has a post on the attorney's fees aspect of this case.