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Court Respect for Autonomy of Parties Allow ADR to Flourish, Part II

Court Respect for Autonomy of Parties Allow ADR to Flourish, Part II

Source: Focus Column
Date: July 9, 2003

Just as the U.S. Supreme Court and other federal courts have redefined and strengthened contractual arbitration as a true alternative to litigation during the past 10 years, the California Supreme Court has done the same in a series of cases beginning in the 1990s. (This is Part II of a two-part article. Part I, published on June 11, covered federal decisions; this part covers state decisions.)

Building on the fundamental principle of party autonomy, the state courts have helped to effectuate the parties' contractual intent by not infecting the substantive aspects of arbitration with excessive litigation, while at the same time preserving the process's procedural integrity.

In Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992), Chief Justice Malcolm M. Lucas identified party autonomy as the key attribute of private arbitration: "The scope of arbitration ... is a matter of agreement between the parties" and "[t]he powers of an arbitrator are limited and circumscribed by the agreement or stipulation of submission."

Of all of the unique attributes of arbitration, Moncharsh found the expectation of finality to be the strongest motivation to arbitrate rather than litigate: "The arbitrator's decision should be the end, not the beginning, of the dispute." The court observed that finality only can be ensured if judicial intervention in the arbitration process is minimized.

This led to the holding that the merits of the controversy between the parties are not subject to judicial review, even where "error of law" appears on the face of the award to the prejudice of a party. Thus the parties are left solely to the grounds of review established by Code of Civil Procedure Section 1286.2 and Section 1286.6.

Even in the case of a claim of illegality, substantive review is limited to those situations where a clearly defined statutory right exists that is inconsistent with the award.

An example of this narrow exception is Board of Education v. Round Valley Teachers Ass'n, 13 Cal.4th 269 (1996). There, the court substantively reviewed and overturned an arbitrator's award under a collective-bargaining agreement that varied express statutory provisions affecting probationary employees. The arbitrator had upheld the contractual provision instead of the statute.

The Supreme Court extended the Moncharsh principle of party autonomy in Advanced Micro Devices Inc. v. Intel Corp., 9 Cal.4th 362 (1994). There, the issue was whether the arbitrator exceeded his power by imposing particular remedies for breach of contract.

The court, relying on the parties' agreement and agreed-upon rules, determined that the arbitrator did not exceed his power if the remedies bore a rational relationship both to the contract as interpreted by the arbitrator and to the breaches that he found.

The Advanced Micro Devices court found no basis not to defer to the arbitrator's choice of remedies. The court noted, "We do not [by this holding] intend to suggest an arbitrator's exercise of discretion in ordering relief is unrestricted or unreviewable. ... The powers of an arbitrator derive from, and are limited by, the agreement to arbitrate [citing Moncharsh].

"Awards in excess of those powers may ... be corrected or vacated by the court. ... [T]he courts retain the ultimate authority to overturn awards as beyond the arbitrator's powers, whether for an unauthorized remedy or a decision on an unsubmitted issue."

The Advanced Micro Devices parties had agreed on arbitration in accordance with rules similar to the American Arbitration Association Commercial Rules and specifically included rules permitting the arbitrator to "grant any remedy or relief which the Arbitrator deems just and equitable and within the scope of the agreement of the parties."

They also gave the arbitrator the power to interpret the agreed rules insofar as they related to his powers and duties.

Although the Supreme Court has left the parties to their own devices on matters of substance, it has been persistent in scrutinizing the procedural and fairness aspects of the private arbitration process. A prime example is Engalla v. Permanente Medical Group Inc., 15 Cal.4th 951 (1997).

The Engalla court permitted a party to an arbitration (a medical-malpractice claimant) to withdraw from an ongoing arbitration in order to assert in court, as a ground of waiver of the right to arbitrate, the opposing party's conduct in delaying selection of the neutral arbitrator, which may have been intended to advantage the opposing party at the claimant's expense.

According to the court, ordinarily, "'[o]nce it is determined ... that the parties are obligated to submit the subject matter of a dispute to arbitration, 'procedural' questions which grow out of the dispute and bear on its final disposition should be left to the arbitrator. ... Here, the question is different and more fundamental - whether Kaiser, by its delay or by other acts or omissions, has in fact waived its right to compel arbitration. Section 1281.2 subd. (a), gives the trial court jurisdiction to decide this question when petitioned to compel arbitration.'"

Rosenthal v. Great Western Financial Securities Corp., 14 Cal.4th 394 (1996), raised a similar issue. There, the court held that the process that should apply to the determination of a petition to compel arbitration is that prescribed in the California Arbitration Act, notwithstanding different procedures in the Federal Arbitration Act (motion process versus jury trial) and notwithstanding the argument that the federal procedure pre-empted the state one. See, for example, Doctor's Associates Inc. v. Casarotto, 517 U.S. 681 (1996).

These two distinct lines came together in a decision dealing with the subsequent use of an arbitration award by or against nonparties. Vandenberg v. Superior Court, 21 Cal.4th 815 (1999), held that nonparties may not assert the collateral-estoppel effect of an award against a party to the arbitration (so-called "nonmutual collateral estoppel").

However, the opinion expressly limits its effect to this one form of collateral estoppel and does not affect strict res judicata (claim preclusion).

In Vandenberg, an arbitrator determined that a lessee was liable to a landowner for soil contamination. In the lessee's action against his insurers seeking indemnity, the insurers sought to use the arbitration award to establish the applicability of a pollution exclusion in their policies.

The Supreme Court held that the parties to the arbitration did not intend and did not reasonably expect that the outcome of their private arbitration could be asserted collaterally in a later proceeding. Public policy supporting arbitration and the integrity of the judicial process, therefore, compelled the conclusion that such a use is inappropriate.

The reason for this conclusion is seen in Moncharsh and Advanced Micro Devices, which differentiate arbitration from litigation and allow the parties lesser substantive safeguards in arbitration in order to achieve the goals of efficiency and finality. It would have been ironic if the court had so limited the substantive aspects of the process and then allowed third parties to capitalize on an arguably incorrect (but unreviewable) award.

The Vandenberg court noted that nonmutual collateral estoppel presents an additional and unknown risk of application of the award in later proceedings.

The nature and circumstances of the later proceeding and the stakes involved may not be known or knowable at the time that the decision to arbitrate is made. Therefore, to assume that the parties accepted the risk of nonmutual collateral estoppel "would ... violate the fundamental premise that private arbitration is a contractual process whose scope and effect are defined and limited by the parties' consent."

For the same reason, the possibility of nonmutual collateral estoppel would likely chill the voluntary use of arbitration. Weighing these policies against those that support collateral estoppel, the Vandenberg court concluded that nonmutual application of collateral estoppel is not warranted unless the parties expressly so provide in their agreement.

The issue of fairness most often arises in the context of imposed arbitration agreements, such as that in Engalla. The Supreme Court explored the elements of fairness in process in Armendariz v. Foundation Health Psychcare Services Inc., 24 Cal.4th 83 (2000).

That case held that employers may impose arbitration on employees as a condition of employment or of continued employment but only if the process imposed is fair and mutual.

Under Armendariz, "fairness" includes mutuality of obligation, a neutral arbitrator, more than minimal discovery, a written award, appropriate judicial review, access to all forms of relief otherwise available in court and no obligation on the employee to pay unreasonable costs or arbitrator's fees as a condition of arbitration.

If the arbitration agreement does not meet some of these criteria, then the court may either sever the offending provisions or refuse to enforce the agreement. See also Little v. Auto Stiegler Inc., 29 Cal.4th 1064 (2003).

The California Supreme Court's consistent balance between respect for the parties' autonomy as to substance and scrutiny of procedure in order to ensure systemic fairness has created an atmosphere in which arbitration has thrived and expanded in California.

This model has motivated the Judicial Council to encourage responsible use of alternative dispute resolution in our courts and has inspired individual courts to develop programs that give parties the opportunity to choose alternatives to litigation.

As a result, California lawyers are more aware of, and knowledgeable about, the advantages of ADR, and they are more sophisticated about making recommendations to clients about available alternatives that might be suited to a particular matter.



Richard Chernick is an arbitrator and mediator and is managing director of the JAMS Arbitration Practice. He is a co-author of The Rutter Group's "California Practice Guide - Alternative Dispute Resolution."




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