Michael P. Carbone

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Publications > Neutrals Following the Law


Michael P. Carbone*
California lawyers have long been accustomed to providing for alternative dispute resolution in business agreements. It is common practice to require the parties to submit any disputes to mediation, and if mediation does not succeed then to use binding arbitration.
In recent years, however, many lawyers and clients have become disillusioned with arbitration. One of the most frequent objections, along with excessive costs and long delays, is that in most instances the arbitrator is not required to follow the law.[1] For that reason some lawyers and clients now avoid arbitration, while others tend to accept the occasional “arbitrariness” as being in the nature of the process. Still others have sought ways to force arbitrators to follow the law, such as appellate arbitration or judicial review.
In 2008 the dissatisfaction led to a ground breaking decision from the California Supreme Court. The Court held in Cable Connection Inc. v. DIRECT TV, 44 Cal.4th 1334, that under the California Arbitration Act (CAA) parties can contract for judicial review of arbitral awards for legal error. Parties who choose to follow the approach that was taken in Cable Connection should now be able to expect an arbitral award that conforms to substantive law.
In Cable Connection the parties agreed that “[t]he arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction.” (44 Cal.4th 1334, 1335.) Because one of the statutory grounds for review of an arbitral award is that “[t]he arbitrators exceeded their powers” (CCP §1286.2 (a)), the Supreme Court held that the contract provision was enforceable. But “the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts.” (44 Cal.4th 1334, 1361.) 
Thus, to take advantage of Cable Connection there are two elements that must be included in the agreement: first, that the arbitrators shall not have the “power”[2] to commit errors of law; second, that the award may be vacated or corrected by judicial review under the CAA.[3]
There are some questions left open by Cable Connection. The legal error made by the arbitrators pertained to the manner of determining whether classwide arbitration would be available. What about reviewing an award for substantial evidence? Or for errors in evidentiary rulings? Is it necessary to use language that expressly includes such errors as well? Will the scope of judicial review of an arbitral award in the Superior Court always be the same as for appellate review of a lower court judgment? Future decisions may be needed to answer these questions.
Apart from Cable Connection however, California has long provided at least one other way of obtaining judicial review of decisions rendered in private dispute resolution.[4] CCP §638provides for “general reference.” In this process the court may, if the parties have agreed in writing,[5] appoint one or more referees (not exceeding three) to hear their case.[6] The referee, who acts as a subordinate judicial officer, decides all questions of fact and law.[7] Judgment can be entered on the referee’s decision, and it can be reviewed on appeal in the same manner as if it had initially been made by the court.[8]
Parties who insist on a decision that comports with substantive law now have several choices. If they wish to avoid going to court, they may use the services of an ADR provider that offers appellate arbitration. If they prefer to go to court, they may choose either an arbitration agreement that conforms to the requirements of Cable Connection or a general reference under CCP §638. 
Before making the choice it is advisable to review the similarities and the differences between the two processes.
·         Subject Matter Expertise. In both processes, the parties have the opportunity to choose decision-makers with expertise in the subject matter.
·         Case Management. Parties can work with either an arbitrator or a referee to manage the process, including control of discovery, so that it will work well for the particular case. In the case of arbitration they can also choose a set of rules from a provider organization to govern procedure.
·         Speed and Economy. Either process should, if properly managed, be faster and more convenient than litigation. Legal fees and costs can often be saved, although the extent of the savings will depend on the length of the proceedings as well as the fees and administrative costs to be paid for the neutral(s).
Appellate court review of a referee’s decision, if that is desired, will be more expeditious than review of an arbitral award because the case can go directly to the Court of Appeal following the entry of judgment in the Superior Court.
·         Reasoned Decision. An arbitration agreement may require a reasoned decision from the arbitrator, and parties normally receive a written statement of decision from a referee.[9]
·         Privacy. Both processes offer more privacy than litigation,[10] although neither one will necessarily avoid going to court. Arbitrations are often initiated only after a lawsuit has been filed and the court has granted a motion to compel arbitration. Many, if not most, arbitrations are followed by either a motion to confirm the award or else to vacate or correct it, and the award becomes public in the process.
In judicial reference, it is necessary for one of the parties to file suit first and then to move for appointment of the referee.[11] Court papers in any matter pending before a referee must be filed with the clerk of the court.[12] After the hearing has been concluded and the matter has been submitted, the referee will normally file his or her written statement of decision with the court.[13] 
·         Multi-Party Cases. The court may, in multi-party cases, decline to compel either arbitration or judicial reference. A court may, in its discretion, refuse to compel arbitration between contracting parties where there are other individuals suing over the same matter and separate arbitration and court actions risk conflicting rulings on a common issue of law or fact. (CCP §1281.2, subd. (c).) In Tarrant Bell Property, LLC et al. v. SuperiorCourtofAlamedaCounty, Case No. A125714, Dec. 2, 2009, it was held that the trial court is vested with comparable discretion when asked to compel trial by a private referee because §638 states that the court “may” (not “shall”) refer the case pursuant to the agreement of the parties.
·         Admission of Evidence. The rules of evidence that apply in court, and therefore to reference proceedings, do not apply to arbitration,[14] and arbitrators are free to admit such evidence as they choose. Some arbitrators may be inclined toward liberality because failure to admit “material” evidence can be grounds for vacatur of the award if a party was prejudiced by the exclusion. [15] Referees may be more likely than arbitrators to exclude evidence that is not clearly relevant to the dispute.
·         Neutrals’ Disclosures. In arbitration there is also the possibility of vacatur of the award in the event that a proposed arbitrator inadvertently fails to disclose information (regardless of the degree of materiality) that could be considered grounds for disqualification. Under CCP§1281.9, “…a proposed neutral arbitrator must disclose all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial….” The statute refers to a number of situations involving prior relationships with the parties or their lawyers, including “matters required to be disclosed by the ethics standards for neutral arbitrators adopted by the Judicial Council pursuant to this chapter.”[16] The requirements of the Code and the Standards adopted by the Judicial Council are stringent. Neutrals, or the provider organizations with which they may be connected, may inadvertently fail to make all required disclosures, and nondisclosure requires vacatur of the award, even if no one was prejudiced. (CCP§1286.2(a)(6).)
A person who is nominated to serve as a referee must comply with disclosure obligations that are similar to those which apply to judges,[17] and objection can be made to the referee’s appointment on grounds that are specified by statute.[18] Failure of a proposed referee to comply with his or her disclosure obligations can be grounds for a new trial, but only if the nondisclosure prevented a party from receiving a fair trial.[19]
·         Discovery. Unless the parties have agreed otherwise, discovery in a judicial reference will be the same as if the case were tried in court. Discovery in arbitration may be more limited, particularly with respect to depositions, which may not be taken except in the discretion of the arbitrator.[20] The agreement of the parties or the rules of the ADR provider organization, if adopted by the parties, may provide otherwise.
In summary, California is an ADR-friendly jurisdiction that offers parties to commercial transactions, whether domestic or international, the opportunity to utilize dispute resolution processes that will serve their needs. An arbitration agreement that is subject to the California Arbitration Act can be drafted in a way that provides for judicial review of the award for legal error. 
Parties may also wish to consider the advantages provided by judicial reference, which include better control over the admission of evidence, faster access to the appellate courts for judicial review, greater certainty regarding the standards for review, and fewer opportunities for the losing party to overturn the decision because of a failure of the neutral to make disclosures.
As always, it pays to consider the alternatives.
Copyright 2010
* The author is a dispute resolution specialist who handles virtually all kinds of civil disputes.  He is a founder and past president of The Mediation Society and a frequent author and lecturer on dispute resolution issues. His website is found at www.mpcdisputeresolution.com.

[1] See Moncharsh v. Heily & Blasé (1992) 3 Cal. 4th 1, 6.
[2] Although the statute uses the term “power” the Court also used the word “authority” which would seem to make more sense. If the arbitrator lacks the power to commit error, then obviously the error would never be committed.
[3] In Hall Street Associates, L.L.C. v. Mattel, Inc. 552 U.S. ____ (2008) the United States Supreme Court held the Federal Arbitration Act cannot be expanded through a contractual agreement that would provide for judicial review of arbitral awards. Hence, it is essential to make clear that judicial review will be pursuant to the CAA
[4] See Seabolt, “The Demand for Public Judicial Review in Private Dispute Resolution,” http://www.duanemorris.com/articles/article2263.html
[5] The parties may agree to a general reference either before or after a dispute has arisen. CCP §638(a).
[6] CCP §640(a).
[7] CCP §638(a).
[8] CCP §644, 645.
[9] CCP §643.
[10] As a judicial proceeding a hearing before a referee is open to the public. As a practical matter hearings are frequently held in private offices.
[11] CCP §638.
[12]Cal. Rule of Court 2.400(b).
[13] CCP §643(a).
[14] CCP §§1282 et seq. govern the procedure to be followed in arbitration.
[15] CCP§1286.2(a)(5).
[16] See Appendix to California Rules of Court, Division VI.
[17]California Code of Judicial Ethics, Canon 6 D(5).
[18] CCP§641.
[19] CCP §§645, 657 subpar. 1.
[20] CCP 1283.05.

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