Arbitration Article No. 13

EQUITABLE DEFENSES AND WRITTEN FINDINGS

In a further extension of an arbitrator’s powers, Gueyffier v. Ann Summers, Ltd. (2008) 43 Cal.4th 1179 holds that arbitrators do not exceed their authority when they apply equitable defenses to excuse a party from performing a material condition of an agreement that provides the arbitrator may not modify or change any of the agreement’s material provisions.

In Gueyffier, a franchisee and retailer sued each other over the failed operation of the store in question. An arbitrator found that the retailer had not provided Gueyffier, the franchisee, promised training, guidance and assistance. He also concluded that any obligation on Gueyffier to give written notice of the breaches and time to cure them, as provided in the contract, would have been an idle act because the breaches were not curable. The appellate court reversed the trial court’s affirmation of the award because it found that the arbitrator, by excusing Gueyffier’s performance of the notice-and-cure clause, had violated the contract’s express prohibition against an arbitrator’s modifying or changing a material term of the contract, thus exceeding his powers in violation of Code of Civil Procedure section 1286.2, subd. (a)(4). That section provides, on petition, that the superior court shall vacate a contractual arbitration award if “[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.”

The Supreme Court held that the appellate court erred in its application of section 1286.2, subd. (a)(4). “Absent an express and unambiguous limitation in the contract or the submission to arbitration, an arbitrator has the authority to find the facts, interpret the contract, and award any relief rationally related to his or her factual findings and contractual interpretation.” (Id. at p. 615; emphasis added.) ¶ “While the contract limitation on arbitral powers to change the parties’ agreement was explicit, it did not unambiguously prohibit the arbitrator from excusing performance of a contractual condition where the arbitrator concluded performance would have been an idle act. The contract’s no-modification provision would have been effective to bar an actual change or modification. Had the arbitrator, for example, decided the parties’ agreement should be reformed by changing the required 60 days’ notice to 30 days’ notice, he would have exceeded his powers. But to excuse performance of a contract term in a specific factual setting is not, in ordinary usage at least, to ‘modif[y] or change[ ]’ the term. The no-modification clause did not ‘explicitly and unambiguously’ (citation) bar the arbitrator from deciding that (the) notice-and-cure provision was inapplicable on the facts of the case as he found them.” ¶ “The arbitrator was empowered to interpret and apply the parties’ agreement to the facts he found to exist; included therein was the power to decide when particular clauses of the contract applied.” (Id. at p. 618; emphasis in the original.)

Gueyffier also held on a somewhat related point that the arbitrator had not exceeded his powers by concluding, without any factual support, that Gueyffier’s compliance with the notice-and-cure obligation would have been futile since the arbitration agreement did not require the arbitrator to support his award with written factual findings. (Id. at p. 619.)

The lesson from Gueyffier is that parties either in an arbitration agreement or in their submission of the dispute to arbitration must be exact as to what powers and obligations they give the arbitrator. In the absence of such express language, an arbitrator has the power to modify, change or excuse performance of a material provision, even when the agreement states that an arbitrator may not do so, and to make general findings without any factual support.

Judge Michael D. Marcus (Ret.)
ADR Services, Inc.
1900 Avenue of the Stars, Suite 250
Los Angeles, California 90067
(310) 201-0010

Copyright Michael D. Marcus, June 2008

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