Is an arbitration award reviewable by a court of law when the arbitrator misapplies the law?
An arbitrator’s award will not be reviewed by a court for errors of facts or law, even when the error is obvious and causes substantial injustice. [Hall v. Superior Court (1993) 18 CA4th 4271]
If a buyer and seller initial an arbitration provision in a purchase agreement, they agree to give up their right to a jury trial and instead submit all disputes arising from the transaction to a third-party arbitrator for a final and binding decision. Unless the arbitration provision specifically states otherwise, a buyer and seller who initial the provision also agree to give up their rights to:
- discovery to prepare a defense; and
- judicial appeal.
Arbitration was conceived decades ago as an alternative to litigation to avoid the cost and time of resolving minor disputes via the judicial system. Thus, to further this end, arbitration awards are only correctable in very limited circumstances. This arrangement often results in arbitrary and absurd legal consequences in direct conflict with the reasons and practical purposes for its inception — to say nothing about the contractual intentions of the individuals in the dispute.
California law permits a court to review and correct an arbitrator’s award only when:
- the arbitrator exceeds their authorized powers;
- the arbitrator acts with fraud or corruption;
- the arbitrator fails to disclose grounds for their disqualification of a dispute;
- the arbitrator’s award was procured by corruption, fraud or other misconduct;
- the arbitrator’s refusal to postpone a hearing substantially prejudiced the rights of one of the individuals in the dispute; or
- the arbitrator deprives an individual of their statutory rights. [Calif. Code of Civil Procedure §1286.2; Richey AutoNation Inc. (2015) 60 Cal.4th 909]
Legal errors and misapplication of law by the arbitrator do not fall under these criteria.
An arbitrator, unlike a judge in a court of law, is not bound by the rules of law controlling analysis when making an award in a dispute. Arbitration is arbitrary. Even when the arbitrator agrees to follow applicable California real estate law, their erroneous award, unlike an award of a court, is final — severely disadvantaging buyers and sellers who are asked by their agents to initial the arbitration provision and agree to submit disputes to arbitration (which they do not have to do).
For the reason that a judge needs to be involved to protect the public, arbitration provisions are not included in trust deeds, consumer mortgage agreements or rental or lease agreements. [12 Code of Federal Regulations §1026.36(h)]
The Consumer Financial Protection Bureau (CFPB) has also recently sought to prohibit mandatory arbitration provisions to better protect consumer rights.
The only way to ensure a defect in the arbitrator’s award is correctable is to state in the arbitration provision the award is “subject to judicial review.” Without this language, the award resulting from arbitration brought under the provision is binding and final.
Importantly, the arbitration provision included in most boilerplate real estate trade union forms does not allow for judicial review of the arbitrator’s decision. The buyer and seller, by initialing the arbitration provision, agree to relinquish their rights to appeal the arbitrator’s award in a court of law. Agents need to protect their client by advising on the rights lost on agreeing to arbitration, as failure of this duty will impose liability with the arbitration clause continuing to lose public favor.