Answers to Summer 2014
Summer 2014 Performance Test
PT-B: Riley v. LRI
PT-B: Riley v. LRI
STATEMENT OF FACTS
LRI and Riley submitted a dispute to arbitration and agreed as to the issues to be resolved:
On May 9, the arbitrator found that LRI breached the contract and Riley awarded damages. The arbitrator did not address the second issue, whether LRI intentionally concealed the manufacturing flaw. The arbitrator also failed to award attorneys fees.
On May 27, Riley wrote to the arbitrator requesting that the arbitrator address the omitted issue and award attorneys fees. Riley copied LRI on the letter, and LRI sent a letter to the arbitrator opposing the request.
On July 11, the arbitrator issued an amended award, finding that LRI did intentionally conceal a manufacturing flaw, assigning some of the previously awarded legal damages to the concealment claim, adding punitive damages, and awarding attorneys fees to Riley, the amount to be determined according Riley’s documentation.
LRI then filed this suit to vacate the amended award.
I. THE ARBITRATOR HAD THE POWER TO AMEND THE ARBITRATION AWARD.
Here, LRI and Riley agreed to the questions submitted to the arbitrator. These included: breach of contract and intentional concealment of a manufacturing flaw. By the terms of the arbitration contract itself, a third issue—award of attorneys fees—was a mandatory issue.
There is no dispute that the initial arbitration award did not address the second issue and did not award attorneys fees. Therefore, the initial arbitration award did not satisfy the mandates of CCP 1283.
The CLASSIC court noted that the consequence of an arbitration award’s omission to decide all the questions is not addressed by CAA. Nothing in the statutory scheme, it said, either authorizes or prohibits the amendment of an award.
B. THE CCA’S PREFERENCE FOR ARBITRATION TO DETERMINE ALL ISSUES SUPERSEDES THE FINALITY DOCTRINE.
However, the finality doctrine has lost most of its teeth under the CAA. In fact, the TRANSPORT case itself is not decided based on the finality rule, but merely nods to its existence in dicta. On the contrary, the TRANSPORT court ruled on an exception to the finality rule: specifically, that it does not apply when the parties themselves agree to bifurcate the issues submitted to arbitration. Unfortunately, that holding is not applicable to our facts.
Therefore, LRI has provided no authority in support of the finality rule preventing an arbitrator amending his award.
C. THE CAA’S DEADLINE DO NOT APPLY TO AMENDING THE AWARD TO DETERMINE OMITTED ISSUES, SINCE IT COVERS ONLY CORRECTING MATH ERRORS.
CCP 1284 permits an arbitrator to correct an award not later than 30 days after service of the award for grounds (a) and (c ) in CCP 1286.6. Application for such correction shall be not later than 10 days after service of the award on the applicant.
However, the provisions of CCP 1284 are limited by their terms to those grounds specified in CC) 1286.6, to wit: (a) an evident miscalculation of figures or evident mistake of any person, thing or property referred to in the award, or (c ) the award is imperfect in a matter of form, not affecting merits.
In CLASSIC, the appellants argued that the arbitrator lacked authority to amend the award because the arbitrator did so in response to an ex parte communication, and that ground is not authorized in 1286 (a) or (c ).
The CLASSIC court rejected that argument, holding that the CCP section does not operate as a limitation on the arbitrator’s action, but applies only to the situations cited—where there has been a miscalculation of amounts, a mistake in description, or a defect in form of the award.
The court stated: “The amendment of the arbitration award in this case does not fall within these subdivisions….Rather, he was resolving the remainder of the dispute submitted to him. Thus the tie limits specified in CCP 1284 do not apply.
Therefore, LRI’s argument that the arbitrator lacked power to amend the award due to time limits contained in the act is without merit.
II. NONE OF THE OBJECTIONS RAISED BY LRI ARE GROUNDS FOR VACATING THE AMENDED AWARD, BECAUSE THE COURT MAY NOT REVIEW THE MERITS OF ARBITRATON AWARDS.
In MONROE, the court underscored that the CAA expresses a strong pubic policy in favor of arbitration, and that the courts do not intervene in the process. The parties have agreed that the arbitration decision is final and conclusive, the MONROE court said, adding, “The courts simply assure that the parties receive the benefit of that bargain.”
A safeguard exists by providing for judicial review in circumstances involving serious problems with the award itself or with the fairness of the arbitration process. The act sets forth grounds for both vacation and correction of an award, in CCP 1286.2 and 1286.6. The CLASSIC court clarified: , “Except in the grounds specifically listed in the statute, CCP section 1286.2, arbitration awards are immune from judicial review to confirm or challenge the award.“
The statutory grounds for vacation, according to the MONROE court, all boil down to situations where an error of law appears on the face of the award causing substantial injustice.
We examine in turn each of LRI’s arguments to determine if it provides any statutory basis for vacating or correcting the amended award.
Specifically, LRI claims (1) that the arbitrator erred in adding a finding that LRI committed intentional concealment. (2) Further, LRI claims that the arbitrator assigned an invalid reason for its decision. (3) Finally, LRI claims that punitive damages are not a proper measure of damages in a contract dispute.
(1) LRI objects that the arbitrator added a finding not made in the original award, concerning LRI’s intentional concealment.
An arbitrator is mandated by CCP 1283 to determine all issues put before it. In this case, LRI and Riley by joint stipulation put this issue before the arbitrator for determination. Therefore, the arbitrator was simply following the law’s mandates in determining the issue of concealment. This was not an error of law.
Furthermore, Riley presented evidence on the issue, evidence that was uncontroverted by LRI. Riley presented evidence in the original arbitration proceeding that LRI had a duty to monitor manufacture of the chips and a duty to report defects to Riley and did not do so. LRI knew of Riley’s claim from the outset of arbitration. Therefore LRI cannot claim that the arbitrator’s determination of this issue resulted in a substantial injustice.
(2) LRI objects that the arbitrator assigned an erroneous reason for some of the contract damages. Without increasing the total amount awarded, the arbitrator labeled $75,000 of the contract damages for Riley’s hiring an engineering study to trace the source of the defect in the chips, the subject of the contract.
The MONROE court addresses choice of relief, as well. It stated unless the contract, submission or rules governing the arbitration provide otherwise, an arbitrator’s choice of relief does not exceed his or her powers so long as it bears a rational relationship to the underlying contract and to the breach thereof, as interpreted by the arbitrator.
Here, LRI expressly promised to monitor the manufacture of computer chips and to inform Riley. Riley submitted proof that the chips were defectively manufactured and that LRI knew or should have known that, under its contract duty to monitor production. LRI did not rebut this evidence. The arbitrator awarded some of the contract legal damages for expenditures Riley made in order to discover the manufacturing defect. That is surely rationally related to the underlying contract and to its breach. Therefore, the arbitrator’s assigning $75,000 for concealing the manufacturing defect is well within his discretion and is not reviewable.
(3) LRI objects to the award of punitive damages, without citing any legal argument for its objection, other than “it is a fundamental principle of law that punitive damages do not lie for breach of contract.” LRI is asking the court to review a question of law.
In MONROE, the court stated arbitrators are given wide latitude in reaching their decision; they are not bound to award on “principles of dry law” but may decide on principles of equity and good conscience and make the award according to what is just and good.
They do not exceed their powers merely because they assign an erroneous reason for their decision. A contrary holding would permit the exception to swallow the rule (that judicial review is limited). A litigant could always contend the arbitrator erred and thus exceeded his powers. This is why courts are not permitted to review any question of law or fact.
This is a question of law that is not subject to court review.
Therefore, LRI has provided no basis for the court to vacate the arbitrator’s amended award.
III. THERE IS NO GROUND TO CORRECT THE AMENDED ARBITRATION AWARD, BECAUSE THE ARBITRATOR CORRECTED THE AWARD PRIOR TO SUIT, ORDERING LRI TO PAY ATTORNEYS FEES.
CCP 1286.6(b) states that where the arbitator “exceeded the scope of authority” in issuing the award, the court must act.
In MARCO, the court construed the statute, stating that one such ground of exceeding the scope is failure to award attorneys fees when the disputed contract mandates they be awarded to the prevailing party.
In the initial award the arbitrator accepted Riley’s argument, rejected LRI’s counterclaim, and ordered LRI to pay damages. This establishes Riley was the prevailing party. This is in contrast to the hypothetical the MARCO court considers, that an arbitrator might not conclude that either party was the prevailing party. In such a case, of course, the arbitrator would not exceed the scope of his authority if he failed to award attorneys fees. However, that is not the case on our facts, where the arbitrator held in favor of Riley on all points, and held against LRI on its counterclaim. The arbitrator order LRI to pay Riley damages on all claims. There is no doubt that the arbitrator found that Riley was the prevailing party. Thus, the arbitrator’s failure to award attorneys fees in the original award exceeded the scope of his authority.
CCP 1286.6(b) mandates the court correct awards by adding attorneys fees, where to do so does not affect the merits of the arbitral award.
In our case, the merits of the arbitration are that LRI breached the contract. The award of attorneys fees in no way affects the merits.
Had the arbitrator not amended the award himself, the court would have been forced to intervene and correct the award. However, prior to this suit, the arbitrator did properly amend his determination to award attorneys fees, thus obviating any need for court action.
Therefore, the amended award properly added attorney’s fees.
CONCLUSION. For these reasons, we respectfully pray that the suit to vacate the amended award be dismissed.
Answers © 2014 Vivian Dempsey, The Writing Edge™ All rights reserved.
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