Opinion ID: 2613976
Heading Depth: 2
Heading Rank: 1

Heading: Standard of Review of the Remedies Fashioned by a Private Arbitrator

Text: (1) Although this court has not previously articulated a detailed standard for review of the remedies fashioned by an arbitrator, we have considered the related question how to review determinations of arbitrability, that is, whether an arbitrator exceeded his or her authority by deciding a particular issue. On that point, our decisions teach that courts should generally defer to an arbitrator's finding that determination of a particular question is within the scope of his or her contractual authority. Code of Civil Procedure section 1283.4 [7] provides the arbitrator's written award shall determine all submitted questions necessary in order to determine the controversy. Construing that section in Morris v. Zuckerman (1968) 69 Cal.2d 686, 690 [72 Cal. Rptr. 880, 446 P.2d 1000], this court held it is for the arbitrators to determine what issues are necessary to the ultimate decision. We continued: Likewise, any doubts as to the meaning or extent of an arbitration agreement are for the arbitrators and not the court to resolve. ( Ibid.; accord, Taylor v. Crane (1979) 24 Cal.3d 442, 450 [155 Cal. Rptr. 695, 595 P.2d 129]; Van Tassel v. Superior Court (1974) 12 Cal.3d 624, 627 [116 Cal. Rptr. 505, 526 P.2d 969].) Although section 1286.2 permits the court to vacate an award that exceeds the arbitrator's powers, the deference due an arbitrator's decision on the merits of the controversy requires a court to refrain from substituting its judgment for the arbitrator's in determining the contractual scope of those powers. ( Morris v. Zuckerman, supra, 69 Cal.2d at p. 691; see also O'Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482, 493 [30 Cal. Rptr. 452, 381 P.2d 188] [contractual clause precluding arbitrator from modifying contract did not permit court to reach merits of controversy in deciding limits of arbitrability]; Weiman v. Superior Court (1959) 51 Cal.2d 710, 714 [336 P.2d 489] [court's duty to determine if there was a disagreement to be arbitrated did not authorize prior judicial decision on merits of dispute].) Giving substantial deference to the arbitrators' own assessments of their contractual authority is consistent with the general rule of arbitral finality we recently reaffirmed in Moncharsh v. Heily & Blase, supra, 3 Cal.4th at pages 8-13 (hereafter Moncharsh ). As we stated there, parties to private, nonjudicial arbitration typically expect `their dispute will be resolved without necessity for any contact with the courts.' ( Id. at p. 9, quoting Blanton v. Womancare, Inc. (1985) 38 Cal.3d 396, 402, fn. 5 [212 Cal. Rptr. 151, 696 P.2d 645, 48 A.L.R.4th 109].) The decision to arbitrate disputes is motivated in part by the desire to avoid the delay and cost of judicial trials and appeals. Ensuring arbitral finality thus requires that judicial intervention in the arbitration process be minimized. ( Moncharsh, supra, 3 Cal.4th at p. 10.) A rule of judicial review under which courts would independently redetermine the scope of an arbitration agreement already interpreted by the arbitrator would invite frequent and protracted judicial proceedings, contravening the parties' expectations of finality. (See Van Tassel v. Superior Court, supra, 12 Cal.3d at p. 627 [trial de novo of jurisdictional facts would defeat purposes of choosing arbitration].)
(2) Intel contends that even if California precedents require deference to an arbitrator's assessment of arbitrability, a different, less deferential rule applies to an arbitrator's choice of remedies. Intel's position is neither logically persuasive nor supported by precedent. In providing for judicial vacation or correction of an award, our statutes (§§ 1286.2, subd. (d), 1286.6, subd. (b)) do not distinguish between the arbitrators' power to decide an issue and their authority to choose an appropriate remedy; in either instance the test is whether the arbitrators have exceeded their powers. Because determination of appropriate relief also constitutes decision on an issue, these two aspects of the arbitrators' authority are not always neatly separable. Morris v. Zuckerman, supra, 69 Cal.2d 686, illustrates this overlap between arbitrability and remedies. A contract required plaintiff and defendant to sell jointly owned land on demand of another party. When the demand was made, however, the plaintiff proposed selling to a company he controlled, and the defendant refused to comply. ( Id. at pp. 687-689.) The arbitrators decided the plaintiff and defendant were fiduciaries, and the proposed sale to a company controlled only by the plaintiff was an inequitable attempt to `squeeze out' the defendant. The arbitrators therefore declined to require the defendant to sign the new sale contract as written; instead they found he was obliged to execute the contract only if it was modified to include him as a one-half partner in the purchase. ( Id. at pp. 689, 691-694 & fn. 4.) This court, upholding the award, held it was within the arbitrators' power to decide the parties were fiduciaries, to consider that relationship in fashioning their award, and to make an award designed to prevent one party from taking unfair advantage of the other. ( Id. at pp. 693-694.) Although in Morris v. Zuckerman we did not explicitly state the issue in such terms, we there in fact upheld the arbitrators' choice of relief against a claim they exceeded their contractual authority. (69 Cal.2d at pp. 690-691.) The plaintiff contended the arbitrators had no authority to add conditions to the new sale contract; we held they could do so if they found equity and the parties' relationship required such relief. In reaching this conclusion we applied a rule of substantial deference to the arbitrators' jurisdictional determinations. ( Morris v. Zuckerman, supra, 69 Cal.2d at p. 690.) Morris thus implies an arbitrator's discretion to determine the extent of remedies is as great as his or her discretion to determine the related question of what issues are necessary to the decision. Deference to the arbitrator is also required by the character of the remedy decision itself. Fashioning remedies for a breach of contract or other injury is not always a simple matter of applying contractually specified relief to an easily measured injury. It may involve, as in the present case, providing relief for breach of implied covenants, as to which the parties have not specified contractual damages. It may require, also as in this case, finding a way of approximating the impact of a breach that cannot with any certainty be reduced to monetary terms. Passage of time and changed circumstances may have rendered any remedies suggested by the contract insufficient or excessive. As the United States Supreme Court explained in the leading case on review of arbitral remedies in the collective bargaining context, the arbitrator is required to bring his informed judgment to bear to reach a fair solution of a problem.... There the need is for flexibility in meeting a wide variety of situations. The draftsmen may never have thought of what specific remedy should be awarded to meet a particular contingency. ( Steelworkers v. Enterprise Corp. (1960) 363 U.S. 593, 597 [4 L.Ed.2d 1424, 1428, 80 S.Ct. 1358].) The choice of remedy, then, may at times call on any decisionmaker's flexibility, creativity and sense of fairness. In private arbitrations, the parties have bargained for the relatively free exercise of those faculties. Arbitrators, unless specifically restricted by the agreement to following legal rules, `may base their decision upon broad principles of justice and equity....' [Citations.] As early as 1852, this court recognized that, `The arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono [according to what is just and good].' [Citation.] ( Moncharsh, supra, 3 Cal.4th at pp. 10-11.) [8] Were courts to reevaluate independently the merits of a particular remedy, the parties' contractual expectation of a decision according to the arbitrators' best judgment would be defeated. Independent reevaluation by a court, moreover, is unlikely to be either expeditious or accurate. Arbitrations may, as this case demonstrates, be lengthy and complicated. The proceedings may be informal and a complete stenographic record may not be prepared. A reviewing court is thus not in a favorable position to substitute its judgment for that of the arbitrators as to what relief is most just and equitable under all the circumstances. Further, independent review of remedies, no less than of other arbitrated questions, would tend to increase the cost and delay involved. If the courts were free to intervene on these grounds [disagreement with the arbitrators' honest judgment as to remedy] the speedy resolution of grievances by private mechanisms would be greatly undermined. ( Paperworkers v. Misco, Inc. (1987) 484 U.S. 29, 38 [98 L.Ed.2d 286, 299, 108 S.Ct. 364].) We do not, by the above, intend to suggest an arbitrator's exercise of discretion in ordering relief is unrestricted or unreviewable. Such an extreme position enjoys no support in our statutes or cases. The powers of an arbitrator derive from, and are limited by, the agreement to arbitrate. ( Moncharsh, supra, 3 Cal.4th at p. 8.) Awards in excess of those powers may, under sections 1286.2 and 1286.6, be corrected or vacated by the court. Unless the parties have conferred upon the arbiter the unusual power of determining his own jurisdiction ( McCarroll v. L.A. County etc. Carpenters (1957) 49 Cal.2d 45, 65-66 [315 P.2d 322]), the courts retain the ultimate authority to overturn awards as beyond the arbitrator's powers, whether for an unauthorized remedy or decision on an unsubmitted issue. What does follow from the considerations discussed above is that review of remedies cannot be, as the Court of Appeal characterized it in this case, de novo. [9] Nor are Intel and allied amici curiae correct in describing judicial review of remedies as independent. To the contrary, an appropriately deferential review starts not from the beginning, but from the arbitrator's own rational assessment of his or her contractual powers and is dependent on (that is, rests on acceptance of) this and any other factual or legal determination made by the arbitrator. The principle of arbitral finality, the practical demands of deciding on an appropriate remedy for breach, and the prior holdings of this court all dictate that arbitrators, unless expressly restricted by the agreement or the submission to arbitration, have substantial discretion to determine the scope of their contractual authority to fashion remedies, and that judicial review of their awards must be correspondingly narrow and deferential.
Having rejected the extremes of de novo review on the one hand, and complete unreviewability on the other, we must attempt to articulate a standard capturing the middle ground of deferential yet meaningful review. We begin by surveying similar efforts in the Courts of Appeal and in other jurisdictions. Recent decisions in the Courts of Appeal have employed two formulas to determine whether an arbitrator's award exceeded his or her powers. The courts have asked whether the award rests on a completely irrational construction of the contract (e.g., Tate v. Saratoga Savings & Loan Assn. (1989) 216 Cal. App.3d 843, 855 [265 Cal. Rptr. 440]; Summit Industrial Equipment, Inc. v. Koll/Wells Bay Area (1986) 186 Cal. App.3d 309, 320 [230 Cal. Rptr. 565]; Hacienda Hotel v. Culinary Workers Union, supra, 175 Cal. App.3d 1127, 1133) or whether it amounts to an arbitrary remaking of the contract (e.g., Blue Cross of California v. Jones (1993) 19 Cal. App.4th 220, 228 [23 Cal. Rptr.2d 359]; Pacific Gas & Electric Co. v. Superior Court (1993) 15 Cal. App.4th 576, 592 [19 Cal. Rptr.2d 295]; Southern Cal. Rapid Transit Dist. v. United Transportation Union, supra, 5 Cal. App.4th at p. 423). These tests were combined in Southern Cal. Rapid Transit Dist. v. United Transportation Union, supra, 5 Cal. App.4th at page 423, into a single formula: Generally, a decision exceeds the arbitrator's powers only if it is so utterly irrational that it amounts to an arbitrary remaking of the contract between the parties. These statements of the standard tend to focus the inquiry on the arbitrator's construction of the contract. Useful as such an examination may sometimes be, it is incomplete as a test of whether arbitrators have exceeded their powers in awarding a particular item of damages or other relief. [10] The critical question with regard to remedies is not whether the arbitrator has rationally interpreted the parties' agreement, but whether the remedy chosen is rationally drawn from the contract as so interpreted. This case illustrates the distinction; Intel argues not that the arbitrator misconstrued the contract, but that the remedy he fashioned bore an insufficient relationship to the agreement as he interpreted it. In contrast to the California cases, decisions from the federal courts applying the essence test announced in Steelworkers v. Enterprise Corp., supra, 363 U.S. at page 597 [4 L.Ed.2d at page 1428] (hereafter Enterprise ) properly focus on the source of the arbitrators' chosen remedy. [11] In Enterprise, a labor arbitrator ordered several workers reinstated with backpay upon finding their dismissal improper. The collective bargaining agreement authorizing the arbitration, however, had expired after the workers' dismissal but before the award. The company argued the award of reinstatement, and of backpay after expiration of the agreement, was therefore unenforceable. ( Enterprise, supra, 363 U.S. at pp. 595-596 [4 L.Ed.2d at pp. 1427-1428].) The high court held the award could not be refused enforcement on this ground. If the arbitrator was relying solely on statutory requirements extraneous to the contract, he exceeded his powers under the submission. But if the award derived from the arbitrator's construction of the agreement, even an erroneous construction, it was within his authority. Ambiguity on this point, which the court found to exist, was insufficient grounds to refuse enforcement. ( Id. at pp. 597-599 [4 L.Ed.2d at pp. 1428-1429].) In reaching its holding the high court explained the limits on an arbitrator's authority to fashion remedies as follows: [A]n arbitrator is confined to interpretation and application of the collective bargaining agreement; he does not sit to dispense his own brand of industrial justice. He may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement. When the arbitrator's words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award. ( Enterprise, supra, 363 U.S. at p. 597 [4 L.Ed.2d at p. 1428], italics added.) Judicial review of remedies as outlined in the Enterprise decision thus looks not to whether the arbitrator correctly interpreted the agreement, but to whether the award is drawn from the agreement as the arbitrator interpreted it or derives from some extrinsic source. As the court explained in a later labor case, where an arbitrator is authorized to determine remedies for contract violations, courts have no authority to disagree with his honest judgment in that respect.... [A]s long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision. ( Paperworkers v. Misco, Inc., supra, 484 U.S. at p. 38 [98 L.Ed.2d at p. 299] [hereafter Misco ].) In addition to governing federal court review of labor arbitration awards, the standard enunciated in Enterprise and Misco has been applied by federal courts reviewing commercial arbitration awards, as well as by state courts. (See, e.g., Anderman/Smith Co. v. Tenn. Gas Pipeline Co., supra, 918 F.2d at p. 1218; Pacific Reinsurance v. Ohio Reinsurance (9th Cir.1991) 935 F.2d 1019, 1024; Engis Corp. v. Engis Ltd. (N.D.Ill. 1992) 800 F. Supp. 627, 629; Malekzadeh v. Wyshock (Del. Ch. 1992) 611 A.2d 18, 22; Beaver Cty. Comm. Col. v. Society of the Faculty (1986) 99 Pa. Commw. 641 [513 A.2d 1125, 1127].) Indeed, the essence test has displaced all its rivals in the marketplace of judicial formulas. ( Ethyl Corp. v. United Steelworkers of America (7th Cir.1985) 768 F.2d 180, 184.) The dissent argues the Enterprise/Misco standard should not be applied in the commercial context, apparently on the ground commercial arbitrators do not have the same need for flexibility in fashioning remedies as labor arbitrators. (Dis. opn., post, pp. 396-400.) The dissent, we think, overstates the difference: while many commercial arbitrations involve single transactions in which a finding of breach suggests well-defined contractual damages, others  including the present one  involve lengthy and complicated dealings between the parties, in which the breaches are numerous, extended or repeated, and monetary damages are either indeterminable or inadequate. We nonetheless recognize differences do exist, and our employment of the Enterprise/Misco formulation does not, as the dissent suggests, incorporate the entire body of labor arbitration law applying that test. The need for expeditious and informal procedures to resolve disputes  and hence for a deferential standard that will minimize judicial intrusion  is at least as great in the commercial context as in labor relations. Although the present parties may both be able to bear the costs of fully litigating their claims, many commercial arbitrations involve small businesses and consumers, for whom avoiding the court system's high cost is of utmost importance. The more rigorous the standard of judicial review of arbitral remedies, the more time and money consumer plaintiffs, for example, will be forced to spend confirming and preserving awards in their favor. We recognize certain aspects of labor arbitration may be unique, and not all rules established for resolution of disputes over collective bargaining agreements are applicable to commercial contracts. On the issues discussed here, however, Enterprise and other federal labor decisions have been influential in the commercial arbitration context because they are grounded on considerations of judicial policy equally applicable to review of commercial arbitration awards. ( Hecla Min. Co. v. Bunker Hill Co. (1980) 101 Idaho 557, fn. 4 [617 P.2d 861, 866].) In both labor and commercial arbitrations, the choice of remedies calls on the arbitrator's flexibility and informed judgment ( Enterprise, supra, 363 U.S. at p. 597 [4 L.Ed.2d at p. 1428]); in both areas, independent judicial reevaluation of remedies would tend to defeat the contractual intent to resolve disputes efficiently and by private mechanisms ( Misco, supra, 484 U.S. at p. 38 [4 L.Ed.2d at p. 299]). Two federal appellate decisions provide useful elaborations on the Enterprise/Misco test. In Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d 180, 184, the arbitrator had awarded vacation pay for the year 1982 to workers laid off from a plant at the end of 1981, although under a literal reading of the collective bargaining agreement they could not have earned the vacation pay, since they did not work 200 hours during 1982 as the contract required. ( Id. at pp. 182-183.) The Court of Appeals held the district court erred in setting aside this award as beyond the arbitrator's powers. ( Id. at pp. 183-184.) The court explained an award does not exceed the arbitrator's powers if it is based on an interpretation  unsound though it may be  of the contract: It is only when the arbitrator must have based his award on some body of thought, feeling, or policy, or law that is outside the contract ... that the award can be said not to `draw its essence from the collective bargaining agreement'.... ( Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at pp. 184-185.) Although the Enterprise test emphasizes the source from which the arbitrator drew the award, it nevertheless is objective. The arbitrator cannot shield his decision from scrutiny simply by making the right noises  noises of contract interpretation.... ( Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at p. 187.) Rather, the question is whether the award is so outre that we can infer that it was driven by a desire to do justice beyond the limits of the contract. ( Ibid. ) Restated, the test asks `whether the arbitrator's solution can be rationally derived from some plausible theory of the general framework or intent of the agreement.' ( Id. at p. 186.) Local 120 v. Brooks Foundry, Inc. (6th Cir.1990) 892 F.2d 1283 is particularly instructive, as it deals with the difficult problem of choosing remedies for a real but unquantifiable injury. After the union agreed to a wage concession for all workers, the company improperly protected one favored employee from the reduction. In the arbitrated grievance, the union requested an award of $130,000, the aggregate amount of the wage concession for all employees. The arbitrator found such a massive award would be inappropriate and beyond the company's ability to pay and instead awarded 10 percent of the amount, $13,000, which he stated was intended as `damages' to `cushion' the harm to the union from the company's breach. ( Id. at pp. 1284, 1287.) The Court of Appeals reversed the district court's ruling vacating the award. Acknowledging the amount of the award was not drawn directly from measurement of the injury done the union ( Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d at p. 1288), the court held it was nonetheless within the arbitrator's powers. [D]etermining damages appropriate for an inchoate injury is not always an exact exercise, susceptible to strict logical explication. ( Id. at p. 1287.) The arbitrator did not abuse his authority in taking into account the economic facts of life which prompted the pay cut provision or in viewing it in the realistic light of the history that brought it about. ( Id. at p. 1288.) The court concluded the award, although unusual and even bizarre, drew its essence from the contract because it was related to arguably proper compensatory damages.... ( Ibid. ) (3) We distill from these cases what we believe is a meaningful, workable and properly deferential framework for reviewing an arbitrator's choice of remedies. Arbitrators are not obliged to read contracts literally, and an award may not be vacated merely because the court is unable to find the relief granted was authorized by a specific term of the contract. ( Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at pp. 184, 186.) The remedy awarded, however, must bear some rational relationship to the contract and the breach. The required link may be to the contractual terms as actually interpreted by the arbitrator (if the arbitrator has made that interpretation known), to an interpretation implied in the award itself, or to a plausible theory of the contract's general subject matter, framework or intent. ( Ibid. ) The award must be related in a rational manner to the breach (as expressly or impliedly found by the arbitrator). [12] Where the damage is difficult to determine or measure, the arbitrator enjoys correspondingly broader discretion to fashion a remedy. ( Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d at p. 1287.) The award will be upheld so long as it was even arguably based on the contract; it may be vacated only if the reviewing court is compelled to infer the award was based on an extrinsic source. ( Enterprise, supra, 363 U.S. at p. 598 [4 L.Ed.2d at pp. 1428-1429]; Misco, supra, 484 U.S. at p. 38 [98 L.Ed.2d at p. 299]; Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at pp. 184-185.) In close cases the arbitrator's decision must stand. ( Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d at p. 1289.)
Intel maintains that, whatever the general standard, the cases establish one bright-line rule: [A]rbitrators may not award a remedy that conflicts with express terms of the arbitrated contract. To the extent this means arbitrators may not award remedies expressly forbidden by the arbitration agreement or submission, the point is well taken. How the violation of `an express and explicit restriction on the arbitrator's power' ( Hecla Min. Co. v. Bunker Hill Co., supra, 617 P.2d at p. 869) could be considered rationally related to a plausible interpretation of the agreement is difficult to see. Thus, for example, where a collective bargaining agreement provided for arbitration solely of `grievance[s],' and defined a grievance as `a complaint or claim against the employer,' the arbitrator was without power to award the employer damages against the union. ( Carpenter Local 1027 v. Lee Lumber & Bldg. Material (7th Cir.1993) 2 F.3d 796, 798-799.) [13] Even where the parties' original contract included a broad arbitration clause, the arbitrator's powers may be restricted by the limitation of issues submitted. (See, e.g., Totem Marine Tug & Barge v. North Am. Towing (5th Cir.1979) 607 F.2d 649, 650-651 [where arbitrated claim sought only return expenses, and claimant's brief in arbitration conceded charter hire was not at issue, arbitrator exceeded powers in awarding charter hire as damages].) (4) To the extent Intel is advocating a broader rule  that arbitrators may not award a party benefits different from those the party could have acquired through performance of the contract  the cases do not support its position. No exact correspondence is required between the rights and obligations of a party had the contract been performed and the remedy an arbitrator may provide for the other party's breach. In Morris v. Zuckerman, supra, 69 Cal.2d 686, for example, we held it within the arbitrator's power, as a remedy for the plaintiff's breach of fiduciary duties, to excuse the defendant from executing a document the parties' underlying contract required him to execute; the arbitrator properly created a condition to the required sale, although the original contract had no such limitation. ( Id. at pp. 688, 694.) Similarly, the union in Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d 1283, had no contractual right to a payment of $13,000, but the award was proper to alleviate the effects of the company's breach. In Anderman/Smith Co. v. Tenn. Gas Pipeline Co., supra, 918 F.2d 1215, a dispute over the pricing of natural gas, the court approved an award requiring certain prices to remain in effect for one year and requiring any future price changes to be approved by the arbitrators, although the contract contained different, comprehensive provisions for price changes. ( Id. at pp. 1217, 1219-1220; see also Engis Corp. v. Engis Ltd., supra, 800 F. Supp. at pp. 629-630 [arbitrator within powers in requiring one party to delete Engis from its corporate name, even though contract specifically granted it right to use name]; Hecla Min. Co. v. Bunker Hill Co., supra, 617 P.2d at p. 870 [arbitrator could invalidate price schedule imposed by party while in breach although schedule was otherwise valid under contract]; Malekzadeh v. Wyshock, supra, 611 A.2d at pp. 22-23 [in dispute between general and limited partners, arbitrator could, as practical necessity, delegate managerial duties to independent third party, although contract assigned those duties to general partner].) As these examples demonstrate, arbitrators, unless expressly restricted by the agreement of the parties, enjoy the authority to fashion relief they consider just and fair under the circumstances existing at the time of arbitration, so long as the remedy may be rationally derived from the contract and the breach. The rights and obligations of the parties under the contract as it was to be performed are not an unfailing guide to the remedies available when the contract has been breached. It follows that parties entering into commercial contracts with arbitration clauses, if they wish the arbitrator's remedial authority to be specially restricted, would be well advised to set out such limitations explicitly and unambiguously in the arbitration clause. Because parties to arbitration agreements do have the power to limit possible remedies in this manner (as the dissent acknowledges), we do not believe our holding will, as the dissent speculates, discourage arbitration.