Many employers rely on arbitration agreements with their employees to control litigation costs. But the right to require arbitration is under attack from various directions. Here’s a recent one.
On October 20, 2009, a California appellate court issued an opinion that left the door wide open for challenging binding arbitration awards. In Burlage v. Superior Court, the dispute involved purchase of a home. After the close of escrow, the buyers learned that part of what they were told was their property actually belonged to a neighbor. They sued the seller, claiming he fraudulently failed to disclose the encroachments. The arbitrator ruled that damages must be determined as of the close of escrow and excluded evidence of subsequent actions that lessened (practically eliminated) plaintiff’s damages. The trial court vacated the award and the buyers took a writ.
In a 2-1 decision, the appellate court affirmed the decision to vacate the award. It based its decision on California Code of Civil Procedure section 1286.2 which allows a court to vacate an arbitration award where a party’s rights “were substantially prejudiced . . . by a refusal of the aribtrator[] to hear evidence material to the controversy . . . .” Because the arbitrator did not admit evidence of damages from a period of time he concluded was irrelevant, the court concluded that the award could be vacated.
The dissent characterized the arbitrator’s decision as one as to when damages should be determined and explained that the law does not permit courts to overturn arbitration awards just because they would reach a different conclusion on a legal issue. It noted that many legal rulings would necessarily result in determinations as to what evidence was or was not material to the controversy.
The majority opinion also raised the question whether arbitrators, to avoid having their decisions vacated, might be more inclined to admit evidence. It concluded, however, that that was an overly cynical view and that the decision would not impact evidentiary rulings. It remains to be seen whether a little healthy cynicism might be justified here.