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Finding that an arbitrator did not exceed his powers by finding a contract provision unconscionable and awarding consequential damages, a California appellate court held that failing to challenge the scope of an arbitrator's authority during the arbitration amounts to a waiver.
In J.C. Gury Co. v. Nippon Carbide Industries (USA) Inc., No. B194926, 2007 WL 1874245 (Cal. Ct. App. June 29, 2007) Nippon sold reflective sheeting material to Gury, a manufacturer of reflective signs. For years, Gury used Nippon's reflective sheeting without experiencing any problems. However, after Nippon relocated its reflective sheeting factory to China, Gury began to experience defects in signs sold to its customers.
After unsuccessfully seeking reimbursements from Nippon, Gury submitted an arbitration claim. The arbitrator concluded Nippon failed to maintain proper quality control. Further, the arbitrator found the contract provision limiting damages was unconscionable and awarded Gury consequential damages. Gury moved to confirm the award while Nippon sought vacatur arguing the arbitrator exceeded his authority because the contract expressly prohibited the arbitrator from nullifying or modifying a contractual provision. The trial court confirmed the award and Nippon appealed.
The Court held that Nippon had waived its right to challenge the scope of the arbitrator's authority in court by failing to do so during the arbitration. Although the arbitrator lacked "the power to change, modify, or alter" the contract's provisions or "grant an award which has such effect" under the contract, the parties may nonetheless submit to arbitration issues that they were not contractually compelled to arbitrate.
The Court found that Nippon had submitted the unconscionability issue to the arbitrator. Moreover, Nippon offered no evidence showing that it notified the arbitrator of its unwillingness to waive the contractual limitation on the arbitrator's powers. The Court concluded that Nippon cannot submit a claim to arbitration and then challenge the scope of the arbitrator's authority after receiving an undesired outcome.
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