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Refusing to vacate an arbitration award on the alleged grounds that an arbitrator exceeded his powers, a California appellate court found than an arbitrator's failure to follow California law when rendering an arbitration ruling is not grounds for vacatur.
In Storm Water Inspection and Maintenance Services, Inc. v. Smith, No A114779, 2007 WL 1849097 (Cal. Ct. App. June 28, 2007), Smith and several family members formed Storm Water Inspection and Maintenance Services, Inc. (SWIMS). Smith owned 25% of SWIMS, worked part time as a secretary, and served as the board's secretary/treasurer. Smith was subject to an employment agreement containing an arbitration clause. SWIMS fired Smith and exercised its option to repurchase Smith's shares in the company.
SWIMS filed a petition to compel arbitration, which the trial court granted. The arbitrator determined SWIMS terminated Smith with cause and that it was entitled to a reconveyance of its shares held by Smith for $27,548.26. SWIMS moved to confirm the award and Smith moved to vacate, asserting the arbitrator exceeded his powers by failing to follow the law. The trial court confirmed the award and Smith appealed.
The Court held that the arbitrator did not exceed his powers. The mere fact that an arbitrator made an erroneous decision does not furnish grounds for vacating an award. A contrary rule would eviscerate the principle of limited judicial review of arbitral awards, as a party could always conceivably assert that the arbitrator exceeded his powers by rendering an erroneous decision.
Moreover, the Court rejected Smith's argument that the arbitrator's ruling was binding only if he followed California law. The mere fact that the arbitrator may have misapplied a state's law is insufficient grounds for vacating an award. Finally, the parties' agreement provided no basis for expanded judicial review as it specifically denoted that arbitration is "the exclusive forum" for resolving disputes.
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