Affirming a trial court's denial of a motion to vacate an arbitration award pertaining to a securities dispute, a California appellate court held that the arbitration panel's decision to dismiss the claim did not amount to a failure to hear evidence material to the controversy.

In Baker v. American Exp. Financial Advisors, Inc., No. B193400, 2008 WL 223776 (Cal. Ct. App. Jan. 29 2008), the Bakers created a trust for the benefit of their son, Robert Baker. In 2002, Robert Baker sued American Express and its adviser Cohen for breach of contract, breach of fiduciary duty, conversion, fraud, and Violation of the Elder Abuse and Dependant Adult Civil Protection Act.

American Express moved to compel arbitration pursuant to an arbitration agreement contained in the original account application for the Trust. Baker opposed the motion, arguing he had never signed the arbitration agreement. The trial court dismissed Baker's complaint and ordered arbitration.

In 2005, the arbitration panel issued an award dismissing Baker's claims. In January 2006, Baker moved to vacate the award, arguing that Section 1286.2, subdivision (a)(5) required the trial court to vacate the award because the panel had refused to hear evidence material to the controversy. The trial court denied the motion and Baker appealed.

Finding no statutory grounds for vacating the award, the Court held that "the arbitrators acted well within their authority in dismissing the action." Section 1286.5 subdivision (a) (5) requires a court to vacate an award when, "The rights of the party were substantially prejudiced by the refusal… of the arbitrators to hear evidence material to the controversy." California courts find that an arbitrator does not exceed his powers if the award bears a rational relationship to the underlying contract as interpreted by the arbitrator.

Here, the underlying agreement did not limit the arbitrators' authority as it applied to "all controversies" between the parties. Additionally, the NASD rules expressly authorize the panel to dismiss the proceedings before the arbitration hearing. The Court found the panel had the authority to rule on American Express's defense that Baker lacked standing to sue before hearing Baker's claims. Consequently, the Court found the panel had a rational basis for its decision, as it would have been wasteful to hear Baker's claims without first determining whether he had standing to sue.