In affirming confirmation of an arbitration award, a California Court of Appeal held that parties to an arbitration agreement cannot contract for heightened judicial review. The Court reached its decision based on California caselaw holding that parties to an arbitration agreement cannot create contractual grounds for vacatur. Accordingly, the Court’s decision leaves open the possibility that under California law, parties may guard against arbitrator error through the operation of the statutory grounds for vacatur.

In Grubb & Ellis Co. v. Herzog, No. B197092, 2008 WL 944150 (Cal. Ct. App. Apr. 9, 2008), Herzog, a real estate salesperson, worked as an independent contractor for Grubb & Ellis, a real estate broker. The parties’ contract included an arbitration agreement providing that "[t]he arbitrator(s) must apply applicable law."

During this relationship, Herzog signed three promissory notes – totaling $36,000 – in favor of Grubb & Ellis. The promissory notes also contained an arbitration agreement providing that the arbitrator must apply California law and that "should the arbitrator(s) fail to follow such law, the ruling of the arbitrator(s) can be appealed to the court of general jurisdiction."

When Herzog failed to pay on the promissory notes, Grubb & Ellis filed an arbitration claim against her, seeking the amount due under the promissory notes less Herzog’s share of an earned but unpaid commission. In response, Herzog filed a counterclaim seeking a larger share of the commission and alleging that Grubb & Ellis violated California law on credit reporting. The arbitrator issued an award in favor of Grubb & Ellis.

Herzog filed a motion to vacate the arbitration award, arguing that the arbitrator did not follow applicable law as required by the parties’ arbitration agreement. The trial court denied the motion to vacate and thus confirmed the award.

On appeal, Herzog argued that she was entitled to judicial review for errors of law because the arbitration agreement required the arbitrator to follow applicable law. In rejecting this argument, the Court cited Crowell v. Downey Community Hospital Foundation, 115 Cal. Rptr. 2d 810 (Cal. Ct. App. 2002) for the proposition that parties to an arbitration agreement cannot contract for heightened judicial review.

Since California law did not allow the parties to contract for heightened judicial review, the Court affirmed the order confirming the arbitration award.

The Court’s decision in this case does not squarely address an important question: Setting aside an apparent split of authority, see, e.g., Baize v. Eastridge Cos., 47 Cal. Rptr. 3d 763 (Cal. Ct. App. 2006), and assuming that California law does not allow parties to supplement the statutory grounds for vacatur of arbitration awards, can parties to an arbitration agreement direct the arbitrator to apply a designated body of law and hold the arbitrator to this directive via the statutory grounds for vacatur – specifically, on the basis that an arbitrator exceeds their powers when the arbitrator disregards the terms of the parties’ agreement?

In a recent decision by the Seventh Circuit Court of Appeals, Judge Posner recognized that parties to an arbitration agreement may invoke the statutory grounds for vacatur as a means of enforcing the parties’ agreement that the arbitrator must apply a specified body of law. See Edstrom Indus., Inc. v. Companion Life Ins. Co., 516 F.3d 546 (7th Cir. 2008). This approach to guarding against arbitrator error continues to pass muster in the wake of Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S.Ct. 1396 (2008) because it relies on statutory grounds for vacatur, not contractual grounds for vacatur. See Edstrom Indus., 516 F.3d at 549-50 (distinguishing Hall Street).

There is California caselaw recognizing that parties may rely on the statutory grounds for vacatur as a means of enforcing the contractual terms that govern an arbitrator’s decision-making. See Gueyffier v. Ann Summers, Ltd., 50 Cal. Rptr. 3d 294, 312-13 (Cal. Ct. App. 2006), review granted, 150 P.3d 693 (2007).