The California Supreme Court held that an arbitrator did not exceed his powers by excusing noncompliance with a notice-and-cure provision because even though the arbitration agreement expressly foreclosed the arbitrator's authority to modify the notice-and-cure provision, it did not contain any unambiguous limitations on the arbitrator's authority to excuse noncompliance on equitable grounds.

In Gueyffier v. Ann Summers, Ltd., 184 P.3d 739 (Cal. 2008), Gueyffier and Ann Summers entered into a franchise agreement (the Agreement) whereby Gueyffier would open an Ann Summers store in a Beverly Hills shopping center. The store, which sold lingerie and sex toys, opened to controversy and closed shortly after the opening.

After the closing, Ann Summers filed an arbitration claim pursuant to the Agreement. Gueyffier responded by filing a counterclaim, alleging that Ann Summers breached the Agreement by failing to provide training and other assistance. In defending against this counterclaim, Ann Summers relied largely on the Agreement's notice-and-cure provision, which stated that Ann Summers could not be liable for breach of contract without written notice of the breach and at least 60 days to cure it. The Agreement also stated that the notice-and-cure provision "may not be modified or changed by any arbitrator."

Following a series of hearings, the arbitrator found Ann Summers liable for breach of contract for failing to provide training and other assistance. Regarding the notice-and-cure provision, the arbitrator found that once the store had opened, the breach was no longer curable after and, accordingly, that notice of the breach would have been futile.

Ann Summers filed a motion to vacate the award, while Gueyffier filed a motion for confirmation. The trial court confirmed the award, but the California Court of Appeal reversed the trial court, holding that the arbitrator exceeded his powers by excusing noncompliance with the notice-and-cure provision. See Gueyffier v. Ann Summers, Ltd., 50 Cal. Rptr. 3d 294 (Cal. Ct. App. 2006).

The California Supreme Court granted review and found that the arbitrator did not exceed his powers because the Agreement did not unambiguously limit the arbitrator's authority to excuse noncompliance with the notice-and-cure provision. In other words, according to the Court, the express limitation on the arbitrator's authority to modify or change the notice-and-cure provision could not be construed as unambiguous limitation on the arbitrator's authority to apply principles of equity in excusing noncompliance with the notice-and-cure provision.

Accordingly, the Court held that the court of appeal erred in deciding that the arbitrator had exceeded his powers. The Court thus reversed the appellate court decision and remanded the case for further proceedings.

As this case illustrates, limitations on an arbitrator's authority must be express and unambiguous. The Court relied on this principle in distinguishing DiMarco v. Chaney, 37 Cal. Rptr. 2d 558 (Cal. Ct. App. 1995), which held that an arbitrator exceeded his powers by denying attorney fees to the prevailing party where the arbitration agreement provided that the prevailing party "shall" recover reasonable attorney fees.

Rule 20(D) of the National Arbitration Forum Code of Procedure also uses the mandatory term "shall" in requiring arbitrators to follow the applicable substantive law. This limitation on arbitrator authority precludes the arbitrator from disregarding the law.