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The California Court of Appeals held that an arbitrator exceeded his powers by finding a party liable for breach of contract even though the contract’s notice and cure requirement was not satisfied.
In Gueyffier v. Ann Summers, Ltd., No. B186996, 2006 WL 3028272 (Cal. Ct. App. Oct. 26, 2006), Gueyffier and Ann Summers, a British company, entered into a franchise agreement allowing Gueyffier to open an Ann Summers store in Los Angeles.
The franchise agreement, which contained an arbitration clause, provided that Ann Summers could not “be held in breach” without written notice of the breach and an opportunity to cure. The agreement further provided that the notice and cure requirement was a “material term” that could “not be modified or changed by any arbitrator.”
Gueyffier opened an Ann Summers store in the Beverly Center, but the store closed almost immediately. Shortly thereafter, Ann Summers filed an arbitration demand, and Gueyffier field a counterclaim for breach of contract.
The arbitrator found Ann Summers liable for breach of contract based on its limited efforts “to mitigate the potential negative reaction from opening a lingerie and sex toy shop in an upscale mall in Beverly Hills.” Citing the store’s “disastrous opening,” the arbitrator found that the notice and cure requirement was moot because “the effect of the breaches was not curable.” The trial court confirmed the award.
On appeal, since Ann Summers is a British company, the Court first addressed whether the vacatur provisions of the California Arbitration Act (CAA) apply to an award that is subject to the New York Convention (the Convention), the international treaty on arbitration. Relying on Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., 126 F.3d 15 (2d. Cir. 1997), the Court held that the Convention does not preempt the vacatur provisions of the CAA when the award is rendered in California.
The Court thus proceeded to analyze whether the award should be vacated under the CAA on the ground that the arbitrator exceeded his powers by finding Ann Summers liable for breach of contract even though the notice and cure requirement was not satisfied.
In analyzing this question, the Court cited Advanced Micro Devices, Inc. v. Intel Corp., 885 P.2d 994 (Cal. 1994) for the rule that parties may “explicitly and unambiguously” restrict an arbitrator’s powers via “the arbitration agreement, the submission or the rules of arbitration.” Applying that rule, the Court held that the arbitrator exceeded his powers because Gueyffier and Ann Summers “explicitly and unambiguously” restricted the arbitrator’s authority to moot the notice and cure requirement. Accordingly, the Court remanded the case with instructions to vacate the award.
As the Court observed, “parties may agree to limit or restrict an arbitrator’s authority and powers.” For example, parties can adopt a rule that requires the arbitrator to follow the applicable substantive law. See Rule 20D of the National Arbitration Forum Code of Procedure. This restriction ensures that an arbitrator’s decision making will be legally sound, because the arbitrator would be exceeding his powers if he mooted the restriction and rendered an award in contravention of applicable law. See DaimlerChrysler Corp. v. Porter, No. 270112, 2006 WL 3019682 (Mich. Ct. App. Oct. 24, 2006) (holding that an arbitrator exceeded his powers by rendering an award “in contravention of controlling principles of law”).
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