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Low Cost, Finality, and Speed: The Three Main Advantages of Arbitration

For San Diego businesses, there are many advantages to using arbitration as the dispute resolution mechanism in business contracts. The three most prominent advantages are low costs relative to court litigation, finality, and speed. These advantages are connected; an arbitration is low cost, in part, because it is speedy and final.

Here in the Golden State, we have a statute that promotes and supports arbitration as an alternative method of dispute resolution. See Cal. Civ. Procedure Code, §1280 et seq. As the courts phrase it, there is a strong public policy in favor of arbitration, particularly in commercial contracts. The statute promotes finality by limiting the grounds on which a person or entity can challenge the decision made during arbitration. That is, while it is possible to appeal an arbitration award to the California courts, the scope of judicial review is extremely narrow. Courts are not allowed to review the merits of the controversy or the arbitrator’s reasoning. Furthermore, the courts cannot explore or rule on the sufficiency of the evidence supporting the award, nor correct or vacate an award because of an arbitrator’s legal or factual error, even if it appears on the award’s face. Moreover, courts are instructed to be very deferential to the arbitrator’s decision about the scope of their contractual authority to rule on issues and to fashion remedies.

Under sections 1284 and 1286.6, the only grounds for correcting an arbitration award are where the arbitrator’s final award is in “excess of its powers” and/or where the award is facially inaccurate and be corrected “without affecting the merits of the decision upon the controversy submitted.” This is generally limited to correcting mathematical errors in calculating the award. As for situations in which it is alleged that the arbitrator “exceeded its powers,” this too is narrow. To win that argument, it is necessary to show that the arbitration award was “… so utterly irrational that it amounts to an arbitrary remaking of the contract between the parties.”

A good illustration of these principles can be found in the recent unpublished case of QBE Insurance Corporation v. American Claims Management, Inc., Case No. D073345 (Cal. App. 4th Dist. February 4, 2019). In that case, American Claims Management was contracted by QBE as a third-party insurance claims administrator. American Claims made a huge mistake with respect to a certain insurance claim. The claim could have been settled for as little as $30,000, but American Claims failed to inform QBE about the demand. Eventually, QBE paid $15 million to settle the claim.

For obvious reasons, QBE was not happy about American Claim’s mistake and sued for breach of contract with respect to failing to report the $30,000 demand. The contract between American Claims and QBE required arbitration and, a panel of arbitrators awarded QBE total damages of $18,450,855.73, which included interest, attorney fees and costs.

The procedure for collecting an arbitration award is to petition in a California court to confirm the award. This is what QBE did. But American Claims objected arguing that the arbitrators exceeded their authority. American Claims provided a laundry list of examples including:

  • The panel “ignored California law” by its failing to cite “a single California case or statute in discussing whether American Claims breached the contract or must indemnify QBE”
  • “Created new California law in violation of California statutes and public policy”
  • Held American Claims liable for the entire settlement although their mistake related to only a small part of the settlement
  • Manifestly disregarded the law
  • “Miscalculated amounts owed to QBE” by improperly including damages not related to the American Claims mistake

The trial court rejected these arguments and the California Court of Appeals affirmed. The court held that American Claims’s arguments were only claims of legal errors by the arbitrators and not acts in excess of the panel’s power. According to California law, legal errors are not reviewable. The finality of the award was affirmed.

Call San Diego Corporate Law Today

For more information, call corporate attorney Michael Leonard, Esq., of San Diego Corporate Law. Call Mr. Leonard at (858) 483-9200 or contact him via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters and he proudly provide legal services to business owners in San Diego and the surrounding communities. Like us on Facebook.

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