In our “Lessons Learned in the Courtroom” presentations to Brokers we have covered the pros and the cons of arbitration clauses extensively and a very recent decision from the California Supreme Court now presents some added benefits of such clauses which you may wish to consider.
In the past, one of the disadvantages of arbitration has been that an award can reflect very rough justice in a way that the arbitrator feels is a balanced result while at the same time denying the parties a right to challenge the result for being contrary to established legal principles. As one example, we recently tried the case for a broker and won it completely, such that the claimants were awarded nothing and yet, even though there was an attorneys fees clause in the contract, the arbitrators declined to award our client attorneys fees. This was contrary to established legal principles and yet, under the rules which applied at the time, a Court challenge was not possible.
The California Supreme Court has now cleared the way for brokers to avoid such results. In Cable Connection, Inc. v. Direct TV, Inc., the Court decided late last month that an arbitration agreement may expressly provide for a judicial review of an arbitration award for legal error. More specifically, it decided that an arbitration clause that provided that “the arbitrator shall not have the power to commit errors of law or legal reasoning and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error” was enforceable under state law. The earlier rule under state law (and perhaps the current rule under federal law) was that such protections against legal errors were not enforceable as they cut too deeply into an arbitrator’s discretion. But the rules of the game have changed now and so prudent brokers will review their representation agreements and purchase contract forms (as well as others that may be supplied by the parties) to consider whether the language takes full advantage of this additional available protection.