Contracts: California Supreme Court Reinstates Award, Reasserting An Arbitrator Power (Web)

California's highest court last month ended a long legal battle when it reinstated an arbitral award and reaffirmed an arbitrator's powers. 
   
The case also will mean rewriting arbitration agreements more carefully to clearly provide for express limits on arbitrator power.

In Gueyffier v. Ann Summers Ltd., 43 Cal. 4th 1179 (June 9, 2008)(available at http://www.courtinfo.ca.gov/opinions/documents/S148568.PDF), the unanimous California Supreme Court held that an arbitrator did not exceed his powers when he equitably excused a franchisee from performance of a contractual condition, where the arbitrator concluded performance would have been an idle act.

The Court reversed an appellate court that had overturned the award.  The appeals court had found that the parties had limited the arbitrator’s power to modify their contract, and the arbitrator had violated the provision by excusing the plaintiff’s failure to allow the defendant franchiser an opportunity to cure breaches in the agreement.
      
Celine Gueyffier, a French citizen who resides in California, and Ann Summers, Ltd., a British retailer, entered into a franchise agreement under which Gueyffier was to open an Ann Summers store in Los Angeles.  The agreement submitted disputes to binding arbitration before the American Arbitration Association. 

The arbitration clause provided: “In no event may the material provisions of this Agreement   . . .  be modified or changed by the arbitrator at any arbitration hearing.”  The contract also provided a notice-and-cure provision under which the franchiser could not be in breach of the agreement until the franchisee provides written notice and 60 days to cure. 

The store opening was disastrous.  The opinion says that Ann Summers stores’ line of lingerie and sex toys was greeted with “a ‘harsh’ reception of insults and thrown tomatoes at Gueyffier’s Beverly Hills Center franchise--and both parties claimed breach of contract. 

An arbitrator conducted hearings from 2001 through 2004, finding that Ann Summers had failed to provide Gueyffier with the promised training, guidance and assistance.  The arbitrator excused Gueyffier from giving notice because Ann Summers could not have cured the problems within the 60 days as provided by the contract. 

The arbitrator issued a written award in February 2005, of $478,030, as consequential damages, to Gueyffier for the breach.  The superior court confirmed the award but the California Court of Appeal reversed, holding that the arbitrator exceeded his powers by excusing performance the notice and cure provision, when the contract expressly prohibited the arbitrator from modifying or changing a material term.

The 7-0 California Supreme Court Gueyffier decision, written by Associate Justice Kathryn Mickle Werdegar, states, “Absent an express and unambiguous limitation in the contract or the submission to arbitration, an arbitrator has the authority to find the facts, interpret the contract, and award any relief rationally related to his or her factual findings and contractual interpretation.”

The contract’s drafting weakness was at the decision’s core.  The Court found that the contract limitation on the arbitrator's powers was explicit, but did not unambiguously prohibit the arbitrator from excusing performance. 

The opinion suggests that the parties could have prohibited the arbitrator from excusing performance by stating that the arbitrator would have no power to “modify, change or excuse performance of” the provision.
 
Franchiser Ann Summers argued that the arbitrator’s factual finding was erroneous and that had the company been given adequate notice, it may have cured the breach.  The Court held, however, that the arbitrator is authorized to find the facts, and it is not the court’s position to do so, since the parties contracted to have the arbitrator decide their dispute.  Further, whether a trial court properly could have excused the notice and provision was not at issue, as an arbitrator “does not ordinarily exceed his or her powers by reaching an erroneous legal conclusion.”

–By Jillian Lee Hunt, CPR Intern