Judge: Daniel S. Murphy, Case: 21STCV20172, Date: 2024-03-29 Tentative Ruling

Case Number: 21STCV20172    Hearing Date: March 29, 2024    Dept: 32

BACKGROUND

            This action arises from a purported loan agreement between Nap Holdings, LLC (“Plaintiff”) and China Electronics, Inc. (“Defendant”). Pursuant to the purported agreement, Defendant wired $600,000 to Plaintiff with the expectation that Plaintiff would repay the loan in monthly installments. When Plaintiff defaulted on the loan, Defendant initiated a JAMS arbitration proceeding for breach of contract, relying on an arbitration provision contained in the writing.

            Plaintiff then initiated this action before the Court for declaratory relief. The operative pleading is the First Amended Complaint (“FAC”), which prays for a declaration that: (1) the Court, not the arbitrator, has the authority to determine the existence of the loan agreement and the arbitration clause within it; and (2) no valid written agreement exists between the parties. Plaintiff then filed a motion to stay arbitration pending the outcome of this action, and Defendant filed a motion to compel arbitration and stay this action pending arbitration.

            On September 15, 2021, the Court granted Plaintiff’s motion to stay arbitration and denied Defendant’s motion to compel arbitration. Defendant appealed the ruling, and on July 6, 2022, the Court of Appeal reversed and remanded. The parties thereafter participated in arbitration. 

            In a decision dated January 3, 2024, the arbitrator awarded Defendant $600,000, plus $142,849.31 in interest. The arbitrator additionally awarded $340,502.50 in attorneys’ fees and $17,591.85 in costs. 

            On February 20, 2024, Defendant filed the instant petition to confirm the arbitration award. Plaintiff filed its opposition on March 18, 2024 and simultaneously filed a motion to vacate the award. Defendant filed its reply on March 22, 2024.  

LEGAL STANDARD

“Any party to an arbitration in which an award has been made may petition the court to confirm, correct or vacate the award.” (Code Civ. Proc., § 1285.) A petition shall set forth the substance of the agreement to arbitrate, the names of the arbitrators, and any written opinion of the arbitrators. (Id., § 1285.4.) If the petition is duly served and filed, “the court shall confirm the award as made, whether rendered in this state or another state, unless in accordance with this

chapter it corrects the award and confirms it as corrected, vacates the award or dismisses the proceeding.” (Id., § 1286.)

            The court shall vacate an arbitration award if it finds, inter alia, that “[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted,” or “[t]he rights of the party were substantially prejudiced by the refusal of the arbitrators to . . . hear evidence material to the controversy.” (Code Civ. Proc., § 1286.2(a).)

            The Federal Arbitration Act does not apply here because the parties’ contract provides that it shall be governed by California law (Loan Agmt., § 6(b)), and the procedural provisions of the FAA do not apply unless the parties expressly agree to adopt them (Valencia v. Smyth (2010) 185 Cal.App.4th 153, 177). Therefore, the Court does not consider the federal standard for vacating arbitration awards or the associated federal cases.  

DISCUSSION

I. Exceeding Powers

            “An arbitrator does not exceed his or her powers . . . merely by rendering an erroneous decision on a legal or factual issue, so long as the issue was within the scope of the controversy submitted to the arbitrator.” (Moshonov v. Walsh (2000) 22 Cal.4th 771, 773.) “An arbitrator's powers ‘derive from, and are limited by, the agreement to arbitrate.’” (Kelly Sutherlin McLeod Architecture, Inc. v. Schneickert (2011) 194 Cal.App.4th 519, 528.) “[P]arties to a private arbitration impliedly agree that the arbitrator's decision will be both binding and final.” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9.) “[T]he essence of the arbitration process is that an arbitral award shall put the dispute to rest.” (Id. at p. 10.) “Expanding the availability of judicial review of such decisions ‘would tend to deprive the parties to the arbitration agreement of the very advantages the process is intended to produce.’” (Ibid.) “As a consequence, arbitration awards are generally immune from judicial review.” (Id. at p. 11.) This is so even if an arbitrator’s decision is mistaken, because the parties voluntarily assume that risk in exchange for the less formal, expedited procedure. (Id. at pp. 11-12.) Additionally, “an arbitrator is not ordinarily constrained to decide according to the rule of law.” (Id. at p. 11.) “An error of law is not one of the grounds” for vacating or correcting an arbitration award. (Id. at p. 14.)

            Plaintiff argues that the arbitrator exceeded her powers by awarding attorneys’ fees. The loan agreement contained a provision stating that “Borrower agrees to pay upon demand all of the reasonable expenses incurred by Lender, including reasonable attorney fees, in connection with the enforcement of Borrower’s obligations under this Agreement.” (Loan Agmt., § 6(d).) However, Plaintiff contends that this provision was overridden by the following provision that the arbitrator ruled was part of the contract: “Notwithstanding any provision of this agreement, a payment of a total sum of $600,000 plus any interest, if applied, or 10 percent membership interest of the borrower shall be the sole remedy for the lender under this agreement, and any other remedies that the court may allow.” (Attachment 8(c) to Petition, pp. 3-4.)

            Plaintiff’s argument at most describes an error of law but does not demonstrate that the arbitrator exceeded her jurisdiction. The arbitration agreement authorized the arbitrator to adjudicate “[a]ny dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof.” (Loan Agmt., § 6(c).) “This language provided the Arbitrator with the broad authority to rule on all claims, and impose any form of relief rationally related to those claims.” (Emerald Aero, LLC v. Kaplan (2017) 9 Cal.App.5th 1125, 1140.) The question of whether the agreement permitted an award of fees constitutes a dispute relating to the agreement or its interpretation, which is a matter expressly subject to the jurisdiction of the arbitrator. Therefore, the arbitrator was within her powers to adjudicate fees and costs, even if she erroneously awarded them.  

The Court does not find that the arbitrator arbitrarily remade the contract, upheld an illegal contract, or issued an award that violates a statutory right. (See Jordan v. Department of Motor Vehicles (2002) 100 Cal.App.4th 431, 443.) “Courts may not review the merits of the controversy, the validity of the arbitrator's reasoning, or the sufficiency of the evidence. Indeed, an arbitrator's decision is not generally reviewable for errors of fact or law, even if the error appears on the face of the award and causes substantial injustice.” (Ibid.) In sum, the Court does not find that the arbitrator exceeded her powers in awarding attorneys’ fees and costs. Therefore, this cannot serve as the basis for vacating the arbitration award.

II. Refusal to Hear Material Evidence

            Code of Civil Procedure section 1286.2(a)(5) provides that an arbitration award shall be vacated if “[t]he rights of the party were substantially prejudiced by the refusal of the arbitrators to . . . hear evidence material to the controversy.” This provision acts “as a safety valve in private arbitration that permits a court to intercede when an arbitrator has prevented a party from fairly presenting its case.” (Hall v. Superior Court (1993) 18 Cal.App.4th 427, 439.) However, it does not “provide[] a back door to Moncharsh through which parties may routinely test the validity of legal theories of arbitrators.” (Ibid.) “To find substantial prejudice the court must accept, for purposes of analysis, the arbitrator's legal theory and conclude that the arbitrator might well have made a different award had the evidence been allowed.” (Ibid.)

            Plaintiff argues that the arbitrator erred in denying Plaintiff’s motion to compel discovery based on the attorney-client privilege. However, Plaintiff cites no authority suggesting that the denial of a discovery motion justifies vacating an award based on refusal to hear material evidence. If that were the case, any party in arbitration that loses a discovery dispute could petition a court to review the award. Additionally, Plaintiff fails to demonstrate that the withheld communications would have resulted in a different award had they been admitted. In other words, there is no indication that this “substantially prejudiced” Plaintiff’s rights or that Plaintiff was prevented from fairly presenting its case. The parties fully briefed the discovery issue before the arbitrator, and the Court will not review the merits of the arbitrator’s ruling. Therefore, the arbitration award cannot be vacated based on refusal to hear material evidence.

III. Violation of JAMS Rules

            “[A] party may successfully challenge an arbitration award if the relief granted was in violation of . . . the rules of arbitration.” (Emerald Aero, supra, 9 Cal.App.5th at p. 1140.) Plaintiff argues that the arbitrator violated JAMS Rule 19(i), which allows a party to petition the arbitrator to amend an award to correct computational, typographical, or other similar errors, and provides seven days for the other party to file an opposition. Plaintiff contends that the arbitrator granted Defendant’s request to correct the award one day after Defendant made the request, thus failing to provide Plaintiff seven days to oppose the request. Plaintiff further contends that Defendant’s requested correction was not computational or typographical, but rather changed material facts.  

            The initial version of the award stated that Defendant wired the $600,000 to third party SNBC. Pursuant to Defendant’s request, the award was amended to state that Defendant wired the amount directly to Plaintiff. The arbitrator granted the request because the evidence was undisputed that Defendant wired the money directly to Plaintiff, not SNBC. (Plntf.’s Ex. F.) This is akin to a typographical error. Plaintiff does not explain how this correction is inaccurate or materially affected the outcome of the arbitration award. Furthermore, Plaintiff does not contend that it was prevented from filing an opposition or proposing its own correction. In fact, after the arbitrator granted Defendant’s request, Plaintiff indicated that it “does intend to request corrections within the timeframe set forth in Rule 19(i).” (Ibid.) There is no indication that Plaintiff was prevented from doing so.

            This is distinct from Emerald Aero, where the arbitrator allowed plaintiffs to add a claim for punitive damages one day before the arbitration hearing, violating the AAA’s minimum notice requirement for adding or increasing claims. (Emerald Aero, supra, 9 Cal.App.5th at p. 1141.) This “call[ed] into question the fairness of the damages award.” (Id. at p. 1142.) By contrast, the issue here is a correction to the wording of the written decision after the arbitration hearing. This does not call into question the fairness of the proceedings themselves. Both sides had an opportunity to present their case. Plaintiff was not surprised by a material change on the eve of arbitration; the arbitrator merely corrected the award to reflect a fact that Plaintiff does not even dispute. There is no indication that Plaintiff was deprived of the opportunity to request its own correction to the award within the timeframe allowed by JAMS rules. The Court does not find that the arbitrator’s actions affected the fairness of the proceedings or the damages award. Therefore, this is not a reason to vacate the arbitration award.

CONCLUSION

            Defendant’s petition to confirm arbitration award is GRANTED. Plaintiff’s motion to vacate the award is DENIED.