A recent California decision miraculously vacated an arbitration award in a commercial lease dispute. The Columbus Club Inc. owned a banquet room, and leased to a commercial caterer, who did over $300,000 in tenant improvements. The Lessee intended to hold weddings at the location. At their first event, the police showed up and told the Tenant the could not hold functions beyond 12:30 at night due a local ordinance. The tenant also learned that they could not use the Landlord’s liquor license. Apparently they did not consult with an experienced real estate and leasing attorney in negotiating this lease.
The Lessee claimed that, during the negotiations, the Lessor knew about the restrictive laws but did not disclose them, and in fact made contrary representations about the operating hours. They sued the Club, and the individual (Rodela) who signed the lease on behalf of the club. After a trial date had been set they agreed to submit the case to binding arbitration.
The arbitrator, retired judge Hubbell, refused to allow the Club to select who would represent the corporation, allowing only Rodela to do so. The arbitrator also allowed the Lessee to present an expert who submitted a report that the Lessee’s lost profits were over $1 million, though the Lessee failed to provide that report o the Club as part of the pre-arbitration exhibit exchange. I guess the fact that the Club was surprised by this million dollar claim, and without disclosure was unprepared to counter it, did not bother this arbitrator. He ruled for the Lessee, with a total of $1.2 million in damages. The Court of Appeals vacated the decision, on the grounds that the arbitrator exceeded his powers, in Hoso Foods, Inc. V. Columbus Club, Inc.
First, a discussion of arbitration and why this blogger is not a fan. Arbitration decisions get only extremely narrow judicial review. Courts will not review the merits of the controversy, the validity of the arbitrator’s reasoning or the sufficiency of the evidence supporting the award. Unless specifically required to act in conformity with the rules of law, may act contrary to substantive law and base their decisions on broad principles of justice and equity. Hoso @ 887. Even where application of a particular law or body of law is required by the arbitration agreement, the arbitrator’s failure to apply such law is not an excess of the arbitrator’s powers. Hoso @ 890. That means they can do as they darn well please.
In this case, the Court of Appeals took umbrage with the arbitrator’s refusal to allow the Columbus Club to select whoever they wanted to represent them at the arbitration. Rodela did not participate in the lease negotiations, and could not assist their attorney with the arbitration, and cross-exam of witnesses who testified as to misrepresentations. The Court found that this violated Code of Civil Procedure section 1286.2 (a)(4), because the arbitrator exceeded his powers by limiting the appellant’s representation. This limitation eliminated the possibility of the Club receiving a fair hearing. Nothing in the state law or AAA arbitration rules provides that an arbitrator has the power to prevent a corporate party from picking their own representative. Decisions vacating arbitration awards are scarce; those affirming obviously bad awards are common.