Crowell v. Downey Community Hospital Foundation

115 Cal. Rptr. 2d 810, 95 Cal. App. 4th 730, 2002 Daily Journal DAR 1013, 2002 Cal. Daily Op. Serv. 840, 2002 Cal. App. LEXIS 843

• Court: California Court of Appeal
• Decided: January 28, 2002
• Docket: B148291
• Status: Published

Opinions

Opinion

DOI TODD, J.

This appeal presents an important question of first impression: Can parties to an arbitration agreement validly agree that an arbitration award is subject to judicial review to determine whether the award is supported by law and substantial evidence? We hold that parties cannot expand the jurisdiction of the court to review arbitration awards beyond that provided by statute and affirm the judgment.

Factual and Procedural Background

Ronald Crowell, M.D., a professional corporation, appeals from a judgment of dismissal pursuant to an order granting defendant Downey Community Hospital Foundation’s (DCHF) general demurrer without leave to amend his complaint. The complaint sought a declaration of rights as to the enforceability of an arbitration provision which explicitly required that (1) the arbitrator make findings of fact and conclusions of law, (2) the award be supported by law and substantial evidence, and (3) the merits of the award be subject to court review.

Crowell and DCHF entered into an “Agreement to Provide Hospital Emergency Department Services” effective January 1, 1996 through December 31, 1997. The agreement required arbitration of certain disputes in accordance with the provisions of the California Arbitration Act (Act),¹ except that the arbitrator was required to prepare written findings of fact and conclusions of law which “shall be supported by law and substantial evidence.” The parties agreed that the decision of the arbitrator was to be final and binding except that “upon the petition of any party to the arbitration, a court shall have the authority to review the transcript of the arbitration proceedings and the arbitrator’s award and shall have the authority to vacate the arbitrator’s award, in whole or in part, on the basis that the award is not supported by substantial evidence or is based upon an error of law . . . .”²

In March 1998, DCHF notified Crowell to cease operations. Crowell demanded arbitration pursuant to the agreement. Although contending the agreement had expired, DCHF nonetheless expressly agreed in writing “to arbitrate the disputes identified in [Crowell’s letters demanding arbitration] under the terms specified in the expired agreement.”

The arbitration was not immediately initiated. Instead, after an unexplained lapse of more than two years, Crowell filed a complaint for declaratory relief seeking a judicial determination that the arbitration agreement was “valid and enforceable” and that the parties were “obligated, forthwith, to arbitrate in accordance with their agreement.”

DCHF demurred to the complaint on the grounds that the arbitration agreement was “void and unenforceable as a matter of law” and because declaratory relief was “not necessary or proper under all the circumstances pursuant to [section] 1061.” It argued that judicial review of private arbitration awards was limited to cases where statutory grounds existed to vacate or correct the award and that declaratory relief was unnecessary “to enforce an illegal contract.”

The trial court sustained the demurrer without leave to amend, issuing the following minute order: “Defendant contends that the parties agreed to do something that does not exist, conduct a Code of Civil Procedure Section 1280 et seq. arbitration with a guaranteed right of judicial review of the merits, making the arbitration clause at issue unenforceable. The relief requested by Plaintiff is neither ‘necessary nor proper’ under Code of Civil Procedure 1061.”

Judgment of dismissal of the complaint was subsequently entered and a timely notice of appeal from that judgment filed.

Contentions

Appellant contends that binding arbitration is essentially a matter of contract between the parties, and that while sections 1286.2 and 1286.6 specify grounds on which a court may vacate or correct an arbitration award, these are merely default provisions which control when the parties do not agree otherwise. Respondent contends that the arbitration agreement is void and unenforceable as a matter of law because jurisdiction to review arbitration awards is conferred by the Act, which provides the exclusive grounds on which courts are authorized to vacate or correct an award, and the parties cannot broaden review by agreement. Both parties find support for their claims in the Supreme Court’s decision in Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 [10 Cal.Rptr.2d 183, 832 P.2d 899] (Moncharsh).

Discussion

A. The Agreement Provided for Court Review of the Arbitration Award on the Merits.

Private arbitration is a matter of agreement between the parties and is governed by contract law. (Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307 [24 Cal.Rptr.2d 597, 862 P.2d 158].) Arbitration agreements are to be construed like other contracts to give effect to the intention of the parties. (Straus v. North Hollywood Hosp., Inc. (1957) 150 Cal.App.2d 306, 310 [309 P.2d 541].) “In cases involving private arbitration, ‘[t]he scope of arbitration is . . .a matter of agreement between the parties.’ [Citation.]” (Moncharsh, supra, 3 Cal.4th at p. 8.)

Here, there is no dispute that the parties agreed to an arbitration process that required findings of fact and conclusions of law and purported to authorize judicial review on the merits.

B. The Parties Cannot Expand the Trial Court’s Jurisdiction to Review Arbitration Awards by Agreement.

Because the parties clearly agreed to the arbitration provision here, the issue we must decide is a narrow one: Can the parties expand the scope of judicial review of an arbitration award by agreement? We have found no California case deciding this issue, but there is substantial support in the Act and in cases interpreting the Act that they cannot.

Moncharsh

The Supreme Court’s most expansive discussion of the scope of judicial review of arbitration awards is contained in Moncharsh. Although it does not specifically deal with an arbitration provision allowing judicial review of the merits of an award, Moncharsh provides guidance in resolving this issue.

In Moncharsh, Moncharsh, an attorney, was hired by a law firm and signed an employment agreement that provided for the allocation of legal fees in the event he left the firm. The agreement contained an arbitration clause that provided: “Any dispute arising out of this Agreement shall be subject to arbitration under the rules of the American Arbitration Association. No arbitrator shall have any power to alter, amend, modify or change the terms of this agreement. The decision of the arbitrator shall be final and binding on Firm and Employee-attorney.” (Moncharsh, supra, 3 Cal.4th at p. 7, fn. 1.) Moncharsh subsequently left the firm, and a dispute arose as to the allocation of fees he received from former firm clients who left the firm with him. The parties invoked the arbitration provision and submitted the matter to an arbitrator, who ruled in the firm’s favor, stating his conclusions in the award.

Moncharsh petitioned the superior court to vacate the award, and the law firm petitioned to confirm it. The superior court ruled that “ ‘[t]he arbitrator’s findings on questions of both law and fact are conclusive. A court cannot set aside an arbitrator’s error of law no matter how egregious.’ ” (Moncharsh, supra, 3 Cal.4th at p. 8.) While the court acknowledged an exception for error appearing on the face of the award, it found no such error. (Ibid.) The Court of Appeal affirmed.

The Supreme Court recognized that the Act “represents a comprehensive statutory scheme regulating private arbitration in this state. [Citation.]” (Moncharsh, supra, 3 Cal.4th at p. 9.) “ ‘The policy of the law in recognizing arbitration agreements and in providing by statute for their enforcement is to encourage persons who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing.’ [Citation.]” (Ibid.) “Expanding the availability of judicial review of such decisions ‘would tend to deprive the parties of the arbitration agreement of the very advantages the process is intended to produce.’ [Citations.] [¶] Ensuring arbitral finality thus requires that judicial intervention in the arbitration process be minimized.” (Id. at p. 10.)

The court expressed a strong concern that judicial intervention in the arbitral process be minimized to ensure that the benefits of arbitration were not lost. It surveyed nearly 150 years of the legal history of arbitration in California. It observed that “because an arbitrator is not ordinarily constrained to decide according to the rule of law, it is the general rule that, ‘The merits of the controversy between the parties are not subject to judicial review.’ [Citations.] More specifically, courts will not review the validity of the arbitrator’s reasoning. [Citations.] Further, a court may not review the sufficiency of the evidence supporting an arbitrator’s award. [Citations.]” (Moncharsh, supra, 3 Cal.4th at p. 11.)

The court noted that at early common law, in the absence of statutes, courts sitting as courts of equity would set aside arbitration awards for mistakes of fact or law. After adoption of the first statute, in 1851 which did not permit review, the courts “concluded the grounds for vacating an award were exclusively those set forth by statute” with a narrow exception for errors “ ‘spread upon the record’ ” affecting a “ ‘palpable and material point.’ ” (Moncharsh, supra, 3 Cal.4th at pp. 16-18.)

The 1927 amendments to the Act provided several additional grounds for vacating an arbitrator’s award. (Moncharsh, supra, 3 Cal.4th at p. 21.) The cases after the amendments continued to hold that “The merits of the controversy between the parties are not subject to judicial review.” (Pacific Vegetable Oil Corp. v. C. S. T., Ltd. (1946) 29 Cal.2d 228, 233 [174 P.2d 441].) In Crofoot v. Blair Holdings Corp. (1953) 119 Cal.App.2d 156, 181 [260 P.2d 156], the court concluded that after the 1927 amendments to the Act, written agreements to arbitrate were governed exclusively by statute and there was “no field for a common law arbitration to operate.” (Ibid.) After noting differences between common law and statutory arbitration, Crowfoot concluded that “by the adoption of the 1927 statute, the Legislature intended to adopt a comprehensive all-inclusive statutory scheme applicable to all written agreements to arbitrate, and that in such cases the doctrines applicable to a common law arbitration were abolished.” (Id. at p. 182.)

Moncharsh concluded that the statutory bases for vacating and correcting arbitration awards are exclusive. Permitting parties to expand that review by agreement would undermine the benefits of arbitration and the goals of the Act to reduce expense and delay in resolving disputes. The Act clearly “limit[s] judicial review of private arbitration awards to those cases in which there exists a statutory ground to vacate or correct the award.” (Moncharsh, supra, 3 Cal.4th at pp. 27-28.)

The California Arbitration Act

The Act also suggests that limitation on judicial review was intended by the Legislature. Sections 1286.2 and 1286.6 set forth grounds for vacating and correcting arbitration awards. Former section 1286.2 provided: “Subject to Section 1286.4, the court shall vacate the award if the court determines any of the following: [¶] (a) The award was procured by corruption, fraud or other undue means. [¶] (b) There was corruption in any of the arbitrators. [¶] (c) The rights of the party were substantially prejudiced by misconduct of a neutral arbitrator. [¶] (d) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted. [¶] (e) The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefore or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title. [¶] (f) An arbitrator making the award was subject to disqualification upon grounds specified in Section 1281.9 but failed upon receipt of timely demand to disqualify himself or herself as required by that provision.” (Stats. 1997, ch. 445, § 4 [amendments to § 1286.2 were enacted in 2001 which do not bear on our discussion].)

Section 1286.6 provides that the court shall correct an award if it determines: “(a) There was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; [¶] (b) The arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision upon the controversy submitted; or [¶] (c) The award is imperfect in a matter of form, not affecting the merits of the controversy.”

None of the grounds for vacating or correcting an award suggests that a court can review the merits of an award for errors of law or lack of adequate supporting evidence.

There is further evidence the Legislature did not intend that an arbitration award could be reviewed on its merits, even by the parties’ agreement.

Section 1296, under title 9.2, headed “Public Construction Contract Arbitration,” provides: “The parties to a construction contract with a public agency may expressly agree in writing that in any arbitration to resolve a dispute relating to the contract, the arbitrator’s award shall be supported by law and substantial evidence. If the agreement so provides, a court shall, subject to Section 1286.4, vacate the award if after review of the award it determines either that the award is not supported by substantial evidence or that it is based on an error of law.” Here, the Legislature specifically authorized the parties to agree to a review of the merits of a construction contract arbitration. No such review is authorized for other forms of arbitration in the Act. This suggests the legislative intent that parties cannot agree to a review on the merits. If that were not the case section 1296 would be superfluous. (See Leeth v. Workers’ Comp. Appeals Bd. (1986) 186 Cal.App.3d 1550, 1556 [231 Cal.Rptr. 468] [“ ‘a statute should be construed so that effect is given to all its provisions, leaving no part superfluous or inoperative, void or insignificant’ ”].)

Furthermore, with respect to the scope of the arbitration and the procedures applicable to the actual arbitration, the Legislature has explicitly provided that the parties can agree for themselves on the powers of arbitrators (§ 1282), the conduct of arbitration proceedings (§ 1282.2), discovery (§ 1283.1, subd. (b)), and time for making an award (§ 1283.8).

The statutory grounds to vacate a private arbitration award under the Uniform Arbitration Act, which has not been adopted in California, are. similar to those contained in section 1286.2. Most states considering the Uniform Arbitration Act have concluded that the specified grounds for vacating an award are exclusive. (Moncharsh, supra, 3 Cal.4th at p. 26.)

Appellant invites us to consider Lapine Technology Corp. v. Kyocera Corp. (9th Cir. 1997) 130 F.3d 884, a Ninth Circuit Court of Appeals case he argues is directly on point. We decline to do so. Lapine was decided by a sharply divided panel of the Ninth Circuit under the Federal Arbitration Act (FAA), which allows broader judicial review of arbitration awards than the Act. Under the FAA, a federal court may vacate or modify an award if it is “ ‘completely irrational,’ ” exhibits “ ‘manifest disregard of law,’ ” or otherwise fits within other grounds set forth in title 9 of the United States Code. (Lapine, supra, 130 F.3d at p. 888.) Moreover, there is disagreement among the federal circuits as to whether parties can agree to a review of arbitration awards on the merits. (Favoring such review: Lapine, supra, 130 F.3d 884; Gateway Technologies v. MCI Telecommunications Corp. (5th Cir. 1995) 64 F.3d 993, 996, 997; disfavoring such review: UHC Management Co. v. Computer Sciences Corp. (8th Cir. 1998) 148 F.3d 992; Bowen v. Amoco Pipeline Co. (10th Cir. 2001) 254 F.3d 925, 934 [“Although the [Supreme] Court has emphasized parties may ‘specify by contract the rules under which . . . arbitration will be conducted,’ [citation], it has never said parties are free to interfere with the judicial process.”]; see also Chicago Typographical Union v. Chicago Sun-Times (7th Cir. 1991) 935 F.2d 1501, 1505 [“[i]f the parties want, they can contract for an appellate arbitration panel to review the arbitrator’s award. But they cannot contract for judicial review of that award; federal jurisdiction cannot be created by contract”].)

Old Republic Ins. Co. v. St. Paul Fire & Marine Ins. Co. (1996) 45 Cal.App.4th 631 [53 Cal.Rptr.2d 50] is instructive on the question of parties’ ability to expand the jurisdiction of the trial court to review arbitration awards. There, two insurance companies agreed to arbitrate a controversy. The agreement required the arbitrator to enter findings of fact and conclusions of law, review of which was to be governed by the provisions of the Act relating to review of vacating awards. The agreement further provided that the award would be treated as a judgment of the superior court for all purposes and the party against whom the judgment was rendered could seek review of the findings of fact and conclusions of law. In other words, the trial court could review the award on statutory grounds but the appellate court could review its merits.

Citing Moncharsh, the court in Old Republic refused to provide the review to which the parties had agreed. “Since one of the reasons for this rule is that ‘it vindicates the intentions of the parties’ [citation], the issue arises whether a contrary intention of the parties, as expressed in the stipulation herein, overrides the general rule.” (Old Republic Ins. Co. v. St. Paul Fire & Marine Ins. Co., supra, 45 Cal.App.4th at p. 636.) The court commented that “[t]here is . . . nothing which precludes parties to a contractual arbitration from agreeing that the arbitration may be governed by any rules they see fit.” (Id. at p. 637.) But it concluded that “[t]he parties cannot by their stipulation confer jurisdiction upon this court where none exists.” (Id. at p. 639.)

Because the Legislature clearly set forth the trial court’s jurisdiction to review arbitration awards when it specified grounds for vacating or correcting awards in sections 1286.2 and 1286.6, we hold that the parties cannot expand that jurisdiction by contract to include a review on the merits.

C. The Trial Court Acted Within Its Discretion in Denying Appellant Leave to Amend His Complaint.

Appellant argues that the trial court erroneously refused to allow him to amend the complaint to sever the unenforceable provisions of the arbitration agreement. There is no indication in the record that a request to amend was ever made. If this issue is properly before us, we find no error. The provision for judicial review of the merits of the arbitration award was so central to the arbitration agreement that it could not be severed. To do so would be to create an entirely new agreement to which neither party agreed. “ ¹ “Whether a contract is entire or separable depends upon its language and subject matter, and this question is one of construction to be determined by the court according to the intention of the parties.” ’ ” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 122 [99 Cal.Rptr.2d 745, 6 P.3d 669].) The parties to the contract here agreed to arbitration with judicial review of errors of law and fact. Without that provision, a different arbitration process results. “[C]ourts reform contracts only where the parties have made a mistake [citation], and not for the purpose of saving an illegal contract.” (Kolani v. Gluska (1998) 64 Cal.App.4th 402, 407 [75 Cal.Rptr.2d 257].)

Disposition

The judgment is affirmed.

Boren, P. J., concurred.

1 The Act has been adopted as Code of Civil Procedure section 1280 et seq. All subsequent statutory references are to the Code of Civil Procedure unless otherwise indicated.

2 The arbitration provision states: “7.11 . . . Any dispute between Hospital and Contractor concerning the standards of medical practice or qualifications of any Contractor Physician or of Contractor shall be referred to the Medical Staff Executive Committee for review and determination by that Committee, whose decision concerning such dispute shall be final and binding upon both the Hospital and the Contractor. Any dispute between Hospital and a Contractor Physician resulting from any action taken by the Hospital concerning a Contractor Physician’s Medical Staff membership and/or clinical privileges at the Hospital shall be resolved as set forth in the Hospital’s Medical Staff Bylaws. [¶] Hospital and Contractor agree that if any dispute of any other nature whatsoever arises between Hospital and Contractor concerning their respective performance or observance of any of the terms and conditions of this Agreement and such dispute cannot be resolved by mutual agreement, such dispute shall be submitted by Contractor or Hospital to binding arbitration by an arbitrator mutually agreed upon in writing between Contractor and Hospital within forty-five (45) days of the Hospital’s or Contractor’s receipt, as the case may be, from the other of a written demand for such arbitration. [¶] The arbitrations shall proceed in accordance with and be subject to the provision of Title 9 of Part III of the California Code of Civil Procedure (commencing at Section 1280) (the ‘arbitration statute’), or any successor statute, and in accordance with the following additional provision: [¶] (1) the arbitration proceedings shall be transcribed and the arbitrator’s award shall be in writing, shall include a statement of the arbitrator’s findings of fact and conclusions of law with respect to each claim decided, and shall be supported by law and substantial evidence; [¶] (2) the award of the arbitrator may be for an award of money and/or for specific performance and shall be final, binding and enforceable upon both Hospital and Contractor as provided in the arbitration statute, except that upon the petition of any party to the arbitration, a court shall have the authority to review the transcript of the arbitration proceedings and the arbitrator’s award and shall have the authority to vacate the arbitrator’s award, in whole or in part, on the basis that the award is not supported by substantial evidence or is based upon an error of law; [¶] (3) the prevailing party shall be entitled to an award of reasonable costs and attorney fees incurred in addition to any other relief awarded; and [¶] (4) the venue for the arbitration proceedings shall be the City of Downey, California.”

1 Unless otherwise noted, all statutory references are to the Code of Civil Procedure.