Arbitration is often chosen by parties as a faster and cheaper alternative to court. One of the reasons for this is the limited review of the award. While a trial court judgment can be overturned based on erroneous fact finding, errors of law, or procedural issues, an arbitration award can only be overturned on limited grounds stated in the Federal Arbitration Act (FAA) or applicable state arbitration acts. These grounds include matters such as corruption, fraud, partiality, and misconduct or incompetence. Erroneous fact finding, errors of law, and improper treatment of evidence are not among them. Thus, the focus is on whether the decision was fairly made.
Parties who attack an arbitration award, and courts deciding whether to vacate an award, must adhere to the limited grounds for overturning an award. However, a recent case from the California Court of Appeals, FCM Investments, LLC v. Grove Pham, LLC, No. D080801 (Cal. App. Oct. 17, 2023), is of interest as it reversed and vacated an award based on bias, a ground for vacating an award under California’s arbitration statute and the FAA.
The case involved a dispute between FCM and Grove Pham over the sale of a nursing home for over $7 million. The arbitrator found in FCM’s favor, based on a credibility determination, that it was justified in terminating its escrow for the deal and that it did not breach its contract with Pham Grove. The arbitrator’s award was based on a credibility determination, and the arbitrator’s decision created a reasonable impression of possible bias requiring that the arbitration award be vacated.
The California Court of Appeals reversed and vacated the award on the basis of bias, even though it was not raised below. The Court found that the arbitration panel had acted in a racist fashion by hanging their concerns on the use of an interpreter. The Court found that the claim of bias was one of law based on undisputed facts and that it implicated “weighty concerns” involving the due administration of justice. It also noted that sensitivity to language differences in the multilingual state of California was crucial and that the arbitrator relied only on Mrs. Pham’s use of a translator as a ploy to explain why Mrs. Pham lacked credibility. The Court concluded that “the four corners of the award raise an impression of possible arbitrator bias.”
The case raises important lessons for arbitrators and counsel. If an arbitrator is going to provide a reasoned decision, it should be suitably comprehensive and well-reasoned. The main problem in this case was that the decision seemed to have turned on a credibility finding bolstered only by the example that Mrs. Pham asked for a translator even though she didn’t need one. Given the appellate court’s observation that, in important legal matters, even folks fairly fluent in English may prefer to express themselves in their native language, the main example of lack of credibility given by the arbitrator was not very convincing.
The Court spent a great deal of time explicating the importance of sensitivity to language differences in the multilingual state of California. Then it noted that, in explaining why Mrs. Pham lacked credibility, the arbitrator relied only on Mrs. Pham’s use of a translator as a ploy. While noting there were disputed facts about Mrs. Pham’s fluency in English and that it did not have a transcript with all the facts that were or may have been raised on the matter, it concluded “the four corners of the award raise an impression of possible arbitrator bias.”
But what’s next?
It is puzzling that the Court merely directed the trial court to vacate the award. The Court thought another arbitration hearing would be held. To provide guidance “in further proceedings between the parties” it found that the individual Phams had agreed to arbitrate the dispute. But it is unclear whether the matter will return to the same arbitrator, or how things will now proceed.
A Puzzle
This case presents an arbitration and legal puzzle. Recall that arbitration awards are not to be vacated based on errors of fact finding or law. Most court have said something to the effect that the “so long as the arbitrator is even arguably construing or applying the contract and acting in the scope of his authority,” the award must be confirmed. Gas Aggregation Svcs., Inc. v. Howard Avista Energy, LLC, 319 F.3d 1060, 1064 (8th Cir. 2003).
And courts have often observed that credibility determinations are for the finder of fact. After all, the finder of fact – be it jury, judge, or arbitrator – has had the chance to observe the witness first-hand and so is in the best position to make that determination.
Sometimes courts will simply wade into a matter and bend the law a little when they perceive an arbitration award is simply unjust. Perhaps this case is an example of that. Recall that the only real analysis done by the court was that Mrs. Pham was essentially faking her need for a translator. That didn’t make sense to the appellate judges, who were convinced that this was a bias against immigrants at work. They even disregarded the general rule that issues raised for the first time on appeal wouldn’t be considered to arrive at their result. So, although it would appear the arbitrator based her decision on certain findings of fact – primarily that Mrs. Pham was faking the need for a translator – it waded into the dispute.
Another part of the puzzle is what will now happen to the case. Will it return to the same arbitrator? That hardly seems fair if the judges were convinced the arbitrator exhibited potential bias. But that is not addressed.
Lessons for arbitrators and counsel
There is a lesson here for arbitrators. If you are going to provide a reasoned decision, make it suitably comprehensive and well-reasoned. The main problem here is the decision seems to have turned on a credibility finding bolstered only by the example that Mrs. Pham asked for a translator even though she didn’t need one. Given the appellate court’s observation that, in important legal matters, even folks fairly fluent in English may prefer to express themselves in their native language, the main example of lack of credibility given by the arbitrator was not very convincing.
Perhaps the arbitrator found other grounds for her conclusion that “the lack of credibility issues are so rampant and obvious.” But without identifying them, her decision did not hold up.
There is also a lesson here for counsel. Without a transcript, you may be unarmed when hoping to make points on appeal. Here, there was no transcript. So, while there may have been additional facts from which the arbitrator could have concluded a witness lacked credibility, there was no way to present them. In many cases, the cost of a transcript may not be justified. But some cases have enough at stake to justify that expense for situations like those presented by the FMC case.
