Parties choose arbitration because it promises to be faster and cheaper than court. One of the reasons it is faster and cheaper is the limited review of the award. A trial court judgment can be overturned based on erroneous fact finding, errors of law, or procedural issues, including improperly allowing or disallowing evidence. An arbitration award can be overturned only for the limited grounds stated in the Federal Arbitration Act (FAA) or applicable state arbitration acts. Erroneous fact finding, errors of law, and improper treatment of evidence is not among them. Instead, the focus is on whether the decision was fairly made. Thus, the grounds to vacate an arbitration award include matters such as corruption, fraud, partiality, and misconduct or incompetence.
Faster and cheaper with limited review
Thus, the price of obtaining the lower cost and efficiency of arbitration includes giving up the right to have a court review factual findings and legal determinations. The parties can provide for an arbitral appeal in their arbitration agreement, and some state courts allow the parties to agree to have awards reviewed for factual or legal errors. But if the parties have a normal arbitration agreement, the review is limited to the narrow grounds listed in the FAA or state arbitration acts.
So, parties attacking an arbitration award, and courts deciding whether to vacate an award, must stick to the limited grounds for overturning an award.
FCM v. Grove Pham
Which makes a recent case from the California Court of Appeals of interest. The case is FCM Investments, LLC v. Grove Pham, LLC, No. D080801 (Cal. App. Oct. 17, 2023).
The parties' dispute arose when a deal for FMC to purchase a nursing home from Grove Pham for over $7 million fell through. After a two-day arbitration hearing, the arbitrator found in FCM's favor, finding it was justified in terminating its escrow for the deal and that it did not breach its contract with Pham Grove. Other related parties, including Phuong Pham, were also included in the arbitration.
The case turns on credibility
The arbitrator's award was based on a credibility determination. The arbitrator said that case was unique "both in 12 years of doing arbitration and 24½ years on the Los Angeles County Superior Court, in that the lack of credibility issues are so rampant and obvious." She highlighted as a key example the use of an interpreter by Phuong Pham, one of the principals of Grove Pham, as follows:
Among the items that stand out, is Mrs. Pham's use of an interpreter. While the Arbitrator understands that people for whom English is a second language frequently prefer to testify in their native language in important legal matters, Mrs. Pham's use of an interpreter appeared to the Arbitrator to be a ploy to appear less sophisticated than she really is. She has been in the country for decades, has engaged in sophisticated business transactions and has herself functioned as an interpreter.
"That being said," the arbitrator went on, "the one part of Mrs. Pham's testimony that appeared truthful is that she did not want to sell the business and property to FCM because she believed she could sell it for more money than her agreement with FCM contemplated."
The arbitrator's written decision included very little additional discussion or analysis.
FCM petitioned the trial court to confirm the award, and the Pham parties moved to vacate it. The arbitrator's alleged bias was not raised by the Phams. The trial court confirmed the award.
The appeal turns on bias
The Phams appealed. The California Court of Appeals reversed and vacated the award, focusing on one ground: bias. It said, "In making an adverse credibility finding against Phuong based on her use of an interpreter, the arbitrator's decision creates a reasonable impression of possible bias requiring that the arbitration award be vacated." Bias is deemed to be misconduct and therefore a ground for vacating an arbitration award under California's arbitration statute. It is also a ground for vacating an award under the FAA.
Apparently, the court was so convinced there was an appearance of arbitral bias that it reversed on that basis even though it was not raised below. It 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, if Mrs. Pham had served as an interpreter, she probably did so only in the way that many immigrants do to help recently arrived family and friends.
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.
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.
I have observed in another article that 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.
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