JUDICIAL REVIEW OF ERRORS OF LAW

Samuelian v. Life Generations Healthcare LLC, 104 Cal. App. 5th 331,

The plaintiffs transferred a portion of their interest in Life Generations (Life) to a third party. The contract contained a provision that the plaintiffs would not compete with Life following the sale. The plaintiffs commenced an arbitration to declare the clause invalid because it was associated with the sale of a business interest. The arbitrator ruled in favor of the plaintiffs. The defendants appealed, arguing that such rule did not apply to the sale of a partial business interest.

At the outset, the court ruled that it had the power to review the arbitrator’s award because the arbitration agreement permitted a court to review an award for errors of law. To take themselves out of the general rule that the merits of the award are not subject to judicial review, the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts. Here, the transfer agreement expressly allowed for review of the arbitrator's legal rulings: “The Arbitrator shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.”

To obtain reversal, the defendants had to show they were prejudiced by any legal error. Prejudice means there is a reasonable probability defendants would have received a more favorable result in the absence of the error. A “probability” in this context does not mean more likely than not, but merely a reasonable chance, more than an abstract possibility. The court found that the arbitrator committed a legal error and reversed.