Supreme Court of California Justia
Citation 43 Cal. 4th 1179, 184 P.3d 739, 77 Cal. Rptr. 3d 613
Gueyffier v. Ann Summers, Ltd.


Filed 6/9/08

IN THE SUPREME COURT OF CALIFORNIA

CELINE GUEYFFIER,
Plaintiff and Respondent,
S148568
v.
Ct.App. 2/5 B186996
ANN SUMMERS, LTD.,
Los Angeles County
Defendant and Appellant.
Super. Ct. No. BS095483

Does an arbitrator exceed his powers when he applies equitable defenses to
excuse a party from performing a material condition of an agreement that provides
the arbitrator may not modify or change any of the agreement’s material
provisions? We hold he does not.
Celine Gueyffier and Ann Summers, Ltd. (Ann Summers), a British
retailer, had a franchise agreement under which Gueyffier was to open an Ann
Summers store in Los Angeles. The attempted store opening was a failure,
leading to claims by each party that the other had breached their agreement.
As the contract required, the matter was arbitrated, and the arbitrator found for
Gueyffier, concluding Ann Summers had failed to provide Gueyffier with
promised training, guidance and assistance. In his written award the arbitrator
found that for Gueyffier to have given Ann Summers written notice and at least 60
days to cure these breaches, as the contract provided, would have been an idle act
because the breaches were not curable.
1



The superior court confirmed the award, but the Court of Appeal reversed.
The appellate court held the arbitrator had, by excusing Gueyffier’s performance
of the notice-and-cure clause, violated the contract’s express prohibition against an
arbitrator modifying or changing a material term of the contract and had thereby
exceeded his powers within the meaning of Code of Civil Procedure section
1286.2, subdivision (a)(4).1 The court therefore ordered the award vacated under
that statute.
We conclude the Court of Appeal erred in its application of section 1286.2.
Absent an express and unambiguous limitation in the contract or the submission to
arbitration, an arbitrator has the authority to find the facts, interpret the contract,
and award any relief rationally related to his or her factual findings and contractual
interpretation. (Moshonov v. Walsh (2000) 22 Cal.4th 771, 775-776; Advanced
Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 375, 383; Moncharsh v.
Heily & Blase (1992) 3 Cal.4th 1, 28.) The parties here having included no
effective limitation in their contract, as we discuss, the arbitrator did not exceed
his powers by interpreting the contract to allow for equitable excusal of the notice-
and-cure condition or by making a factual finding that notice would have been an
idle act. The award therefore was not subject to vacation under section 1286.2,
subdivision (a)(4).

1
That statute provides that, on petition, the superior court shall vacate a
contractual arbitration award if “[t]he arbitrators exceeded their powers and the
award cannot be corrected without affecting the merits of the decision upon the
controversy submitted.”

All further statutory references are to the Code of Civil Procedure.
2



FACTUAL AND PROCEDURAL BACKGROUND
Ann Summers is a retailer of lingerie and sex toys organized under the laws
of, and headquartered in, the United Kingdom. Gueyffier is a French citizen who
resides in California. In January 2000, the parties executed a written franchise
agreement under which Gueyffier was to own and operate an Ann Summers store
in Los Angeles.
Article 7.2 of the franchise agreement provided: “Franchisor shall not, and
can not be held in breach of this Agreement until (i) Franchisor shall have received
from Franchisee, promptly after Franchisee first learns of the alleged breach, a
written notice specifying in detail the facts constituting the alleged breach; and
(ii) Franchisor shall have failed to remedy the breach within a reasonable period of
time after such notice, which period shall not be less than 60 days . . . . This is a
material term of this Agreement and may not be modified or changed by any
arbitrator in an arbitration proceeding or otherwise.”
Article 20.1 of the agreement provided that, with certain exceptions
inapplicable here, “any controversy or claim between Franchisor and Franchisee
arising out of or relating to this Agreement or any alleged breach hereof” was to
be submitted to binding arbitration before the American Arbitration Association
under that organization’s Commercial Arbitration Rules. The arbitration clause
further provided: “In no event may the material provisions of this Agreement . . .
be modified or changed by the arbitrator at any arbitration hearing.”
In March 2001, Gueyffier opened her Ann Summers store in the Beverly
Center shopping mall. According to the arbitrator’s award, the shop met a “harsh”
reception, with “tomatoes being thrown at the store and insults being yelled at
Gueyffier.” Gueyffier quickly closed the store, though she later reopened in the
same location under the name, “What Lies Beneath.”
3

In May 2001, Ann Summers demanded arbitration and Gueyffier
counterclaimed. The American Arbitration Association’s International Centre for
Dispute Resolution appointed a single arbitrator, who conducted hearings on legal
and factual aspects of the dispute from 2001 through 2004. In February 2005, by
written award, the arbitrator ruled for Gueyffier. Ann Summers, the arbitrator
found, had “failed to meet its obligations to provide operations manuals, training
and assistance, and an advertising program.” The consequence of the breach was
“the disastrous opening of the Beverly Center store.” Gueyffier was awarded
$478,030 as consequential damages for the breach.
With regard to article 7.2’s notice-and-cure provision, the arbitrator found
as follows: “By the time Gueyffier was finally able to open the Beverly Center
store, the effect of the breaches was not curable. Giving written notice to provide
operations manuals, training and assistance, and an advertising program within a
reasonable period of time would have been an idle act. Therefore, the requirement
of giving sixty (60) days written notice (Article 7.2) is moot.”
Gueyffier and Ann Summers filed petitions to, respectively, confirm and
vacate the award. The trial court granted Gueyffier’s petition to confirm the award
and entered judgment in accord with the award.
The Court of Appeal reversed. On the issue of whether the arbitrator had
exceeded his powers, the court determined, first, that the arbitrator, “in finding the
notice requirement was moot, impliedly found plaintiff did not give notice of
alleged breach.”2 The question to be answered was whether “the arbitrator

2
Before reaching this issue, the Court of Appeal discussed at length the
federal and international laws relating to arbitration, determining that in the
circumstances of this case they did not preempt the vacatur provisions of section
1286.2. Neither party questions that holding, and no preemption issue was raised
in the petition for review or answer.
4



exceeded his powers” by “excus[ing] the notice and cure requirement on mootness
grounds.” As both the notice-and-cure requirement and the prohibition on
modifying material terms of the agreement were set out explicitly in the contract,
the court reasoned, “the arbitrator modified and changed the explicit terms of the
notice and cure requirement when he found it had been excused.” Since the
arbitrator had no authority to modify or change the notice-and-cure provision, his
award had to be vacated under section 1286.2.
We granted Gueyffier’s petition for review.
DISCUSSION
On petition of a party to an arbitration (see §§ 1285, 1286.4), the superior
court is to vacate an arbitrator’s award if “[t]he arbitrators exceeded their powers
and the award cannot be corrected without affecting the merits of the decision
upon the controversy submitted.” (§ 1286.2, subd. (a)(4).) As we have explained
in prior cases, however, this provision does not supply the court with a broad
warrant to vacate awards the court disagrees with or believes are erroneous.
When parties contract to resolve their disputes by private arbitration, their
agreement ordinarily contemplates that the arbitrator will have the power to decide
any question of contract interpretation, historical fact or general law necessary, in
the arbitrator’s understanding of the case, to reach a decision. (Moshonov v.
Walsh, supra, 22 Cal.4th at pp. 775-777; Advanced Micro Devices, Inc. v. Intel
Corp., supra, 9 Cal.4th at pp. 372-375; Moncharsh v. Heily & Blase, supra, 3
Cal.4th at p. 28.) Inherent in that power is the possibility the arbitrator may err in
deciding some aspect of the case. Arbitrators do not ordinarily exceed their
contractually created powers simply by reaching an erroneous conclusion on a
contested issue of law or fact, and arbitral awards may not ordinarily be vacated
because of such error, for “ ‘[t]he arbitrator’s resolution of these issues is what the
5

parties bargained for in the arbitration agreement.’ ” (Moshonov v. Walsh, at pp.
775-776, quoting Moncharsh v. Heily & Blase, at p. 28.)
An exception to the general rule assigning broad powers to the arbitrators
arises when the parties have, in either the contract or an agreed submission to
arbitration, explicitly and unambiguously limited those powers. (Advanced Micro
Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at pp. 375-376, 383.) “The powers of
an arbitrator derive from, and are limited by, the agreement to arbitrate.
[Citation.] Awards in excess of those powers may, under sections 1286.2 and
1286.6, be corrected or vacated by the court.” (Id. at p. 375.) The scope of an
arbitrator’s authority is not so broad as to include an award of remedies “expressly
forbidden by the arbitration agreement or submission.” (Id. at p. 381.)
The Court of Appeal held, and Ann Summers contends, that the parties did
effectively limit the arbitrator’s powers: they explicitly agreed in their franchise
agreement that an arbitrator would have no power to “modif[y] or change[]” any
material term of the contract, including the notice-and-cure provision of article
7.2. The arbitrator violated this express prohibition, the lower court held and Ann
Summers argues, by excusing as futile Gueyffier’s failure to give Ann Summers
prompt notice of, and an opportunity to cure, its breaches.
We disagree with Ann Summers and the Court of Appeal. While the
contract limitation on arbitral powers to change the parties’ agreement was
explicit, it did not unambiguously prohibit the arbitrator from excusing
performance of a contractual condition where the arbitrator concluded
performance would have been an idle act. The contract’s no-modification
provision would have been effective to bar an actual change or modification. Had
the arbitrator, for example, decided the parties’ agreement should be reformed by
changing the required 60 days’ notice to 30 days’ notice, he would have exceeded
his powers. But to excuse performance of a contract term in a specific factual
6

setting is not, in ordinary usage at least, to “modif[y] or change[]” the term. The
no-modification clause did not “explicitly and unambiguously” (Advanced Micro
Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 383) bar the arbitrator from
deciding that article 7.2’s notice-and-cure provision was inapplicable on the facts
of the case as he found them.3
The arbitrator was empowered to interpret and apply the parties’ agreement
to the facts he found to exist; included therein was the power to decide when
particular clauses of the contract applied. In concluding the notice-and-cure
provision was inapplicable on the facts as he found them, the arbitrator did no
more than exercise this power. (See O’Malley v. Wilshire Oil Co. (1963) 59
Cal.2d 482, 493 [for arbitrator to interpret labor arbitration agreement as covering
a particular dispute would not be to “amend, modify or otherwise change” the
agreement]; Schoenduve Corporation v. Lucent Technologies, Inc. (9th Cir. 2006)
442 F.3d 727, 734 [arbitrator did not “ ‘limit, expand or otherwise modify’ ” sales
representation agreement by interpreting it as inapplicable to a particular
transaction].) The no-modification clause could perhaps be interpreted as also
precluding equitable excusal of a condition, but the arbitrator evidently did not
adopt such an interpretation. As construction of the contract was for the arbitrator,
not the courts, we cannot say he exceeded his powers, within the meaning of
section 1286.2, subdivision (a)(4), by failing to adopt a particular interpretation of
the agreement.

3
Had the parties wished to mandate that performance of material conditions
never be excused, they could have done so by, for example, expressly agreeing
that the arbitrator would have no power to “modify, change or excuse performance
of” a material term.
7



As Gueyffier points out, California law allows for equitable excusal of
contractual conditions causing forfeiture in certain circumstances, including
circumstances making performance futile. (See O’Morrow v. Borad (1946) 27
Cal.2d 794, 800; Root v. American Equity Specialty Ins. Co. (2005) 130
Cal.App.4th 926, 939; Russell v. Johns Manville Co. (1971) 20 Cal.App.3d 405,
413.) Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 314, on which Ann
Summers relies, is not to the contrary; indeed, we stated there that “nonoccurrence
of a condition precedent may be excused for a number of legally recognized
reasons.” In any event, whether a California trial court properly could have
excused the notice-and-cure condition in the circumstances of this case is not at
issue here. The parties chose to resolve their dispute not in court but by private
arbitration. As already explained, an arbitrator does not ordinarily exceed his or
her powers by reaching an erroneous legal conclusion. (Moshonov v. Walsh,
supra, 22 Cal.4th at pp. 775-776.)
Ann Summers takes issue with the arbitrator’s factual finding that for
Gueyffier to give notice of Ann Summers’s asserted breaches would have been an
idle act. Two of Ann Summers’s alleged breaches (inadequate training and the
provision of an inappropriate operations manual), the company asserts, occurred
substantially before what the arbitrator called the “disastrous” opening of the
Beverly Center store. Had Ann Summers been given notice of the inadequacies at
that time, the company argues, it might effectively have cured the breaches and
forestalled the disaster. But it was for the arbitrator to find the facts, not for the
superior court or this court. The parties contracted to have the arbitrator, not the
courts, hear and decide their dispute. (See Moncharsh v. Heily & Blase, supra, 3
Cal.4th at p. 28.)
8

We do not decide whether the arbitrator’s conclusion that for Gueyffier to
comply with the notice-and-cure condition would have been futile was supported
by the evidence before the arbitrator or by the arbitrator’s other factual findings.
Article 7.2 of the franchise agreement required Gueyffier to give notice “promptly
after Franchisee first learns of the alleged breach.” But as there is no record of the
arbitration hearing testimony, we would have no way of knowing what the
evidence showed as to the date Gueyffier first learned of the breaches. Nor did the
arbitrator make any express finding on this point.4 As the arbitration agreement
did not require the arbitrator to support his award with written factual findings,
however, he clearly did not exceed his powers by making the award without
particular supportive findings.
To support its contention that the arbitrator exceeded his powers by
excusing Gueyffier’s performance of the notice-and-cure condition, Ann Summers
relies on O’Flaherty v. Belgum (2004) 115 Cal.App.4th 1044, California Faculty
Assn. v. Superior Court (1998) 63 Cal.App.4th 935, and DiMarco v. Chaney
(1995) 31 Cal.App.4th 1809. All three decisions are readily distinguishable.
In O’Flaherty v. Belgum, supra, 115 Cal.App.4th at pages 1056-1061, a
dispute arising out of the dissolution of a law partnership, the Court of Appeal
held the arbitrator had exceeded his powers by ordering that the withdrawing
partners forfeit their partnership capital accounts. Because both the partnership

4
The arbitrator found Gueyffier had gone to the United Kingdom for a
training program, which she “justifiably” abandoned as worthless, but he did not
specify when that event occurred. But even if he had, or if the record established
that the evidence before the arbitrator showed Gueyffier learned of some or all of
the breaches at an early date, the arbitrator’s finding that notice of the breaches
would have been an idle act would still not be grounds for vacating the award.
Again, the parties contracted for the arbitrator, not the courts, to find the facts and
decide the legal issues necessary to resolve their dispute.
9



agreement and California case law provided (according to the appellate court
majority) for a return of capital to withdrawing partners, the award contravened
explicit limitations in the agreement’s arbitration clause that the arbitrator would
have no power “ ‘to grant any remedy which is either prohibited by the terms of
this Agreement, or not available in a court of law.’ ” (Id. at p. 1057.)5 The
Gueyffier-Ann Summers agreement, however, did not limit the arbitrator to
granting only that relief or applying only those defenses available in a court of
law. Nor did the award here contravene an express, unambiguous limitation in the
contract itself. As already discussed, the written award does not demonstrate the
arbitrator violated the directive that he not “modify or change” a material term of
the agreement; it shows only that he declined, on equitable grounds, to hold
Gueyffier to the requirement she give prompt written notice of breach.
In California Faculty Assn. v. Superior Court, supra, 63 Cal.App.4th 935,
the contract (a collective bargaining agreement for state university faculty)
prescribed a strictly limited role for arbitrators in reviewing tenure decisions and,
consistent with that agreement, the parties, on a faculty member’s grievance,
submitted to arbitration only the question of whether the university president
“ ‘engage[d] in reasoned judgment’ ” in denying the grievant tenure. (Id. at
p. 942.) The arbitrator, whose award directed tenure be granted, was held to have
exceeded his powers because his opinion “clearly show[ed]” that he did not review
the president’s decision under that deferential standard but instead “substituted his

5
The dissenting justice in O’Flaherty v. Belgum would have held the
arbitrator had the authority to decide that neither California law nor the parties’
agreement required an accounting of partnership capital under all circumstances
and that the award therefore could not be vacated on these grounds. (O’Flaherty
v. Begum
, supra, 115 Cal.App.4th at pp. 1098-1101 (dis. opn. of Grignon, J.).)
We express no opinion on the merits of this question.
10



own judgment for the president’s” on the underlying question of whether the
grievant had met the university’s tenure standards. (Id. at p. 951.) The agreement
here, in contrast, did not strictly limit the scope of arbitration; the arbitrator was
empowered to decide “any controversy or claim” between the parties arising out of
the agreement or its breach. Nor, as already explained, did the award clearly show
the arbitrator, in excusing part of Gueyffier’s performance on equitable grounds,
acted in contravention of an explicit, unambiguous limitation on his agreed
dispute-resolution authority.
Finally, in DiMarco v. Chaney, supra, 31 Cal.App.4th at page 1815, the
appellate court held the arbitrator had exceeded his powers by refusing to make an
award of attorney fees to the litigant he expressly found to be the prevailing party
despite the contract’s provision that “ ‘the prevailing party shall be entitled to
reasonable attorney’s fees and costs.’ ” The court in DiMarco v. Chaney found a
direct, explicit contradiction between the contractual command and the arbitrator’s
refusal to award the prevailing party fees, whereas no such inescapable
contradiction exists in this case. The franchise agreement did not unambiguously
forbid the arbitrator’s application of an equitable defense to Gueyffier’s
performance of the notice-and-cure condition. (See Moshonov v. Walsh, supra, 22
Cal.4th at pp. 778-779; Moore v. First Bank of San Luis Obispo (2000) 22 Cal.4th
782, 787-788.)
We conclude the Court of Appeal erred in holding the arbitrator exceeded
his powers by declining, on equitable grounds, to enforce the notice-and-cure
condition against Gueyffier. It follows the award should not be vacated under
section 1286.2, subdivision (a)(4).
11

DISPOSITION
The judgment of the Court of Appeal is reversed, and the matter is
remanded to that court for further proceedings consistent with our opinion.
WERDEGAR, J.
WE CONCUR:
GEORGE, C. J.
KENNARD, J.
BAXTER, J.
CHIN, J.
MORENO, J.
CORRIGAN, J.

12



See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Gueyffier v. Ann Summers, Ltd.
__________________________________________________________________________________

Unpublished Opinion


Original Appeal
Original Proceeding
Review Granted
XXX 144 Cal.App.4th 166
Rehearing Granted

__________________________________________________________________________________

Opinion No.

S148568
Date Filed: June 9, 2008
__________________________________________________________________________________

Court:

Superior
County: Los Angeles
Judge: George H. Wu

__________________________________________________________________________________

Attorneys for Appellant:

Jenkens & Gilchrist, Bryan Cave, Jed P. White, Glenn J. Plattner and Keith D. Klein for Defendant and
Appellant.

__________________________________________________________________________________

Attorneys for Respondent:

Zelle, Hoffman, Voelbel, Mason & Gette, Squires, Sanders & Dempsey, Douglas J. Rovens, Marc J.
Shrake and Jeffrey S. Renzi for Plaintiff and Respondent.


Counsel who argued in Supreme Court (not intended for publication with opinion):

Keith D. Klein
Bryan Cave
120 Broadway, Suite 300
Santa Monica, CA 90401
(310) 576-2100

Douglas J. Rovens
Squire, Sanders & Dempsey
555 South Flower Street, 31st Floor
Los Angeles, CA 90071-2300
(213) 624-2500


Petition for review after the Court of Appeal reversed a judgment confirming an arbitration award. This case presents the following issue: Was an arbitration provision in a franchise agreement that prohibited the arbitrator from modifying any material terms of the agreement an absolute limitation, or did it permit application of equitable or legal defenses, such as excusing the franchisee's failure to give the franchisor the required notice of a breach of the agreement and an opportunity to cure it, on the ground the breach could not have been cured and giving notice would have been an idle act?

Opinion Information
Date:Citation:Docket Number:Category:Status:
Mon, 06/09/200843 Cal. 4th 1179, 184 P.3d 739, 77 Cal. Rptr. 3d 613S148568Review - Civil Appealclosed; remittitur issued

Parties
1Gueyffier, Celine (Plaintiff and Respondent)
Represented by Marc Jude Shrake
Squire, Sanders & Dempsey, LLP
555 S. Flower Street, 31st Floor
Los Angeles, CA

2Gueyffier, Celine (Plaintiff and Respondent)
Represented by Douglas J. Rovens
Squire, Sanders & Dempsey, LLP
555 S. Flower Street, 31st Floor
Los Angeles, CA

3Ann Summers, Ltd. (Defendant and Appellant)
Represented by Glenn J. Plattner
Bryan Cave, LLP
120 Broadway, Suite 300
Santa Monica, CA

4Ann Summers, Ltd. (Defendant and Appellant)
Represented by Keith Douglas Klein
Bryan Cave, LLP
120 Broadway, Suite 120
Santa Monica, CA


Opinion Authors
OpinionJustice Kathryn M. Werdegar
ConcurChief Justice Ronald M. George, Justice Carlos R. Moreno, Justice Carol A. Corrigan, Justice Joyce L. Kennard, Justice Marvin R. Baxter, Justice Ming W. Chin

Disposition
Jun 9 2008Opinion: Reversed

Dockets
Dec 6 2006Petition for review filed
  Respondent Celine Gueyffier [rule 40.1] Attorney Marc J. Shrake
Dec 7 2006Received Court of Appeal record
 
Dec 20 2006Notice of substitution of counsel
  Appellant Ann Summers Ltd. Attorneys Keith D. Klein & Glenn Plattner
Dec 27 2006Answer to petition for review filed
  Ann Summers Ltd., appellant by Keith D. Klein, counsel crc.40.1(b)
Jan 2 2007Received:
  notice of substitution of attorney. counsel for appellant Ann Summers Ltd. by Keith D. Klein, counsel
Jan 5 2007Request for extension of time filed
  Reply to answer to 1-16-07 Attorney Marc J. Shrake
Jan 10 2007Extension of time granted
  On application of respondent Celine Gueyffier and good cause appearing, it is ordered that the time to serve and file the reply to the answer to the petition for review is extented to and including January 16, 2007.
Jan 17 2007Reply to answer to petition filed
  Celine Gueyffier, respondent by Marc J. Shrake, counsel crc.8.25
Jan 17 2007Petition for review granted (civil case)
  Votes: George, C. J., Baxter, Werdegar, Chin and Corrigan, JJ. Moreno, J., was absent and did not participate.
Jan 17 2007Letter sent to:
  counsels
Jan 26 2007Request for extension of time filed
  to March 23, 2007 to file respondent Celine Gueyffier opening brief on the merits. by Douglas Rovens, counsel
Jan 26 2007Filed:
  Unopposed Application To Extend Time To File Petitioner's Brief On The Merits, Celine Gueyffier, respondent Douglas J. Rovens, counsel
Feb 1 2007Certification of interested entities or persons filed
  Respondent Celine Gueyffier Attorney Marc J. Shrake
Feb 1 2007Certification of interested entities or persons filed
  Glenn J. Plattner, counsel for appellant Ann summers Ltd.
Feb 2 2007Extension of time granted
  to March 23, 2007 to file respondent Celine Gueyffier opening brief on the merits.
Mar 26 2007Opening brief on the merits filed
  Celine Gueyffier, respondent by Douglas Rovens, counsel crc.8.25(b)
Apr 5 2007Request for extension of time filed
  to May 23, 2007 to file appellant (Ann Summers Ltd.,) answer brief on the merits.
Apr 6 2007Extension of time granted
  to May 23, 2007 to file appellants answer brief on the merits.
May 24 2007Answer brief on the merits filed
  Ann Summers, Ltd., defendant and appellant by Keith D. Klein of Bryan Cave LLP, retained. (CRC 8.25)
May 31 2007Request for extension of time filed
  reply brief/merits to 6-29-07 respondent Celine Gueyffier Attorney Marc J. Schrake
Jun 7 2007Extension of time granted
  to June 29, 2007 to file respondent's reply brief on the merits.
Jul 2 2007Reply brief filed (case fully briefed)
  Celine Gueyffier, Respondent / CRC 8.25(b) by Douglas J. Rovens, counsel
Oct 30 2007Change of contact information filed for:
  Celine Gueyffier, respondent Marc J. Shrake, counsel
Mar 4 2008Case ordered on calendar
  to be argued on Wednesday, April 2, 2008, at 9:00 a.m., in Los Angeles
Apr 2 2008Cause argued and submitted
 
Jun 6 2008Notice of forthcoming opinion posted
 
Jun 9 2008Opinion filed: Judgment reversed
  The judgment of the Court of Appeal is reversed, and the matter is remanded to that court for further proceedings consistent with our opinion. Opinion by: Werdegar, J. -----joined by: George, C.J., Kennard, Baxter, Chin, Moreno, and Corrigan, JJ.
Jul 10 2008Remittitur issued (civil case)
 
Jul 18 2008Received:
 
Jul 21 2008Received:
  Receipt for Remitittur from Court of Appeal, Second Appellate District - Division Five

Briefs
Mar 26 2007Opening brief on the merits filed
 
May 24 2007Answer brief on the merits filed
 
Jul 2 2007Reply brief filed (case fully briefed)
 
If you'd like to submit a brief document to be included for this opinion, please submit an e-mail to the SCOCAL website
Jun 30, 2011
Annotated by kelli newman

ISSUE:

Does an arbitrator exceed his powers when he excuses a party from performing a material condition of an agreement that prohibits the arbitrator from modifying or changing any of the agreement’s material provisions?

FACTS:

The parties to this case are Ann Summers, a retailer organized under the laws of, and headquarted in, the United Kingdom, and Gueyffier, a French citizen who resides in California. In January 2000, the parties entered an agreement under which Gueyffier (the Franchisee) was to own and operate an Ann Summers store (the Franchisor) in Los Angeles. Article 7.2 of this agreement, the notice-and-cure provision, explicitly stated that the “Franchisor shall not, and can not be held in breach of this Agreement until (i) Franchisor shall have received from Franchisee, promptly after Franchisee first learns of the alleged breach, a written notice specifying in detail the facts constituting the alleged breach; and (ii) Franchisor shall have failed to remedy the breach within a reasonable period of time after such notice, which period shall not be less than 60 days.”

Additionally, the agreement between Ann Summers and Gueyffier included an arbitration clause, article 20.1 of the agreement, which stated that “any controversy or claim between Franchisor and Franchisee arising out of or relating to this Agreement or any alleged breach hereof” was to be submitted to binding arbitration. The arbitration clause further provided that the material provisions of the agreement may not “be modified or changed by the arbitrator at any arbitration hearing.”

The agreed upon store opening, in March 2001, was a failure, which led to claims by each party that the other had breached their agreement. In May 2001, Ann Summers demanded arbitration, per their contract, and Gueyffier counterclaimed. After conducting hearings from 2001 through 2004 on legal and factual aspects of both parties’ claims, the arbitrator found for Gueyffier in February 2005. In the written award, the arbitrator concluded that Ann Summers had “failed to meet its obligations” and found that for Gueyffier to have given Ann Summers written notice and at least 60 days to cure these breaches, as the contract provided, would have been an idle act because the breaches were not curable.

PROCEDURAL HISTORY:

Ann Summers felt that the arbitrator exceeded his powers and brought the case before the superior court. The superior court confirmed the award for Gueyffier, finding that the arbitrator had not exceeded his powers. However, when the case was brought before the Court of Appeal, that body reversed the lower court. In this reversal, the Court of Appeal held that by excusing Gueyffier’s performance of the notice-and-cure provision, the arbitrator had violated the agreement’s express prohibition against an arbitrator modifying or changing a material term of the contract. Thus, the Court of Appeal held, the arbitrator had exceeded his powers and ordered the award vacated. This case was brought before the Supreme Court of California, which reversed the Court of Appeal’s order that the arbitrator’s award be vacated.

HOLDING:

The Supreme Court of California held that “absent an express and unambiguous limitation in the contract or the submission to arbitration, an arbitrator has the authority to find the facts, interpret the contract, and award any relief rationally related to his or her factual findings and contractual interpretation.” (See O’Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482, 493; Schoenduve Corporation v. Lucent Technologies, Inc. (9th Cir. 2006) 442 F.3d 727, 734.) Accordingly, the Court concluded that the arbitrator did no more than exercise his power when he excused Gueyffier from the requirements of the notice-and-cure provision, finding it inapplicable on the facts as he found them. Thus, the Supreme Court of California upheld the arbitrator’s award.

ANALYSIS:

Code of Civil Procedure Section 1286.2(a)(4) provides that, on petition, the superior court shall vacate a contractual arbitration award if “the arbitrators exceeded their powers and the

award cannot be corrected without affecting the merits of the decision upon the controversy submitted.” Thus, the outcome of this case turned on whether or not it was found that the arbitrator had indeed exceeded his power by excusing one party’s performance of a material condition to the agreement.

Drawing on precedent, the Supreme Court of California found that when parties contract to resolve their disputes by private arbitration, their arbitration agreement usually gives the arbitrator the power to decide “any question of contract interpretation, historical fact or general law necessary to reach a decision.” (See Moshonov v. Walsh, 22 Cal.4th 771, 775-777; Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362, 372-375; Moncharsh v. Heily & Blase, 3 Cal.4th 1, 28.) The Court interpreted this case’s crucial provision -- article 20.1 of the agreement, the arbitration clause -- as limiting only the arbitrator’s power to modify or change the agreement. Importantly, the Court did not read into this limitation the further limitation the Court of Appeal read that would prohibit the arbitrator from excusing performance of a contractual condition where the arbitrator found that such performance would have been idle.

Explaining their reasoning, the Supreme Court of California opined that “to excuse performance of a contract term in a specific factual setting is not, in ordinary usage at least, to ‘modif[y] or change[]’ the term. The no-modification clause did not ‘explicitly and unambiguously’ (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 383) bar the arbitrator from deciding that article 7.2’s notice-and-cure provision was inapplicable on the facts of the case as he found them.” Advanced Micro Devices’ requirement that an agreement’s language be “explicit[] and unambiguous[]” to be enforceable (and thus able to vacate an arbitrator’s finding) was critical to this Court’s upholding of the arbitrator’s award.

Because the parties agreed to arbitration, the Court felt it had to give the arbitrator as much power as he lawfully deserved in deciding disputes. Thus, while the Court recognized in its opinion that the agreement’s arbitration clause could have been interpreted by some to preclude the equitable excusal of a material condition, it is within the arbitrator’s powers to interpret the contract. As “construction of the contract was for the arbitrator, not the courts,” according to the opinion, the Court could not hold that the arbitrator exceeded his powers by failing to adopt one of multiple interpretations of an agreement. Moreover, even if the Court had found that the arbitrator erred in excusing Gueyffier from performance of the notice-and-cure provision, it maintained that “an arbitrator does not ordinarily exceed his or her powers by reaching an erroneous legal conclusion.” (Moshonov v. Walsh, supra, 22 Cal.4th at pp. 775-776.)

Emphasizing that they would only hold the arbitrator responsible for interpreting the contract as the parties had written it, the Court stated further that had both parties wished to mandate that performance of material conditions never be excused, they could have done so in the original agreement by, for example, “expressly agreeing that the arbitrator would have no power to ‘modify, change or excuse performance of’ a material term.” Ultimately, despite the Court’s obvious concern about how the agreement between Gueyffier and Ann Summers could have been interpreted, they ultimately found -- crucially for the case -- that when parties contract to have an arbitrator, and not the courts, hear and decide their disputes, it is to the arbitrator to find the facts, not the courts to which one disgruntled party may appeal after the arbitrator has reached his decision.

KEY RELATED CASES:
Moshonov v. Walsh (2000) 22 Cal.4th 771
Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362
Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1
O’Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482
Schoenduve Corporation v. Lucent Technologies, Inc. (9th Cir. 2006) 442 F.3d 727
Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307

TAGS:
arbitration, equitable defense, franchise agreement, contractual interpretation, notice-and-cure, arbitral powers, excuse performance, non-occurrence of condition precedent, material term