PACIFIC GAS AND ELECTRIC COMPANY, Petitioner, v. SUPERIOR COURT of Sutter County, Respondent. ANACAPA OIL CORPORATION et al., Real Parties in Interest.
This petition for a writ of mandate seeks to overturn a superior court order which vacates a binding arbitration award. The award resolved disputes over the construction of contracts for the purchase of natural gas by Pacific Gas and Electric Company (PG & E) from real parties in interest Anacapa Oil Corporation (Anacapa). The arbitration award construed the contracts to permit repricing of the gas at its market price which is below ceiling prices listed in provisions of federal law.
The superior court vacated the award because “[t]he arbitrators exceeded their powers” in the construction of the contracts. (Code Civ.Proc., § 1286.2, subd. (d).) 1 It concluded that the contracts read in the light of federal law provide that the federal ceiling price for gas is also the contract floor price. It justified a review of the legal merits of the award on two grounds: (1) the issues submitted to arbitration were “qualified”, i.e., were to be resolved pursuant to the law in the manner of a court; (2) legal errors in the construction of the contracts appear “on the face of” the award.
We issued an alternative writ to consider the perplexing problem of the scope of judicial review of an arbitration award where it is claimed the arbitrators exceeded their powers.2
We will conclude that the scope of judicial review is determined by the finality which the arbitration agreement and law confer upon the arbitration award. Under the modern view of arbitration law, in the absence of an agreement specifying a broadened scope of review courts may not review an arbitration award for mere error of law or fact appearing on the face of the award, regardless whether the issues submitted are qualified.
In this case the parties' contract gives the arbitrators the power to enter a binding award on any dispute arising under any provision of the contract. That precludes the vacation of the award for mere error of law or fact.
However, finality does not immunize an arbitration award from review for error so egregious that it produces a result completely outside the expectations of the parties to an arbitration agreement, as where the award arbitrarily remakes a contract. As appears, the award in this case does not remake the contract and thus satisfies this limited standard of review.
We will grant the petition.
FACTS AND PROCEDURAL BACKGROUND
A. The Gas Purchase Agreements
In 1971 and 1973 the parties entered into two contracts for the purchase by PG & E of gas produced from wells owned by Anacapa. Each contract uses virtually the same terms. Each contract provides for a set price for the gas unless modified in accordance with subparagraph 7(b). Subparagraph 7(b) of each contract provides in identical terms for the redetermination of the price after January 1, 1975, upon request of either party. If the parties fail to agree on a new price “the price to be paid for such gas shall be the reasonable market value of such gas, which ․ shall be established by arbitration in accordance with Section 6 of the attached General Conditions.”
Section 6 of each contract provides that “[t]he decision of a majority of the arbitrators, after a hearing ․ shall be binding upon the parties hereto.” It also provides that “[i]n addition to those disputes which are required to be arbitrated under the provisions hereof [i.e., market price], any other dispute ․ arising between Buyer and Seller under any provision hereof which cannot be settled by the parties within a reasonable time may be submitted by either party to arbitration” by a panel of three arbitrators. Further, “[e]xcept as otherwise specifically provided in this Section any arbitration shall be subject to the provisions of Title 9 of Part 3 of the Code of Civil Procedure”, which provides for a statement of decision in ordinary civil cases.
On November 8, 1978, the Natural Gas Policy Act of 1978 (“NGPA”) went into effect. (15 U.S.C. §§ 3313 ff.) It divided natural gas into various categories and provided for respective “ceiling prices”, the maximum lawful price at which the gas could be sold. By letter agreements dated June 30, 1980, the parties amended their 1971 and 1973 contracts to take into consideration the ceiling prices mandated by the NGPA. Each letter agreement provides that “Effective January 1, 1982, the price ․ shall be revised each month to the price equal to the highest applicable price ․ under (i) Section 102 of the NGPA․” Each letter agreement further provides that “[a]t such time as ceiling prices under the Natural Gas Policy Act of 1978 ․ cease to apply to all or any part of [Anacapa's] gas, then the provisions of subparagraph 7(b) shall apply to the redetermination of the price to be paid for gas delivered․” Pursuant to these provisions each subparagraph 7(b) of the 1971 and 1972 contracts was amended to provide that “[e]ffective upon deregulation of price controls under any Federal or State legislation, and not more than once in any subsequent three-year period”, either party could invoke the repricing provisions of section 6 and secure a market price determination by binding arbitration. Finally, each letter agreement provided that “[a]t no time shall the price paid for gas delivered under said agreement exceed the maximum lawful price permitted by legislation enacted by the United States or the State of California.”
On January 1, 1985, some gas subject to the NGPA was deregulated. On that date PG & E invoked subparagraph 7(b) and sought an agreement with Anacapa to value the gas produced from all of the Anacapa wells at its market price. Anacapa refused, contending that under a proper construction of the NGPA none of the gas was deregulated and that the ceiling prices continued to apply. That gave rise to the proceedings resulting in this petition.
B. The Submission To Arbitration
On March 25, 1985, Anacapa filed a complaint in the superior court for the County of Sutter seeking a declaration that, under sections 102 and 105 of the NGPA, Anacapa is entitled to be paid the ceiling price for gas produced from its wells and damages in the amount of the underpayments found to be due. Anacapa also sought a declaration that PG & E had an implied obligation under the contracts to avoid causing physical harm to Anacapa's wells or harm to Anacapa's interest in obtaining gas from reservoirs tapped by neighboring producers by shutting in or failing to take enough gas from its wells.
PG & E responded with a petition to compel arbitration of the “controversies that are the subject of the lawsuit ․ in the manner provided by paragraph 7(b) of the 1971 Agreement and of the 1973 Agreement and paragraph 6 of the General Conditions.” Anacapa objected to arbitration principally upon the ground that submission of any controversy other than pricing to arbitration is subject to the consent of both parties. With respect to the issue of shut in, Anacapa claimed the contracts should be read as adhesion contracts. The court granted the petition and ordered arbitration 3 on the ground that doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration.
Anacapa proceeded to arbitration and proposed an agenda containing a “Statement of Issues” for resolution. These issues were incorporated in the arbitrators' prehearing order as the “basic issues” of the proceeding. They are:
“A. Whether, as contended by Anacapa, the June 30, 1980 Amendments to the 1971 and 1973 Agreements obligate PGandE to pay Anacapa ceiling price for gas purchased after December 31, 1984. ‘Ceiling price,’ of course, means ceiling price under the Natural Gas Policy Act of 1978. If so, how much money does PGandE owe Anacapa? [¶] B. Whether, as contended by PGandE, during any period of time prior to January 1, 1985, gas from any of Anacapa's wells was misclassified for Natural Gas Policy Act purposes so that PGandE paid an amount in excess of the maximum lawful ceiling price? If so, to what extent is PGandE entitled to a refund for any such excess payment? [¶] C. To what extent does PGandE have an obligation, as contended by Anacapa, to avoid causing drainage of gas away from Anacapa's wells and into wells operated by Anacapa's competitors? [¶] D. Assuming for sake of argument that PGandE is not obligated to pay ceiling price for the gas purchased from Anacapa after December 31, 1984, then the contracts call for a reversion to “reasonable market value.” If reasonable market value rather than ceiling price is the standard after December 31, 1984, what is the reasonable market value of the gas sold by Anacapa to PGandE?”
In addition the parties agreed to a provision in the prehearing order that “The award will be in the form of a statement of decision, as provided by C.C.P. § 632, issued by the arbitrators.”
C. The Arbitrator's Award
A bifurcated hearing was held on issues A. B. and C. and a written award issued by a majority vote of two of the three arbitrators. In general, the majority arbitrators upheld PG & E's position on all three issues. As to issue A. they concluded that the 1980 amendments to the contracts did not obligate PG & E to continue to pay ceiling prices. They reasoned that under subparagraph 7(b) of the contracts either party may request a redetermination of price effective upon deregulation of price controls of “any” of the gas subject to the agreements and deregulation occurred on January 1, 1985, pursuant to the criteria of 15 United States Code, section 3313. The arbitrators concluded that the “evidence established that four wells owned by the Anacapa 1971 program [met the section 3313 criteria]. Thus, ceiling prices ceased to apply to part of [Anacapa's] gas ․ effective January 1, 1985․”
As to issue B. the arbitrators concluded that PG & E had overpaid for certain gas obtained from Anacapa prior to January 1, 1985. Lastly, with respect to issue C. they held that PG & E owed no obligation to avoid damage to Anacapa's wells. The dissenting arbitrator disagreed on all three issues.
D. Vacation of the Award by the Superior Court
On motion by Anacapa, the superior court vacated the award for errors of law. As related, it reasoned that it had the authority to review the construction given the contracts by the arbitrators on the grounds the agreement submitting the issues to arbitration was “qualified” and that legal errors in the construction of the contracts were apparent on the face of the written award.
The superior court agreed with the arbitrators that the 1980 amendments obligated PG & E to pay NGPA “ceiling prices” until they “ceased to apply” under the NGPA by operation of its provisions for the deregulation of gas prices. However, it concluded that gas from the disputed wells had not been deregulated by the NGPA. For that reason PG & E could not invoke the repricing provisions of the amendments to subparagraph 7(b).
With respect to issue B. the court found that the arbitrators exceeded their legal powers by misclassifying four wells. The classification, it reasoned, turns on whether the lands on which the wells were drilled were committed to PG & E prior to the effective date of the NGPA. Whether that is the case is dependent upon a factual claim which was resolved by the court as a matter of law on grounds the arbitrators had incorrectly employed the parol evidence rule to bar Anacapa's evidence that the location of the lands by a line on a map in evidence was superseded by subsequent oral modifications.
Lastly, with respect to issue C. the court found as a matter of public policy that landowners are entitled to protection against “fraudulent” drainage.
The arbitrators were given the task of construing the contracts and agreements between the parties. The superior court vacated their award on the ground they “exceeded their powers” by misconstruing the pricing and other provisions of the contracts. In so ruling the court assumed the authority to determine whether the arbitrators ruled rightly or wrongly on the law applicable to the contracts. Implicit in the decision is the view that the “powers” delegated the arbitrators, if expressed in a written award, are measured by the legal task given them to determine whether the contracts, read in the light of the pricing rules of the NGPA, authorized the pricing of gas produced by Anacapa at market prices. Under this view, if the arbitrators misread the contracts their powers were “exceeded” and the court could properly vacate the award.
This view of the arbitrators' “powers” confuses three separate questions of authority. The first has to do with the arbitrability of the questions tendered the arbitrators. The second has to do with the scope of the questions submitted to arbitration. These are matters of contract. The third concerns the authority of courts to review whether the arbitrators performed the task given them rightly or wrongly. This is a question of the finality of an award. It also may be the subject of contract.
“The scope of arbitration is ․ a matter of agreement between the parties․” (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323, 197 Cal.Rptr. 581, 673 P.2d 251; see also Carpenters 46 Northern Cal. Counties Conf. Bd. v. Zweigle (1982) 130 Cal.App.3d 337, 345–347, 181 Cal.Rptr. 805 [“the issue of arbitrability itself may be arbitrated if the contract so provides․”].) It is also “the rule that ‘The powers of an arbitrator are limited and circumscribed by the agreement or stipulation of submission.’ ” (O'Malley v. Petroleum Maintenance Co. (1957) 48 Cal.2d 107, 110, 308 P.2d 9, citations omitted; see also Christenson v. Cudahy Pack. Co. (1926) 198 Cal. 685, 692, 247 P. 207.) For these reasons, in an appropriate case judicial review may be had whether the matters resolved in an arbitration award are arbitrable and within the scope of, i.e., addressed to, the questions submitted to arbitration.
We later discuss the question of arbitrability. First we consider the review of an award which is within scope of the arbitration and submission agreements. That gives rise to the central issue of this proceeding, the proper scope of judicial review of a binding arbitration award. Because the governing statutes have left that question largely to the courts, its resolution must follow principles discerned in the case law. The fulfillment of that task is obscured in the cases by the repetition of generalities which do little to explain the ground of decision. One of these generalities is that the scope of review is determined by the happenstance that the arbitration award is in writing and sets forth the arbitrators' reasoning. To show the emptiness of this and similar generalizations requires that we examine the evolving law of arbitration from its inception in the common law.
That inquiry will reveal that the law now presupposes a greater scope of authority in arbitrators than was the case at the common law. Under the modern doctrine, in the absence of a contract provision specifying a broadened scope of review the courts may not review an award for mere errors of law or fact. That principle, however, does not preclude, where the construction of a contract is at issue, judicial review limited to the question whether the arbitrators arbitrarily remade the contract. Egregious error of that kind exceeds the power of the arbitrators as a matter of law.
PG & E contends that the award was conclusive on matters of fact and law and that the superior court had no authority to vacate the award for errors of law. Anacapa disagrees. Its claims for judicial reviewability are severalfold.
It first argues that since the contracts affect interstate commerce the scope of review is determined by the Federal Arbitration Act. This claim can be summarily dispatched. Although the contracts affect interstate commerce and the construction of federal statutes is an aspect of the task of interpreting the contracts, the federal law of arbitration does not govern. The contracts provide that “any arbitration shall be subject to the arbitration provisions of the Code of Civil Procedure of the State of California.” For this reason, under the federal choice of law rule applicable to arbitration state rules apply. (See Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior University (1989) 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488.)
Anacapa's remaining claims for unrestricted review cannot be summarily resolved. Anacapa claims that the fact that the submission agreement sets forth specific questions regarding the parties' legal “obligations” under the contracts means that the arbitration was “qualified”, i.e., limited to a correct legal determination of the obligations, and that such an award may be reviewed for errors of law. There are statements in the case law which suggest that if the submission agreement is qualified the award is fully subject to judicial review. As we will show, this view is incorrect for it confuses the task given the arbitrators with the scope of judicial review of whether the task has been properly performed.
Anacapa also claims that unrestricted review is warranted because the errors of which it complains are revealed “on the face of the award” in the reasoning of the arbitrators in the written arbitration award. There are also statements in the case law which support this claim. Again, for reasons we will advance, these cases are not persuasive and we consider the doctrine to be incorrect.4
Nor does the fact that the arbitrators are constrained to decide under the law and not their personal notions of equity (i.e., that the submission was qualified) affect the scope of judicial review. Regardless whether the submission agreement directs that the award be founded upon “dry law” or more broadly upon “equitable considerations,” the arbitrators do not exceed their powers merely by mistaking the law. Where the arbitrator's award is made binding by the contract or the backdrop law and the legal issue concerns its construction, only a mistake of law egregious enough to amount to an arbitrary remaking of that contract is judicially cognizable. As we will show, none of Anacapa's claims rises to this level and the trial court erred in vacating the award for perceived errors of the arbitrators.
Anacapa next contends that regardless of the scope of review of an arbitration award under an ordinary contract, a broader scope of review should be available where the contract is one of adhesion. It suggests we should afford it another opportunity to show adhesion. As we will show, a second bite at this apple is unwarranted. Assuming that Anacapa could have established adhesion, we do not find that a persuasive basis for varying the scope of review. If, despite adhesion, the arbitration provision of a contract would be enforced, the legal effect given an arbitration award, including that attending its finality, should obtain. The party claiming adhesion must succeed or fail in avoiding the arbitration provision in its entirety.
That leaves Anacapa's residual claim that the award cannot be enforced because it conflicts with public policy deriving from the federal Natural Gas Regulation Act. That claim also has no merit since no action compelled by the award requires that federal law be violated.
The fact that is central to the resolution of this case is that the agreements do not address the scope of judicial review of the task submitted to the arbitrators. They provide for a binding determination by a majority of the arbitrators of any question of market price and “any other dispute ․ arising ․ under any provision [of the contracts] ․ submitted by either party to arbitration.” This means that a finality is given the arbitration award which is not accorded a judgment of a trial court and that, accordingly, the scope of judicial review is not the same. It is for this reason that the courts may not review a binding award for mere error of law or fact.
For other reasons, which we will consider in some detail, a binding arbitration provision does not wholly bar judicial review. Rather, under the better reasoned case law, where the task given the arbitrators involves the construction of a contract a limited judicial review may be had of egregious errors amounting to the arbitrary remaking of the parties' agreements. (Cf. Posner v. Grunwald–Marx, Inc. (1961) 56 Cal.2d 169, 184, 14 Cal.Rptr. 297, 363 P.2d 313.)
The road by which we reach these conclusions begins with the common law and passes through the statutory system for the review of arbitration awards and the evolving case law which it sanctions.
A Brief History of the California Arbitration Law
The California arbitration statute does not furnish a self-evident standard of judicial review in providing that an award may be vacated if “the arbitrators have exceeded their powers” in making an award. Although this language stems from the earliest of the California arbitration statutes (Stats. 1851, ch. 5, § 386, p. 113), its presence in current section 1286.2 derives from the draft recommendations of the California Law Revision Commission, adopted by the Legislature, which are accompanied by this comment: “Nothing in the California statute defines the permissible scope of review by the courts.” (Recommendation and Study Pertaining to Arbitration (Dec. 1960) 3 Cal. Law Revision Com.Rep. (1960) p. G–53, hereafter Arbitration Study.) That, according to the Commission, is a matter for development under the case law. “Neither the Uniform Arbitration Act nor other state statutes attempt to express the exact limits of court review of arbitration awards. And no good reason exists to codify into the California statute the case law as it presently exists.” (Id. at p. G–54.)
The case law, however, is steeped in perplexing and contradictory generalizations. Some cases say that an arbitration award may not be reviewed on the merits for errors of fact or law. Others say that an arbitration award may be reviewed for errors of law appearing on the face of the award. Some cases say that an arbitration award may be reviewed for errors of law where the scope of the submission agreement is qualified. Others say that an arbitration award will not be overturned for an error in reasoning appearing therein. We will examine the source of these and other generalizations with a view to a resolution of the contradictions.
A. Cases Before 1927
The Common Law
The place to begin the discussion of the California case law is at the beginning. In Muldrow v. Norris (1852) 2 Cal. 74, 77–78, a case arising before the enactment of a statute on the subject of arbitration, the Supreme Court gave the following analysis of the scope of review of an arbitration award at common law.
“The first point we propose to examine, is, as to the power of the Court below to inquire into the award now before us. It is a well settled principle that courts of equity, in the absence of statutes, will set aside awards for fraud, mistake, or accident, and it makes no difference whether the mistake be one of fact or law. It is true, under a general submission, arbitrators have power to decide upon the law and facts: and a mere mistake of law cannot be taken advantage of. The arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono [in equity and good conscience]. If however, they mean to decide according to the law, and mistake the law, the courts will set their award aside. A distinction seems to have been taken in the books between general and special awards. In the case of a general finding, it appears to be well settled that courts will not inquire into mistakes by evidence aliunde: but where the arbitrators have made any point a matter of judicial inquiry by spreading it upon the record, and they mistake the law in a palpable and material point, their award will be set aside. 2 Sto.Eq., sec. 1451. The mere act of setting forth their reasons must be considered for the purpose of enabling those dissatisfied to take advantage of them. Kent v. Elstob, 3 East 18. In all cases where the arbitrators give the reasons of their finding, they are supposed to have intended to decide according to law, and to refer the point for the opinion of the Court. In such cases, if they mistake the law, the award must be set aside; for it is not the opinion they intended to give, the same having been made through mistake. Kleine v. Catara. 2 Gall. In the case already cited, the Court says, ‘these special awards are not to be commended, as arbitrators may often decide with perfect equity between the parties, and not give good reasons for their decision; but when a special award is once before the Court, it must stand or fall by its own intrinsic correctness, tested by legal principles.’ See also Chase v. Westmore, 13 East 357; Williams v. Craig, 1 Dall.; Kyd on Awards, 351; 1 Steph.N.P. 75. [¶] In the case before us, the arbitrators have set forth the particular grounds upon which their finding was based: and it follows from the authorities already cited, that the correctness of the principles by which they must be supposed to have been governed is a proper subject for judicial inquiry.”
In contrast with the present view favoring arbitration, Muldrow exemplifies the early disfavor of the common law toward arbitration as a method of resolving disputes. This accounts for its standard of full blown judicial review of the “intrinsic correctness” of the reasons given for an award “tested by legal principles.” The narrow exception to such review arises where the submission is unqualified, i.e., where the arbitrators are given the authority to decide on the basis of “equity and good conscience” rather than under legal precedent.5 That exception is not available where it is apparent that the arbitrators did not decide the matter under this alternative power.
Thus, under Muldrow, the scope of review was measured by the nature of the agreement for submission to arbitration and by its resolution in a written award. A full scope of review of the legal merits of the award was afforded where the submission was “qualified”, i.e., limited to a decision on legal principles. A full scope of review was also afforded where the errors in law appeared upon the face of a written arbitration award in the reasoning of the arbitrators. Both of Anacapa's claims for broader judicial review in this case are traceable to the benighted view of arbitration upon which Muldrow rests.
Muldrow adverts to the notion of qualified submission, one in which the arbitration contract specifies that there is no alternative power to decide on the basis of “equity and good conscience.” (See, e.g., Utah Construction Co. v. Western Pac. Ry. Co. (1916) 174 Cal. 156, 159–162, 162 P. 631.) Muldrow is also the source of the notion that broader judicial review is available for errors of law appearing “on the face of the award.” Despite the demise of the early common law view of arbitration as subject to full blown review, these two related, subordinate notions have lingered on, clouding our views of the subject to the present. The trail from Muldrow to the present is marked by more cases than can be or need be compassed in an appellate opinion. We will briefly trace the pertinent highlights, with no pretense that our review is exhaustive.
Hard on the heels of Muldrow, in Tyson v. Wells (1852) 2 Cal. 122, 130, the Supreme Court connected the scope of review of an arbitration under the common law to that afforded a reference under the statute providing for a decision of a civil action by a referee. “Now, whether we view the case as an arbitration at common law, or a reference under the statute, in either case the decision must be the same; because we hold that the statute is in aid of the common law remedy by arbitration, and in no respect alters its principles.” The statute to which Tyson refers appears to have been statutes of 1850, chapter 142, sections 163–166, concerning trial by referee. Significantly, that statute provided that the report of a referee should be reviewed in the same manner as a trial by the court, i.e., by a full blown review of the legal correctness of the decision. (Stats. 1850, ch. 142, § 165.)
Soon thereafter, in Headley v. Reed (1852) 2 Cal. 322, 325 the Supreme Court, following Tyson in equating a reference with an arbitration, said, “According to the rule settled in Norris v. Muldrow, the decision of the referee can only be set aside on account of fraud or gross error of law or fact apparent upon its face.” In Headley the referee had set forth his reasoning in the decision. The court examined the reasoning and found gross legal error. “[T]he report discloses that the referee allowed a claim against the defendant, the only evidence of which was a check drawn in his favour by the plaintiffs. This was certainly a great error, because the legal presumption is, that the check was drawn in payment of so much money due to the defendant.” (Id. at p. 325.) Headley does not say from what source the “gross” in “gross legal error” was obtained, for that modifier does not appear in Muldrow.
The provisions for vacation of an award on grounds “the arbitrators exceeded their powers in making their award” and other grounds are found in section 386 of the Civil Practice Act of 1851. (Stats. 1851, ch. 5, § 386, p. 113.) The section provided for the vacation of an award essentially for errors which either affected the integrity of the arbitration process or which exceeded the scope of authority delegated the arbitrators. It said:
“The Court, on motion, may vacate the award upon either of the following grounds, and may order a new hearing before the same arbitrators, or not, in its discretion: [¶] 1st. That it was procured by corruption or fraud: [¶] 2d. That the arbitrators were guilty of misconduct, or committed gross error in refusing, on cause shown, to postpone the hearing, or in refusing to hear pertinent evidence, or otherwise acted improperly, in a manner by which the rights of the party were prejudiced: [3d] That the arbitrators exceeded their powers in making their award; or that they refused, or improperly omitted, to consider a part of the matters submitted to them; or that the award is indefinite, or cannot be performed.” (Stats. 1851, ch. 5, § 386.)
In Peachy et al. v. Ritchie (1854) 4 Cal. 205, 207, the Supreme Court said that this arbitration statute “is but a re-affirmance of the common law” and imported the discussion in Muldrow, set forth above, as definitive of the scope of judicial review. Peachy had to do with a general award under the nomenclature of Muldrow and the party attacking the award was unsuccessful on that ground, hence the reviewability of a special award was not in issue. There was no discussion of the text of the arbitration statute.
In 1872 section 386 of the Civil Practice Act became Code of Civil Procedure section 1287, without change in its provisions.6 Under this provision In re Connor (1900) 128 Cal. 279, 60 P. 862 revisited the application of the statute to a claim of invalidity of a general award. “Where controversies are voluntarily submitted to arbitrators who need not be, and frequently are not, learned in the law, it is not contemplated that their awards will be viewed in the light of that strict adherence to legal rules and procedure which is expected in purely judicial trials. As was said in Muldrow v. Norris, supra,: ‘Arbitrators are not bound to award on principles of dry law, but may decide on the principles of equity and good conscience, and make their award ex aequo et bono.’ And in recognition of this principle the only grounds for a motion to vacate ․ an award are specified in section[ ] 1287 [reciting the statutory grounds]. These grounds do not include mere ordinary errors nor even faults of judgment. They refer to things that are ‘gross.’ ” (Connor, supra, 128 Cal. at pp. 281–282, 60 P. 862.)
Here again, the basis for restricting the scope of judicial review turns on the nature of the submission. A qualified submission, i.e., one limited to a resolution on legal principles, is reviewable for errors of law if they appear on the face of the award. If the submission is not qualified, i.e., if an award is permitted on “principles of equity and good conscience”, review is restricted “to things which are ‘gross.’ ” However, a shift from the rigor of Muldrow is detectable in Connor insofar as it suggests that a mistake of law which the arbitrator “spreads upon the record” is beyond the scope of judicial review unless the error is gross.
The shift away from Muldrow is more plainly marked in the next case, the often cited decision in Utah Construction Co. v. Western Pacific Ry. Co., supra, 174 Cal. 156, 162 P. 631. In Utah a railroad paid a debt to a construction company by check. The bank on which the check was drawn had sufficient funds to honor it. Rather than taking the cash the construction company's bank told the railroad's bank to credit its account with the funds. Despite the cash on hand the railroad's bank was insolvent and subsequently closed. (Id. at pp. 163–164, 162 P. 631.) The railroad and the construction company disputed whether the railroad's debt was discharged under these facts and submitted the question to arbitration. The railroad prevailed in the arbitration. (Id. at p. 158, 162 P. 631.)
The Supreme Court upheld an order denying the construction company's motion to vacate the arbitration award. The opinion begins with several standard sayings about arbitration drawn from the early case law. It thereafter addresses the problem of judicial review in a way that demonstrates a significant shift in viewpoint. “The code provisions are in aid of the common-law remedy of arbitration, a reaffirmance thereof, and do not alter its principles. [Citing, Muldrow; Tyson; Headley; Peachy.] An award made upon an unqualified submission cannot be impeached on the ground that it is contrary to law, unless the error appears on its face and causes substantial injustice.7 A different rule is applicable here because of the terms of the submission.” (Utah, supra, 174 Cal. at pp. 160–161, 162 P. 631, fn. added.)
The terms of the submission agreement in Utah were that “the arbitrator should ‘make his judgment and award, according to the legal right of the parties except as to the matter of interest, which shall ․ be determined in accordance with equity and fairness under all the circumstances of the case.’ ” (174 Cal. at p. 161, 162 P. 631.) This rendered the submission, as to matters other than interest, qualified. The court said that “the provisions above mentioned bound the arbitrator to decide in conformity with the law, and left him without authority to do otherwise.” (Id. at pp. 161–162, 162 P. 631.)
The Supreme Court then considered the claim that the special findings of fact in the award were not supported by substantial evidence. The court held that the evidence and legitimate inferences therefrom sustained the findings. “No mistake of law appears, so far as his consideration of the evidence and its sufficiency is concerned. We cannot inquire further on these subjects.” (174 Cal. at pp. 162–163, 162 P. 631.)
That left one further possibility for consideration.
“The only questions remaining for consideration arise out of the claim that, under the qualification of the submission above mentioned, a mistake in the conclusions of law upon the findings should be considered a mistake appearing upon the face of the award, and good ground for vacating it if it affects the substantial rights of the plaintiff on the merits of the case, the theory being that, in that event, as he did not decide according to the legal right, he has exceeded his limited power under the agreement in making the award as he did. Our final conclusion on the merits [that there was no such error of law] renders it unnecessary to determine whether the submission agreement, when properly construed, did or did not empower him to decide the law wrongly as well as rightly.” (Id. at p. 163, 162 P. 631, emphasis added.)
This is a significant passage. Here Utah acknowledges that the question whether a submission requires the arbitrator to make a decision in accordance with the pertinent legal precedents, i.e., is a qualified submission, is different from the question whether a mistake by the arbitrator in so doing is subject to judicial review. This displays a marked shift in attitude toward judicial review from that contained in Muldrow. Utah implicitly acknowledges that the parties to an arbitration may legitimately desire final resolution of questions of law, even if that resolution is incorrect. The Utah opinion accordingly treats as an open question whether errors in legal reasoning in an opinion or findings of the arbitrator are cognizable as occurring on the face of the award, even under a qualified submission. The reason is that if the parties expect the award to be final on questions of law then in making a mere error concerning that law the arbitrator does not exceed his power. In Utah 's terms, if this is the expectation manifested by the contract the arbitrator is “empowered to decide the law wrongly.”
Crofoot and Company: Cases Holding That Mistakes of Law Are Not Reviewable Under the 1927 Arbitration Statute
In 1927 the statutes pertaining to arbitration were amended. (Stats.1927, ch. 225.) The principal change was to make agreements to arbitrate present or future disputes specifically enforceable. (See First Report of the Judicial Council of Cal. (1926) pp. 20–21 and exh. B, pp. 57–60.) Under the 1872 Code of Civil Procedure an agreement to arbitrate was revocable at any time prior to the award unless the parties agreed in the submission that it be entered as an order of the court. (Former Code Civ.Proc., § 1283.) The underlying policy of that rule is that open-ended agreements to arbitrate future disputes ought not be encouraged as that would deprive citizens of “the protection of the courts.” (Blodgett Co. v. Bebe Co. (1923) 190 Cal. 665, 667, 214 P. 38, emphasis added.) Thus the change to enforceability signaled a strong shift in public policy in favor of arbitration. This shift marks a sea change in the law of arbitration that has affected the scope of judicial review.
The provision for vacation of an award was also amended in 1927 and placed in former Code of Civil Procedure section 1288. It provided:
“In either of the following cases the superior court of the county or city and county in which said arbitration was had must make an order vacating the award, upon the application of any party to the arbitration: [¶] (a) Where the award was procured by corruption, fraud, or undue means. [¶] (b) Where there was corruption in the arbitrators, or either of them. [¶] (c) Where the arbitrators were guilty of misconduct, in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence, pertinent and material to the controversy; or of any other misbehaviors, by which the rights of any party have been prejudiced. [¶] (d) Where the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite award, upon the subject matter submitted, was not made. [¶] Where an award is vacated and the time, within which the agreement required the award to be made, has not expired, the court may, in its discretion, direct a rehearing by the arbitrators.” (Stats.1927, ch. 225, § 9, p. 406.)
The first notable case following the 1927 amendment is Pacific Vegetable Oil Corp. v. C.S.T., Ltd. (1946) 29 Cal.2d 228, 174 P.2d 441. At issue was an award holding that a shipping contract had properly been cancelled due to inability to perform by reason of force majeure. (Id. at p. 232, 174 P.2d 441.) The party attacking the award asserted that the arbitrators had denied it an opportunity to meet certain evidence by not affording it the last word. (Id. at p. 233, 174 P.2d 441.) The opinion commenced its discussion of this claim by asserting: “The merits of the controversy between the parties are not subject to judicial review. By section 1288 of the Code of Civil Procedure the superior court has power to vacate an award ‘[Quoting the provisions under the 1927 statute for judicial review].’ ” (Ibid.)
This assertion became a point of departure in Crofoot v. Blair Holdings Corp. (1953) 119 Cal.App.2d 156, 260 P.2d 156. The court of appeal asserted, in effect, that the statement that the merits of the award are not subject to judicial review in Pacific Vegetable Oil Corp., supra, represented a change in the law from the boilerplate dictum at the outset of Utah Const. Co., supra, that errors of law on the face of the award were subject to review. “The law is not quite so clear as to a court's powers of review over questions of law. The earlier cases held that the court had the power to review errors of law, at least where they appeared upon the face of the award. (In re Frick, 130 Cal.App. 290 [19 P.2d 836]; Utah Const. Co. v. Western Pac. Ry. Co., 174 Cal. 156 [162 P. 631].) The later cases have gone much farther in granting finality to the award even as to questions of law. In [Pacific Vegetable ], it was bluntly held that ‘The merits of the controversy between the parties are not subject to judicial review.’ ” (Crofoot, 119 Cal.App.2d at p. 185, 260 P.2d 156, parallel citations omitted.) The opinion suggests that the perceived shift in the law is attributable to the amendment of the statute in 1927. (Ibid.)
The Crofoot opinion then offhandedly adverts to the question of unqualified submission, reiterating the view, with supporting citations, that in such a case arbitrators are not limited to the dry law.8 “Under these cases it must be held that in the absence of some limiting clause in the arbitration agreement, the merits of the award, either on questions of fact or of law, may not be reviewed except as provided in the statute.” (119 Cal.App.2d at p. 186, 260 P.2d 156.) Thereafter the opinion held that an arbitration provision of the contract saying that “ ‘the arbitration shall be mutually conclusive and binding as to all issues' ” conferred finality on the award as to issues of law “except as limited by statute.” (Ibid.) Having established the scope of review based upon this criterion the opinion rejects several contentions of the party attacking the award as “at most” errors of law, “not reviewable by the courts.” (Id. at pp. 188–190, 260 P.2d 156.)
This view is summarily and approvingly imported into the opinion in Griffith Co. v. San Diego Col. for Women (1955) 45 Cal.2d 501, 289 P.2d 476. An arbitrator had denied an award for damages for delay of a construction contract attributable to the owner. The reason proffered was that the contractor failed to establish the amount of damage attributable to the delay. (Id. at p. 514, 289 P.2d 476.) The contractor contended this was contrary to law. The Supreme Court sustained the arbitrator's award, quoting Crofoot's reasoning that even if the arbitrator decided a point incorrectly, “ ‘At most, it is an error of law, not reviewable by the courts.’ ” (Id. at pp. 515–516, 289 P.2d 476.) It went on to say that, in any event, the determination was not an error of law. (Ibid.) Crofoot is also cited with approval and applied as a holding in O'Malley v. Petroleum Maintenance Co., supra, 48 Cal.2d at pages 110–111, 308 P.2d 9.
One might think that at this point the scope of judicial review had been settled. The key question, posed but not answered in Utah, is whether an arbitrator is given final authority to decide a question of law when it is submitted to arbitration. That is, is a mistake of law in answering the question a ground for vacating the award? Crofoot, endorsed by the Supreme Court, says that the arbitrator's mistakes are not cognizable.
This position is flatly incompatible with the view that a qualified submission warrants judicial review for errors in law or that errors “on the face of the award”, in the written reasons of the arbitrator, are subject to judicial review. However, this is one of those areas in which the law, like a restless sleeper, tosses and turns without settling into any comfortable position of repose.9
The Post–Crofoot Revival of the Notion That Errors of Law Are Subject to Judicial Review If the Submission is Qualified or If The Errors Appear On the Face of the Award
Crofoot's repudiation of the notion that errors of law appearing on the face of the award are reviewable was unsuccessful in overcoming the sheer inertia of the encrusted doctrine of the early case law. In Gerard v. Salter (1956) 146 Cal.App.2d 840, 846, 304 P.2d 237 the court gives the following confusing synopsis. “On a general or unqualified submission to arbitration the trial court is not authorized to review the entire evidence to see if it supports the award except in case of fraud, or similar misconduct, or unless the error appears on the face of the award. It is the general rule that the merits of a controversy between the parties are not subject to a judicial review. ( [Citing, inter alia, both In re Frick, which Crofoot discredits, and Crofoot itself.].)” (Id. 146 Cal.App.2d at p. 846, 304 P.2d 237.)
This tendency continued in Campbell v. Farmers Ins. Exch. (1968) 260 Cal.App.2d 105, 67 Cal.Rptr. 175. An arbitrator made an award under an uninsured motorist insurance provision which the insurance company contended was greater than the policy limits. The court found that the arbitration clause did not encompass arbitration of disputes concerning the interpretation of the insurance contract. (Id. at p. 111, 67 Cal.Rptr. 175.) The submission agreement put in issue entitlement to the amount owing under the contract and the court held that an award in excess of the unambiguous limit of the policy was not one under the contract. It accepted the reading of the policy proffered by the insurer and ordered vacation of the award saying: “While ordinarily where an issue is within the scope of the submission agreement and the parties have agreed to be bound by an award, errors in law or in fact committed by the arbitrator are not grounds for vacating the award [citing, inter alia, Crofoot, supra ], where the error appears on the face of the award and causes substantial injustice, the award may be vacated. [Citing, inter alia, Utah Constr. Co., supra ].” (Campbell, 260 Cal.App.2d at pp. 111–112, 67 Cal.Rptr. 175.) While we have no quarrel with the holding we do not endorse the departure from Crofoot.
Crofoot is not entirely without a following. In Lesser Towers, Inc. v. Roscoe–Ajax Constr. Co. (1969) 271 Cal.App.2d 675, 700, 77 Cal.Rptr. 100, the court of appeal said that Crofoot had explained that “[t]he early California cases holding ‘gross errors of law appearing on the face of the award’ reviewable [citing, inter alia, Muldrow and Utah Constr. Co.] ․ are no longer binding authority․” Lesser Towers introduces the formula, borrowed from New York law, that in construing the contract the arbitrator will be upheld unless the construction is “completely irrational.” (Id. at p. 701, 77 Cal.Rptr. 100.) Similarly, Durand v. Wilshire Ins. Co. (1969) 270 Cal.App.2d 58, 75 Cal.Rptr. 415 relying on Crofoot, and making no mention of Campbell, holds that an arbitration award arising under a compulsory arbitration provision of the Insurance Code, section 11580.2, may not be vacated for an error in law.
However, in Allen v. Interinsurance Exchange (1969) 275 Cal.App.2d 636, 80 Cal.Rptr. 247, a case upon which Anacapa relies, Crofoot received a different reception. In Allen, the same court that decided Durand reviewed an arbitration award arising under the same compulsory arbitration provision of the Insurance Code. It sought in an elaborate but clumsy way to get out from under Crofoot.
Allen's reasoning warrants a more lengthy summary. In keeping with the Insurance Code arbitration provision such an arbitration is under a qualified submission. (275 Cal.App.2d at pp. 639–640, 80 Cal.Rptr. 247.) Crofoot says that in the absence of some limiting clause in the agreement an arbitration cannot be vacated by reason of an error of law. (Allen, at p. 641, 80 Cal.Rptr. 247.) Nonetheless, under Code of Civil Procedure section 1286.2, subdivision (d), an arbitration award can be vacated where the arbitrators exceed their powers. In Allstate Ins. Co. v. Orlando (1968) 262 Cal.App.2d 858, 69 Cal.Rptr. 702, an Insurance Code compulsory arbitration case, the court held that an error by the arbitrator in determining the legal issue of his jurisdiction was a proper basis of vacating the award. (Allen, 275 Cal.App.2d at pp. 641–642, 80 Cal.Rptr. 247.) “It thus appears in that case, where an arbitrator's award was based upon his error in law, his award was vacated by the court upon the ground that he had exceeded his powers.” (Id. at p. 642, 80 Cal.Rptr. 247.) Allen then went for authority to Corpus Juris Secundum. The treatise says that if arbitrators intend to decide according to the law and mistake the law this is a miscarriage of the intention of the arbitrators and the award will be set aside. (Id. at p. 643, 80 Cal.Rptr. 247.) The same source says that such a mistake of law must appear on the face of the award. (Id. at pp. 643–644, 80 Cal.Rptr. 247.)
These notions go back to Muldrow. Notwithstanding that Crofoot, followed by Griffith, departed from Muldrow, Allen reasoned that Crofoot has no application to an arbitration under a qualified submission. (275 Cal.App.2d at p. 644, 80 Cal.Rptr. 247.) For that reason it held that the trial court did not err in vacating the award because there was a gross error of law appearing on the face of the findings of the arbitrator and the arbitration was under a qualified submission.
Allen thus revived, at least for qualified submissions, the Muldrow notion of reviewability for errors of law that had been rejected in Crofoot and Griffith. Because of its abstract reference to errors on the face of the award Allen opened the door for the review of such errors regardless of the nature of the submission agreement. Indeed, Park Plaza, Ltd. v. Pietz (1987) 193 Cal.App.3d 1414, 239 Cal.Rptr. 51, which is cited by both PG & E and Anacapa, shrinks this to the generality: “The general rule that an arbitration award may not be vacated for an error of law is subject to an exception where the error appears on the face of the award. ( [Citing, inter alia, Utah Constr. Co.].)” (Id. 193 Cal.App.3d at p. 1420, 239 Cal.Rptr. 51.)
Thus, from Crofoot to this date on the question of reviewability for errors of law the opinions of the courts of appeal have wobbled erratically between two opposite poles, often finessing the point, as did Utah, on the ground that there was no error in law in any event. (Compare, e.g., with the previously noted cases, State Farm Mut. Auto Ins. Co. v. Guleserian (1972) 28 Cal.App.3d 397, 104 Cal.Rptr. 683; Abbott v. California State Auto Assn. (1977) 68 Cal.App.3d 763, 137 Cal.Rptr. 580; That Way Production Co. v. Directors Guild of America, Inc. (1979) 96 Cal.App.3d 960, 158 Cal.Rptr. 475; Rodrigues v. Keller (1980) 113 Cal.App.3d 838, 170 Cal.Rptr. 349, attributing the Campbell, Allen, Abbott line to the statutory context of the uninsured motorist provisions contrasting that to a “voluntary agreement,” at p. 843, fn. 3, 170 Cal.Rptr. 349; Hirsch v. Ensign (1981) 122 Cal.App.3d 521, 176 Cal.Rptr. 17; Ray Wilson Co. v. Anaheim Memorial Hospital Assn. (1985) 166 Cal.App.3d 1081, 213 Cal.Rptr. 62.)
This state of affairs is unfortunate. The uncertainty about reviewability is costly both to litigants and to the judiciary. Since the topic of review is itself a murky one the dissatisfied party to the arbitration is induced to move on to the judicial forum. Both the litigants and the court are induced to look to the merits of the claim of error of law as a device to finesse the scope of review dilemma.10 If the matter before us is any guide, fathoming the dry law alone can be a very expensive enterprise. Much of this uncertainty is dispensable. For the most part errors of law ought not be reviewable and, as we next explain, the line drawn in Crofoot, with a minor but significant qualification, is that to which we will adhere.
Before proceeding with the analysis, we note the significance of the 1961 amendments to the arbitration statute.
The 1961 Amendments To the Arbitration Statute; Development by Case Law Sanctioned
In 1961 the arbitration statutes were again overhauled. (Stats.1961, ch. 461.) The 1927 statute was repealed and new provisions enacted. The provision regarding the vacation of awards is now Code of Civil Procedure section 1286.2.
“Subject to Section 1286.4, the court shall vacate the award if the court determines that: [¶] (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 such 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; or [¶] (e) The rights of such party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by any other conduct of the arbitrators contrary to the provisions of this title.”
A comparison of this statute with section 1288 of the 1927 statute reveals that the (a) and (b) subdivisions are unchanged. That leaves (c), (d), and (e). Of significance, the statute (new (d)) replicates the former statute (old (d)) in providing for judicial review whether the arbitrators exceeded their powers. Old (d) provided for vacation of an award “Where the arbitrators exceeded their powers [remains the same], or so imperfectly executed them, that a mutual, final and definite award, upon the subject matter submitted, was not made.” New (d) provides: “The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.”
The 1961 enactment follows the recommendations of the California Law Revision Commission (Commission). (See Arbitration Study, supra, at p. G–28.) As related, the Commission study states that the scope of judicial review is a matter of case law, not statute. It asserts, with respect to the existing 1927 law, that “[n]othing in the California statute defines the permissible scope of review by the courts.” (Id. at p. G–53.) The Commission opined about the case law standard of review as follows:
“Numerous court rulings have, however, developed the following basic principles which set the limits of any court review: [¶] (1) Every presumption favors an award by arbitrators. [¶] (2) Merits of an arbitration award either on questions of fact or of law may not be reviewed except as provided for in the statute in the absence of some limiting clause in the arbitration agreement. [¶] (3) Unless specifically required to act in conformity with rules of law, arbitrators may base their decisions on broad principles of justice and equity and in doing so may expressly or impliedly reject a claim that a party might have asserted in a judicial action. [¶] (4) The form and sufficiency of the evidence to support an award of arbitrators, and the credibility and good faith of the parties are not matters for judicial review. [¶] (5) Statutory provisions for a review of arbitration proceedings are for the sole purpose of preventing misuse of the proceedings where corruption, fraud, misconduct, gross error or mistake has been carried into the award to the substantial prejudice of a party to the proceedings. [¶] Both the agreement between the parties that the award shall be final and binding and the statutory treatment of arbitration agreements suggest that the ordinary concepts of judicial appeal and review are not applicable to arbitration awards. Settled case law is based on this assumption.” (Id. at pp. G–53–G–54, fns. citing to case authorities deleted.)
The Commission disavowed any purpose of the 1961 statutes to alter the existing case law scope of review of arbitration awards.11 The Commission noted: “Neither the Uniform Arbitration Act nor other state statutes attempt to express the exact limits of court review of arbitration awards. And no good reason exists to codify into the California statute the case law as it presently exists.” (Arbitration Study, at p. G–54, emphasis added.) Thus, other than strengthening the policy in favor of arbitration, the 1961 arbitration statute leaves to the case law whether arbitrators have “exceeded their powers.”
An Error of Law Should Ordinarily Not Be a Subject of Judicial Review Whether or Not It Appears on the Face of the Award and Whether or Not the Submission is QualifiedA. The Rule of No Review.
As related, the submission of a dispute to arbitration as an alternative to judicial adjudication is a matter of contract. If the parties to the contract consent to submit an issue of law to an arbitrator under terms of the contract calling for a “final” decision of the question by the arbitrator ordinarily they should not be able to reopen that “final” decision of the issue under the statutory rubric that the arbitrator has “exceeded his powers.” The judicial process grinds exceedingly fine as to questions of law. But the full reaches of the judicial process are not infallible on such questions. Hence it is said that courts of last resort “are not final because [they] are infallible, but [they] are infallible only because [they] are final.” (Brown v. Allen (1952) 344 U.S. 443, 540, 73 S.Ct. 397, 427, 97 L.Ed. 469, 533 (conc. opn. of Jackson, J.).) A principal reason for selecting arbitration is that the costs of using its exceedingly fine wheels are thought not worth the additional assurance afforded by the judicial process. That purpose, which it is the policy of the law to favor, is disserved if review of questions of law decided in arbitration is freely available.
It is ordinarily assumed that the parties to a contract may draft an arbitration provision so as to afford judicial review of questions of law. The question here is what judicial review should be afforded where they have not done so. This is a question of the contract term to be supplied by law. (See Rest.2d Contracts, § 5, com. (b).) 12 Where parties consent to arbitration in the present day world the common expectation is that the decision of the arbitrator will be final. That is the view of the American Arbitration Association. “A primary advantage of arbitration is the final and binding nature of an arbitral award.” (Arbitration And The Law, 1987–88, American Arbitration Association General Counsel's Annual Report (1988) p. 28, see also p. 32.) In this case the contract uses the term “binding,” a word commonly associated with arbitration. Moreover, the policy of the law favoring arbitration is founded, in part, on the purpose to save the public costs of avoidable litigation. That purpose is advanced by requiring the parties to arbitration to carry the burden of specifying that judicial review of questions of law decided in arbitration is to be permitted.
The consideration that the submission agreement is qualified affords no persuasive reason to provide a broader scope of judicial review. The fact that the parties restrict the arbitrator to a decision of the issues in the manner of a court of law does not mean that they do not expect that the decision will be final and nonreviewable. As Utah indicates, the mode of decision making and its reviewability are separate questions.
Similarly, the consideration that the error of law appears on the face of the award, in the sense that it is contained in the opinion or findings of the arbitrator, is not a persuasive reason to grant broader judicial review. A decision by the arbitrator or the parties to set forth in the award the reasoning used to reach a decision has no bearing on the parties' expectations of finality. Even when, as here, the parties specify that reasons should be provided, the inference that the purpose is to afford a basis for judicial review is not compelling. “There may be any number of reasons for this: the payment by the parties of a fee may require something for their money besides a decision; they may genuinely wish guidance for the future; they may feel that though one side may lose the immediate case the arbitrator may, in his opinion, indicate the error of the other side's ways.” (Feldman, Arbitration Law in California: Private Tribunals for Private Government (1957) 30 So.Cal.L.R. 375, 464.) To this list we would add that the parties may wish to have the benefit of the improved decision making that comes from the discipline of written justification or, as here, the opportunity to have a preliminary written decision on a complex matter so that they may respond to the reasoning of the arbitrator.
For all these reasons, the Crofoot line of cases, cited with approval by the California Supreme Court, supplies the correct general rule. Regardless whether the submission is qualified or whether the error appears on the face of the award a mistake of law by the arbitrator is ordinarily not subject to judicial review. Similarly, errors of fact are also not reviewable. If the parties desire a different scope of judicial review they must specify that in the contract language. (Cf. § 1296.)
B. The Exception for Limited Review of Certain Kinds of Errors.
We have qualified the rule precluding judicial review with the word “ordinarily.” As noted, the law has not been able to find a position of repose on the question of judicial review. That in part may be attributable to judicial hubris and the temptation to try to correct all perceived errors. For that there is no cure; we simply cannot have it both ways. However, in some circumstances there is a principled reason for affording a limited judicial review of claimed errors of law, for which there is tenable precedent. The source of a sympathetic claim for such review is that the mistake of law is one that a party could not have anticipated when consenting to arbitration. This is the pea beneath the mattress of unreviewability which has caused recurrent irritation.
Regardless how egregious the error of law, if the party who complains knew that it was in the offing at the time when the consent to arbitration was given there is no basis for judicial intervention. For example, if the disputed issue of law has actually arisen, the positions of the disputants are staked out, the consent to arbitration is then given with no reservation of a right to judicial review, and the arbitrator accepts the legal position of one side, the loser has no fair complaint, regardless of how egregious the error of law. However, where the consent to arbitrate precedes the dispute and the error of law is so gross that it too should be considered unforseeable there is basis for sympathy for the disadvantaged party.
The fairness of binding a party based upon consent attenuates as the consent becomes less informed. This was the basis of the early common law antipathy toward contracts for arbitration of future disputes. Corbin offers the following explanation of that hostility. “It seems, therefore, that the supposed vice of general and unlimited arbitration agreements lay in the fact that parties try to bind themselves to avoid the courts and to submit to private arbitration issues that at the time they do not have clearly in mind, which after they have arisen one of them is no longer willing to submit to the private arbitrators. The friendly arbitration of a dispute is nearly always desirable. It seems otherwise where the proceeding is against the will of one of the parties, who has lost confidence in the arbitrators or in the method.” (6A Corbin on Contracts (1962) § 1433, p. 393; also see e.g., Blodgett Co. v. Bebe Co., supra, 190 Cal. at p. 667, 214 P. 38, [the underlying policy of the original statutes was that open-ended agreements to arbitrate future disputes ought not be encouraged as that would deprive citizens of “the protection of the courts”]; see generally, Civ.Code, § 1542 [“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release․”].)
These considerations provide a principled reason for limited judicial review of the kinds of claims tendered by Anacapa. The claim of error concerns a dispute in the construction and application of contracts, a provision of which is the agreement to submit such disputes in the future to arbitration. There is authority for a limited review of such questions. In Posner v. Grunwald–Marx, Inc., supra, 56 Cal.2d 169, 14 Cal.Rptr. 297, 363 P.2d 313, a collective bargaining case, a union sought to arbitrate a question concerning vacation pay under its contract. The superior court denied the petition to arbitrate on the ground that the contract was unambiguous in its denial of the claimed vacation pay. (Id. at p. 174, 14 Cal.Rptr. 297, 363 P.2d 313.) The Supreme Court reversed the judgment adopting the federal rule—“all disputes as to the meaning, interpretation and application of any clause of the collective bargaining agreement, even those that prima facie appear to be without merit, are the subject of arbitration․” (Id. at p. 184, 14 Cal.Rptr. 297, 363 P.2d 313, fn. omitted.) However, the court said this did not betoken “a complete judicial retreat from the field of arbitration in collective bargaining cases, which could result in the arbitrary remaking of the collective bargaining agreement by an arbitrator contrary to the intentions of the parties.” (Ibid., emphasis added.) It asserted that evidence of practices could be adduced to aid in resolving ambiguities in the written agreement, but not to add new or contradictory terms. (Id. at pp. 184–185, 14 Cal.Rptr. 297, 363 P.2d 313.)
We draw from this concern that where the award rests on a construction of the contract under a provision for arbitration of future disputes a party should be afforded a limited review of a claim of error of law in the construction. This view finds support in the recurrent intimations in the case law that “utterly irrational” legal conclusions may be cognizable. (See, e.g., Lesser Towers; Manatt, Phelps, Rothenberg & Tunney v. Lawrence (1984) 151 Cal.App.3d 1165, 1171, 199 Cal.Rptr. 246; Hacienda Hotel v. Culinary Workers Union (1985) 175 Cal.App.3d 1127, 1133, 223 Cal.Rptr. 305; Summit Industrial Equipment, Inc. v. Koll/Wells Bay Area (1986) 186 Cal.App.3d 309, 320, 230 Cal.Rptr. 565.) In these circumstances the appropriate standard of review is whether the construction of the contract presents such an egregious mistake that it amounts to an arbitrary remaking of the contract between the parties.
Although this standard will permit some disgruntled arbitrants to pursue judicial review, it should discourage all but the most serious claims of abuse. For, we hasten to note, success in vacating an arbitration award under this standard requires more that a mere conviction that another construction of the contract is plainly correct. The test is one of arbitrariness, not correctness. This is not the sort of review accorded a construction of a contract by the trial court in a legal proceeding. In such a proceeding the appellate court, in the absence of extrinsic evidence, may resolve questions of ambiguity. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865, 44 Cal.Rptr. 767, 402 P.2d 839: [“It is ․ solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence.”].)
The case law provides no general measure of arbitrariness. Rather each case calls for a judgment regarding whether the award is within the ballpark bounded by the outermost liabilities of the parties under the contract. The line between such excess and matters that a reviewing court would have decided differently is one that must be plumbed by the holdings of the cases on either side of the line rather than calculated from a doctrinal formula. At the very least, where the arbitrator's reading of the contract is within the range of ambiguity, i.e., within the ordinary bounds of semantic permissibility, there can be no tenable claim that the contract has been arbitrarily remade.
As we will show, none of Anacapa's claims passes this standard of review and the trial court exceeded its powers in vacating the award.
C. The Claim That This Is a Contract of Adhesion Does Not Warrant Alteration of the Scope of Review.
Anacapa submits that whatever the scope of review under other circumstances, it should be broadened at the behest of the weaker party if the contract is one of adhesion. It claims that the contracts here are such and that it raised the issue in opposing arbitration and in seeking to vacate the award and that it is entitled to claim a broader scope of review predicated upon the claim the contracts are contracts of adhesion. As appears, Anacapa failed to perfect a claim of adhesion and, if it had, no alteration of the standard of review would be appropriate.
There is a preliminary issue to resolve. Anacapa claims the issue of adhesion “was called to the attention of both the trial court and the arbitrators.” However, that occurred only in connection with its claim the matters at issue are not arbitrable. Although the question of arbitrability vel non does not naturally arise in this writ proceeding, we will reach and resolve the question at the request of the parties.
Anacapa's principal argument turns on the language of the arbitration provisions. As related, subparagraph 7(b) of each contract says that if the parties fail to agree on a new price for Anacapa's gas the price shall be reasonable market value “established by arbitration in accordance with Section 6․” Section 6, in turn, commences: “In addition to those disputes which are required to be arbitrated under the provisions hereof, any other dispute other than price arising ․ under any provision hereof ․ may be submitted by either party to arbitration․” (Emphasis added.) Anacapa argues that under this language market value disputes are required to be arbitrated and other disputes are “permissive” and may be arbitrated only if both parties consent.
The applicable precedent is Service Employees Internat. Union, Local 18 v. American Building Maintenance Co. (1972) 29 Cal.App.3d 356, 105 Cal.Rptr. 564. In that case the agreement provided: “ ‘In the event that any matter submitted to the Board of Adjustment cannot be settled within five (5) consecutive business days, time may be extended by mutual agreement with the parties hereto, or the issue in dispute may be submitted to an impartial arbitrator․” (Id. at p. 358, 105 Cal.Rptr. 564, orig. italics.) The court viewed the question as “whether, in the agreement's context, [the language in italics] must be construed as implying (1) with the consent of both parties, or, (2) at the option of either.” (Ibid.)
The court decided that “at the option of either” was the implicit meaning, reasoning as follows. “May” is sometimes used to grant either of the opposing parties a right with regard to the dispute. (Service Employees, supra, 29 Cal.App.3d at p. 359, 105 Cal.Rptr. 564.) If that connotation were not employed the arbitration provision would be of little purpose, a disfavored result under the canon that contracts should be construed so as to make them operative. (Id. at pp. 358–359, 105 Cal.Rptr. 564.) This reasoning is persuasive, all the more so since the clause in this case is explicit in specifying that any dispute “may be submitted by either party to arbitration․” If either party “may” do so, the consent of both is manifestly not required. In this context the “may” signifies the right of the party to invoke arbitration. Anacapa relies on Titan Group, Inc. v. Sonoma Valley County Sanitation District (1985) 164 Cal.App.3d 1122, 211 Cal.Rptr. 62 about which we need say no more than that it concerned different language in the arbitration clauses in issue.
Anacapa suggests that we should construe any ambiguity in the arbitration clause against PG & E on the ground that it drafted the contract, employing the cannon of construction which calls for reading the ambiguity against the party who caused the uncertainty to exist. We reject the suggestion on two grounds. The first is that this is ordinarily a subordinate canon applies only as a tie breaker, when other canons fail to dispel uncertainty. (See Civ.Code, § 1654; cf. 3 Corbin on Contracts (1960) § 559, pp. 262–271; Decter v. Stevenson Properties, Inc. (1952) 39 Cal.2d 407, 418, 247 P.2d 11; compare with Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 871, 27 Cal.Rptr. 172, 377 P.2d 284 and Tahoe National Bank v. Phillips (1971) 4 Cal.3d 11, 20, 92 Cal.Rptr. 704, 480 P.2d 320.) The second reason is that compulsory arbitration is not a term of the contract which inherently favors the interests of PG & E. As we have suggested, if Anacapa had prevailed in the arbitration we would likely uphold that result as well. Where the term of a contract might cut either way it is inappropriate to assign a meaning on the happenstance of the outcome of a particular controversy. (See Jenkins v. Tuneup Masters (1987) 190 Cal.App.3d 1, 7, 235 Cal.Rptr. 214.)
For all of the foregoing reasons we reject Anacapa's principal argument for deeming the matters here not subject to arbitration.
That leaves Anacapa's fall-back argument, that adhesion ought to bear on the scope of review of an arbitration award. However, a careful review of the record shows that Anacapa failed to perfect a claim of adhesion.
Only on the issue of PG & E's duty to avoid drainage was the topic of adhesion broached as a ground upon which to construe the contracts as not providing for arbitration. This claim was based upon the following declarations of fact. PG & E was the only purchaser of gas in the area when the original contract was made. Anacapa was exposed to some (unexplained) degree of risk of loss of its leases if it failed to sell to PG & E. There was no discussion of the arbitration clause. PG & E informed Anacapa that it had a standard form agreement. PG & E prepared and sent such an agreement to Anacapa for signature. Notwithstanding these assertions the superior court granted PG & E's motion to compel arbitration.
The word adhesion was not mentioned in the course of the arbitration proceedings in the brief to which Anacapa points. Nor was there an effort to seek a finding on the question of adhesion. After the arbitration Anacapa renewed the claim of nonarbitrability in its massive petition to overturn the arbitration award. It did so without independent development of the claim of adhesion by incorporating by reference the earlier memorandum of points and authorities in opposition to PG & E's motion to compel arbitration. The trial court rejected Anacapa's claim of nonarbitrability. The statement of decision prepared by Anacapa does not mention the question of adhesion as affecting the arbitrability of the drainage issue. Nor does Anacapa make mention of the adhesion claim in its arguments on the issue of arbitrability in this court.
The sketchy factual showing upon which Anacapa (derivatively) relied in the trial court does not compel the conclusion that the contracts were adhesion contracts. The implication that provisions of the contract were nonnegotiable, i.e., that PG & E's bargaining stance was take it or leave it, is not squarely made out. (Compare Graham v. Scissor–Tail, Inc. (1981) 28 Cal.3d 807, 818, 171 Cal.Rptr. 604, 623 P.2d 165, the performer's association constitution and by-laws required the use of a form contract.) Anacapa's jeopardy if it failed to sell to PG & E is coyly described in conclusionary and unquantified terms. Finally, the contracts were in fact renegotiated after the original agreements and there is no showing of the economic setting at that time.
In view of these considerations, and the shadowy incorporation by reference of the buried claim concerning adhesion and the failure to press the point, we find no fault in the implied determination by the trial court that the claim of nonarbitrability of the drainage issue by reason of adhesion contract should be resolved against Anacapa.
Even if we were to assume that Anacapa had preserved a claim of adhesion we are not persuaded that this should affect the scope of review of an arbitration award. As Anacapa notes, “Where an arbitration clause is part of a contract of adhesion, courts will carefully scrutinize the agreement to assure that the arbitration provisions fall within the reasonable expectations of the weaker, or ‘adhering’ party, and are not unduly oppressive or ‘unconscionable.’ ” (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street, supra, 35 Cal.3d at p. 322, fn. 7, 197 Cal.Rptr. 581, 673 P.2d 251.) Anacapa suggests that this solicitude warrants granting a broader scope of review to the adhering party who is dissatisfied with the results of the arbitration. We find the suggestion unpersuasive.
Generally speaking, a contract of adhesion is fully enforceable according to its terms unless those terms are outside the reasonable expectations of the adhering party or considered in context are unduly oppressive or unconscionable. (Graham v. Scissor–Tail, Inc., supra, 28 Cal.3d at pp. 819–820, 171 Cal.Rptr. 604, 623 P.2d 165.) There is a developed doctrine in case law concerning the enforceability of a provision requiring arbitration when one party seeks to avoid arbitration on the ground of adhesion. (See, e.g. Graham, supra, at pp. 819–820, 171 Cal.Rptr. 604, 623 P.2d 165; Keating v. Superior Court (1982) 31 Cal.3d 584, 593–595, 183 Cal.Rptr. 360, 645 P.2d 1192.) Imposing arbitration on the unwilling adhering party entails relinquishment of significant rights, e.g., loss of the right to a jury trial and the procedural devices available in the judicial forum. Nonetheless, an arbitration provision in an adhesion contract in a commercial context is generally given effect absent a showing that it is structured or utilized in such a way as to gain unfair advantage to the party with the superior bargaining power. (Ibid.)
There is no suggestion that the arbitration provision here is inherently tilted in favor of PG & E or has been utilized in an unfair manner. If Anacapa could succeed in invalidating the arbitration provision on grounds of adhesion contract doctrine, the question of scope of review would be rendered moot. However, if Anacapa could not invalidate the arbitration provision then the consequences that attend arbitration, including the limited scope of review provided by law, should obtain. If this were not the case review of arbitration awards would be unfairly asymmetrical; as a practical matter the adhering party would not be bound by an unfavorable award but the other party would. Moreover, the benefits to society of the finality of arbitration awards could be significantly undercut.
For all the foregoing reasons, we conclude that Anacapa's belated claim of adhesion is ineffectual to alter the standard for judicial review of the arbitration award that we have previously related.
The Arbitrators' Construction of the Contract Concerning Alteration of Price Upon Deregulation of Natural Gas Prices Does Not Arbitrarily Remake The Contract
Anacapa's paramount claim of legal error is that the arbitrators misconstrued the pricing provisions of the contract. The application of those provisions turns upon the construction of the National Gas Policy Act [NGPA]. Under the contract a redetermination of the price is permitted “[e]ffective upon deregulation of price controls under any Federal or State legislation․” Anacapa contends that the arbitrators erred in finding that there was a deregulation of price controls under the NGPA. PG & E contends that the arbitrators were correct in their resolution of these questions.13 We will conclude that the arbitrators' application of the deregulation provisions of the contracts did not exceed the range of semantic permissibility, viewed at the time of formation of the contract; hence there is no error of law amounting to an arbitrary reformation of the contract. From this reasoning it follows that arbitrators did not exceed their authority and that their award is final and unassailable.
As related, the contract only permits a redetermination of price when there is “deregulation of price controls under [the NGPA].” Subparagraph 7(b) of the 1971 contract, as amended by the 1973 agreement, provides for repricing of Anacapa's gas at the request of either party “at any time but not sooner than three years after the effective date of the most recently redetermined price hereunder․” This language was removed by amendment in 1980 and the repricing of the gas tied to the NGPA. Under the 1980 amendment the substituted repricing provision reads: “Effective upon deregulation of price controls under any Federal or State legislation, and not more than once in any subsequent three-year period, either of the parties hereto may [invoke procedures to redetermine the price].”
The letter setting out the 1980 amendment of the contract says that the parties agree that: “At such time as ceiling prices under the Natural Gas Policy Act of 1978 ․ 14 cease to apply to all or any part of Seller's gas, then the provisions of subparagraph 7(b) shall apply to the redetermination of the price to be paid for gas delivered under [the contract].” Anacapa equates the phrase “deregulation of price controls under [the NGPA]” in the amended text of the agreement with “ceiling prices under [the NGPA] cease to apply”, the phrase in the letter setting out the agreement to amend. Anacapa argues that such ceiling prices never ceased to apply to its gas—hence, the precondition for redetermination of price, deregulation of price controls, was never met.15 To understand the argument requires a discussion of the NGPA.
The NGPA imposes a system of price controls on sale of natural gas by producers. The NGPA includes all natural gas in one or more defined categories, each commonly referred to by the section number of the act in which it is defined (as here, §§ 102, 103, 105 and 109). The NGPA provides for maximum lawful prices for each category. However, it also provides, as it did when the parties agreed to the 1980 amendments of the contracts, for elimination of price controls as to certain sales of natural gas effective January 1, 1985. (15 U.S.C. § 3331.) The parties dispute which NGPA categories apply to Anacapa's gas.
The residual NGPA category is section 109 gas. It applies to “any natural gas which is not covered by any maximum lawful price under any other section․” (15 U.S.C. § 3319.) The other categories have higher or lower maximum prices designed to stimulate production of new gas and to reflect the antecedent price controls for gas produced for interstate commerce. There are two such categories of interest here. The first is section 103 gas. Section 103 gas is “natural gas determined in accordance with section 3413 of this title to be produced from any new, onshore production well․” (15 U.S.C. § 3313.) The second category is section 105 gas, natural gas “sold under any existing contract or any successor to an existing contract, which was not committed or dedicated to interstate commerce on November 8,1978.” (15 U.S.C. § 3315.)
The NGPA also provides for the decontrol of prices. Under the act “[the price control provisions for the sale] of each of the following categories of natural gas shall, except as provided in subsections (d) and (e) of this section, cease to apply effective January 1, 1985.” (15 U.S.C. § 3331(a). The “following categories” include: “(2) New, onshore production wells.—Natural gas produced from any new, onshore production well (as defined in § 3313(c) of this title), if such natural gas—[meets two conditions that are undisputed here]” and “(3) Intrastate contracts in excess of $1.00.—Natural gas sold under an existing contract, any successor to an existing contract, or any rollover contract, if [such gas meets two conditions that are undisputed here].” (15 U.S.C. § 3331(a)(2) and (a)(3).) The only applicable exception concerns subdivision (a)(3). (15 U.S.C. § 3331(e).) It provides that where the existing contract calls for a negotiated price the operation of the repricing clause is subject to new price limits, different from the former limits, as of January 1, 1985.
Anacapa claims that all of its gas is section 105 gas and that price controls were not eliminated for any of its gas under the decontrol of prices that occurred effective January 1, 1985. As related there are two contracts in issue. Under the first contract the arbitrators held that gas from four of Anacapa's wells meets the criteria for decontrol of prices as natural gas produced from new onshore production wells under 15 United States Code section 3331(a)(2). The arbitrators further held that this satisfied the contract criterion of “deregulation of price controls under any Federal ․ legislation” because “ceiling prices ceased to apply to part of the gas produced by ․ Anacapa.” Anacapa argues that this is plainly a misreading of the NGPA because it is premised on the conclusion that Anacapa's gas from the four wells is section 103 gas and that cannot be so because a criterion of such classification is a determination by an authorized agency which is lacking here. The argument is unpersuasive.
We cannot fault the view that an authorized agency determination is a criterion for classification as section 103 gas. As related, the definition of that classification in 15 United States Code section 3313(a) is “natural gas determined in accordance with section 3413 of this title to be produced from any new, onshore production well․” Determination in accordance with section 3413, among other things, requires a determination by a state or federal agency with regulatory jurisdiction with respect to the production of natural gas.
However, Anacapa goes wrong at the outset in asserting that the arbitrators' reasoning is necessarily premised on the conclusion that the gas from the four wells is section 103 gas. The pertinent “category” is that provided in 15 United States Code section 3331(a)(2), rather than section 3313(a). Section 3331 decontrols the price on natural gas “produced from any new, onshore production well (as defined in section 3313(c) of this title).” (Emphasis added.) The definition in section 3313(c) does not include as a criterion a certification or determination by a regulatory agency.
Anacapa's reply to this is that this reading of the NGPA decontrol provision is incorrect. As we have been at pains to say it is not enough that the reading is incorrect, i.e., different than the construction we would give if called upon to interpret this law under a Parsons review. If the arbitrators have selected a reading that is within the range of ambiguity and imported that into their construction of the contract, Anacapa cannot prevail.
Anacapa argued as follows to the superior court. The decontrol provision, 15 United States Code section 3331(a), “says that the provisions of the NGPA applying ceiling prices to § 103 gas cease to apply on January 1, 1985. Thus, in order to qualify for price deregulation as an NGPA § 103 well, the well must first qualify for NGPA § 103 ceiling price treatment.” However, section 3331(a) does not say what Anacapa asserts it says. It says “the provisions of part A of this subchapter respecting the maximum lawful price for the first sale of each of the following categories of natural gas shall ․ cease to apply effective January 1, 1985.” The “provisions of part A” include all of the provisions establishing wellhead price controls, not merely the provision pertaining to section 103 gas. In order to rule out ambiguity and compel the reading advanced by Anacapa the statute would have to say that section 103 natural gas is decontrolled if it meets the additional limiting criteria.
Anacapa also argues that its view of the meaning of section 3331 is compelled because it is the view that has been taken by the Federal Energy Regulatory Commission (FERC), the agency to whom the duty of enforcement of the NGPA is assigned. Anacapa points to FERC regulations promulgated under the NGPA after the contracts here were formed. These regulations show that FERC reads section 3331 as Anacapa believes it should be read. (See 18 C.F.R. Part 272.)
If this were a review of the matter in the posture of Parsons we would find Anacapa's argument persuasive, perhaps compelling. Under federal law if a federal agency charged with administering a federal statute issues an interpretive regulation not in conflict with the statute, a court is obliged to defer to the agency. (Chevron U.S.A. v. Natural Resources Defense Council, Inc., supra, 467 U.S. at p. 843, 104 S.Ct. at p. 2782, 81 L.Ed.2d at p. 703; also see Davis, Administrative Law of the Eighties (1989) Ch. 29.) On the record before the arbitrators the meaning we would likely have assigned the contract provision is that deregulation is measured by federal law, as it stood at the time deregulation is claimed to have occurred.
However, that is not the only meaning that could be assigned without arbitrarily remaking the contract of the parties. We need not inquire whether we would be required to reverse the decision of a lower court which made the same decision as the arbitrators in this case. Under the applicable standard of review our inquiry terminates upon the conclusion that the meaning assigned by the arbitrators is not an arbitrary remaking of the contract.
PG & E argued to the arbitrators that the intended meaning of the term “deregulation” in the contract repricing provision was deregulation under the NGPA as it stood at the time the contract was formed. It contended that the provision was drafted in contemplation of “deregulation dates” contained in the NGPA, including the January 1985 deregulation date under the statutory language of section 3331. If the contract were construed as of the date of its formation it would be well within the confines of semantic permissibility, for reasons given, to say that it called for repricing at market price levels as of that date.
That FERC, several years later, might construe the law differently (for its own purposes) is not an outcome that Anacapa could reasonably and legitimately have expected at the time of contract formation. That the contract price would remain fixed above market levels on the contingencies that the market price dropped below ceiling price, that Anacapa declined to apply for certification, and that FERC construe the NGPA as it has, is not a risk that was manifest to PG & E at the time of contract formation. It is not an arbitrary remaking of the contract, that is a reallocation of risks plainly allocated by the contract, to read the contract as it could reasonably be read at the time of formation in these circumstances. We conclude that the claim of error in the construction of the repricing provision of the contract as to the first Anacapa contract has no merit under the applicable standard of review.
Lastly, Anacapa suggests that the foregoing argument rests too heavily upon the ambiguity of the term “deregulation” as opposed to “ceiling prices ․ cease to apply.” It argues that the amendment of subparagraph 7(b) of the contract, “Effective upon deregulation of price controls under any Federal or State legislation,” is given inappropriate prominence. It suggests that, because of the phrasing of the letter signed by the parties, the clause concerning cessation of application of “ceiling prices” is a “condition precedent ” to the application of subparagraph 7(b). Anacapa finds this condition in the text of the letter saying: “[a ]t such time as ceiling prices under the Natural Gas Policy Act of 1978 ․ cease to apply to all or any part of [Anacapa's] gas, then the provisions of subparagraph 7(b) shall apply to the redetermination of the price to be paid for gas delivered․” (Emphasis added by Anacapa.) Therefore, it reasons, the “ceiling prices clause” is a higher source of meaning. We disagree that this construction is compelling.
The two phrases are alternate formulations of the same concept and neither has semantic primacy. That which counts as a cessation of ceiling prices is also that which counts as a deregulation for the reason that ceiling prices are the product of regulation. The cessation of ceiling prices does not give rise to a deregulation—it is a deregulation. In any event neither formulation weighs critically in Anacapa's favor.
Moreover, to the extent that semantic primacy is to be allocated between the two formulations it would seem that the formulation chosen for inclusion in the formal text of the contract document would have the superior claim. The purpose of the letter is to achieve an amendment of the formal contract document and that amendment is the new language of subparagraph 7(b).
That brings us to Anacapa's claim that the arbitrators erred in construing the repricing provision under the second contract. Under that contract the arbitrators held that gas from two of Anacapa's wells meets the criteria for decontrol of prices under subdivision (a)(3) of section 3331, “(3) Intrastate contracts in excess of $1.00.—Natural gas sold under an existing contract, any successor to an existing contract, or any rollover contract, if [such gas meets two conditions that are undisputed here].” Anacapa contends that this holding rests on an impermissible reading of the contract and the NGPA. It argues this is so because natural gas subject to this subdivision under a contract, as here, where the parties could set prices by negotiation is still subject to price limits, under section 3331(e). Once again, the construction given by the arbitrators does not count as an arbitrary remaking of the contract between the parties.
As related, PG & E argued to the arbitrators that the intended meaning of the term “deregulation” in the contract repricing provision was deregulation under the NGPA as it stood at the time the contract was formed. It contended that the repricing provision was drafted in contemplation of “deregulation dates” contained in the NGPA, including the January 1985 deregulation date under the statutory language of section 3331. With respect to the wells under the second contract PG & E contended that the elimination of the original set of price controls under section 3331(a)(3) was a deregulation triggering the repricing option despite the imposition of a new set of price limits upon any negotiated price under the contract. Although this is not the only plausible reading of the contract it is one that is semantically permissible.
That this meaning could be assigned to the contract phrase “deregulation of price controls under any Federal ․ legislation” finds support in the consideration that the new price limit would be lower than the price under section 102 of the NGPA. As related, the letter agreement amending the contract calls for the highest applicable price under section 102 of the NGPA until the repricing provision is invoked. Under the original ceiling prices section 105 gas is eligible for a price at this rate. (15 U.S.C. § 3315(b)(1)(B).) However, the new limit for section 105 gas provided under section 3331(e) for the operation of negotiated price clauses in contracts is lower. (15 U.S.C. § 3315(b)(3)(A).) Hence, if the repricing clause were not meant to be invoked as to section 105 gas, the contract would facially call for an illegal price. Moreover, without some operation of the repricing clause, there is no establishment of price under an indefinite price escalator clause, upon which the limit in 15 United States Code section 3331(e) would operate.
PG & E's proffered usage of the term “deregulation” in the contract is supported by the following similar contemporary usage in the House Conference Report concerning the NGPA. “Natural gas sold under an existing intrastate contract ․ is deregulated as of January 1, 1985, [if § 3331(a)(3) criteria are met].” (1978 U.S.Code Cong. and Admin.News, at pp. 8800, 9008.) Similar usage is also employed in Martin Exploration Management Co. v. F.E.R.C., supra, 813 F.2d at pages 1072–1073. “In essence, [§ 3331(a)(3) ] deregulates intrastate gas that is sold under a contract that set a price in excess of $1.00 on December 31, 1984. [¶] Once such gas has been deregulated, it can become subject to a ‘special rule’ limiting the price that can be obtained pursuant to an indefinite price escalator clause. Conf.Rep. at 83. Congress was concerned that ‘following deregulation, the operation of indefinite price escalator clauses ․ could operate to increase rapidly intrastate gas prices following deregulation.’ ” (Ibid., fn. omitted.)
Lastly, Anacapa argues that even if the reasoning of this part is correct that the shift from Section 105 to the new special limit can be a “DEREGULATION”, IT CANNOT BE A CESSATION OF “CEiling prices” as required. the answer is: Yes it can. The phrase “ceiling prices cease to apply” in the letter means “deregulation.” Deregulation can mean the January 1985 NGPA deregulation date as we have explained. If A = B and B = C then A = C. The first set of ceiling prices ceased to apply on January 1, 1985.
Having found that the term “deregulation” in the contract employed the same usage, referring to the elimination of the original ceiling prices under the NGPA, the arbitrators could reasonably construe the repricing provision as applicable to the section 105 gas under the second contract as of the date of that elimination, regardless of the imposition of another price limit in futuro. This reading of the contract, in view of the considerations advanced by PG & E, even if an error of law, in the sense that we might find it untenable under a Parsons standard of review, does not count as an arbitrary remaking of the contract. We conclude that the claim of error in the construction of the repricing provision of the contracts as to the second Anacapa contract has no merit under the applicable standard of review. For all the forgoing reasons the trial court exceeded its powers in vacating the award as to the application of the repricing term of the contracts in this case.
The Arbitrators' Construction of the Contract Concerning the Exclusion of Four Wells From the Original Contract Does Not Arbitrarily Remake The Contract
The next claim concerns issue B under the statement of issues tendered to the arbitrators. Anacapa contends that the arbitrators committed errors of law in concluding that four wells were not on land included in the contract at the time the NGPA was enacted. If the wells were not on lands covered by the contracts prior to the enactment of the NGPA they were subject to the lower ceiling price for section 109 gas rather than that applicable to 105 gas. PG & E sought recovery of the difference between the section 109 price and the section 105 price it had been paying; approximately $1,846,000. The dispute concerns the scope of the original contract. PG & E claimed that the contract only pertains to lands described in the writing. Anacapa claimed that other lands not described were intended to be covered and were covered by virtue of oral promises. The arbitrators concluded that the original written agreement did not cover the disputed wells, and that the evidence of an oral agreement was insufficient. That conclusion is not subject to judicial review.
The questions concerning the existence of collateral or subsequent oral agreements including the land at issue under the pre-NGPA contracts turn on factual determinations made by the arbitrators concerning the conduct of the parties. The essential holding of the arbitrators is as follows. “On the written record, the wells in question did not qualify for pricing under section 105. [¶] Anacapa contends, however, that the lands on which the wells were drilled were committed to PG and E by an oral agreement entered into before the effective date of NGPA and that, therefore, the gas produced from the wells was correctly priced under section 105(b)(1)(B). Neither the terms of the alleged oral contract nor the time when it was made were clearly established by the evidence.”
For reasons given earlier in this opinion, in the absence of a specific agreement to the contrary, the factual findings of the arbitrators, mistaken or not, are final and not subject to judicial review. Under a submission that does not expressly provide for such review there is no judicially cognizable claim that there was insufficient evidence to support factual findings of the arbitrators. (See, e.g., Morris v. Zuckerman (1968) 69 Cal.2d 686, 691, 72 Cal.Rptr. 880, 446 P.2d 1000.) There is no provision of the submission agreement here which provides for judicial review of the factual determinations of the arbitrators. The superior court erred in vacating the award as to the portion of the award granting PG & E repayment of overcharges because of the incorrect characterization of the four disputed wells.
Nonetheless, Anacapa contends that the determination that these four wells were not covered under the pre-NGPA agreement of the parties and hence not eligible for section 105 pricing is beyond the power of the arbitrators because it contradicts the 1980 and 1981 letter amendments to the original contract. The letters amended the original contract by altering the original maps to include the new wells showing them as proved lands. The text of each amendment is introduced by the following statement in PG & E's letters: “You [Anacapa] have advised us that you have recently completed two new wells, [e.g., the Frye No. 2], on lands covered by [the original contract] and request that said wells be covered as additional wells under the terms and conditions of said agreement.” Anacapa argues that the arbitrators in effect rewrote the contract by determining that this statement was mistaken. Anacapa argues that the issue whether the wells are covered under the original agreement does not arise “under” any provision of the contract, and that the arbitrators must “take the contract as they find it.” We disagree.
The contract provides for arbitration of “any other dispute ․ arising between Buyer and Seller under any provision hereof․” The dispute may be said to arise under a provision of the contract, since the contract provides that the pricing shall in no event exceed NGPA ceiling prices. Again, the general canon is to read arbitration clauses broadly, construing ambiguity in favor of arbitration. If the wells are in fact not eligible for section 105 pricing then “under” the pricing provision of the contract, there has been an overcharge.
Alternatively, it is questionable whether the prefatory statement in PG & E's letter concerning the lands being covered under the initial agreement is a provision of the contract. The statement, in the nature of a recital, is not included in the contract amendment itself.
The Award Does Not Arbitrarily Remake the Contract in Holding that PG & E Has No Obligation to Take Gas To Prevent Drainage or Physical Damage to Anacapa's Wells
The final dispute, under issue C., concerns the obligation of PG & E to act to avoid causing physical harm to Anacapa's wells or Anacapa's interest in obtaining gas from reservoirs tapped by others by failing to take enough gas. The claim is posed under the doctrine of good faith and fair dealing. The written contract does not obligate PG & E to take gas from Anacapa. It provides that regardless whether gas is taken PG & E must pay Anacapa as if it had taken one-third of the maximum delivery rate available. Anacapa claimed PG & E should nonetheless be compelled to take gas at a rate sufficient to prevent damage to the wells by water infiltration and to prevent Anacapa's neighbors who might be tapping the same gas reservoir from obtaining a disproportionate amount of the gas. The arbitrators found that these issues were discussed in the negotiation of the contracts and concluded that the failure to restrict PG & E activity with respect to them was an allocation of the risk of the contingencies. “We conclude that PG and E has no obligation to avoid causing drainage of gas from Anacapa's wells or to take gas at rates of production sufficient to avoid damage to the wells.” There is no basis to impugn this finding under the applicable standard of review.
The implied covenant of good faith and fair dealing in the performance of a contract is one of contract law. (See Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683–684, 254 Cal.Rptr. 211, 765 P.2d 373.) “The rules which govern implied covenants have been summarized as follows: ‘(1) the implication must arise from the language used or it must be indispensable to effectuate the intention of the parties; (2) it must appear from the language used that it was so clearly within the contemplation of the parties that they deemed it unnecessary to express it; (3) implied covenants can only be justified on grounds of legal necessity; (4) a promise can be implied only where it can be rightfully assumed that it would have been made if attention been called to it; (5) there can be no implied covenant where the subject is completely covered by the contract.’ ” (Lippman v. Sears, Roebuck & Co. (1955) 44 Cal.2d 136, 142, 280 P.2d 775, citation omitted.) The reach of the governing law depends upon the contract purposes and looks to commercial standards of fair dealing in the transaction. (See Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818, 169 Cal.Rptr. 691, 620 P.2d 141; Rest.2d Contracts, § 205, com. a.)
Anacapa contends that the finding of the arbitrators presents an error of law, in essence, because it permits PG & E to manipulate drainage or the prospect of damage to pressure Anacapa to renegotiate the contract. Again, we note that Anacapa failed to pursue the issue of adhesion before the arbitrators as a ground for construction of the contracts. We also reiterate that the standard of judicial review is not mere error of law but an error so egregious as to amount to an arbitrary remaking of the contract. In this context that means an error of law that discards an unmistakable expectation of an implied covenant under the contract.
PG & E adduced evidence that the problems and risks associated with drainage and potential for physical damage if gas was not taken continuously are commonly known in this industry, that the right to “shut in” wells, by taking no gas, was valuable to PG & E to handle fluctuating demand, that the right was bargained for in light of the risks of drainage and physical damage, and that Anacapa sought unsuccessfully in the negotiation of the contract to obtain provisions requiring PG & E to take delivery of its gas in a manner that would preclude disadvantageous drainage.
This is not a case where the inference is compelled that Anacapa reasonably presupposed that drainage protection and damage protection would generally be provided by PG & E. Both the history of the negotiations and the contract term providing minimum payments regardless whether gas is taken support the contrary view. In this setting we cannot say that the finding of the arbitrators concerning an implied covenant to take gas in a manner protective of Anacapa's interests is an error of law which discards an evident contractual expectation of Anacapa to the contrary. Hence the superior court erred in setting aside the award as to these issues.16
No Action That Is Compelled Under the Award Presents a Conflict With Public Policy
Anacapa's residual contention is that the portion of the arbitration award concerning repricing compels an illegal act or an act violating public policy. It argues that the determination that some of its gas was deregulated as natural gas produced from new onshore production wells was not arbitrable and that the arbitration of that point itself violates public policy. As appears, this argument confuses an error in legal reasoning with ordering an illegal act. Anacapa also argues that under the award it is illegally compelled to sell section 109 gas for a price that exceeds the section 109 ceiling price. This argument is not one that Anacapa may raise since it is not aggrieved.
Courts will vacate or correct an award at the behest of a party who demonstrates it is invalid insofar as it orders an illegal act. (See e.g., Black v. Cutter Laboratories (1955) 43 Cal.2d 788, 800, 278 P.2d 905, “[H]ere the very award itself is illegal in that it orders reinstatement as an employe of [a Communist];” Evans Products Co. v. Millmen's Union No. 550 (1984) 159 Cal.App.3d 815, 819, 205 Cal.Rptr. 731, under federal arbitration act “not bound to defer to an award that actually violates the law or any explicit and well defined and dominant public policy.”) Arbitrators “exceed their powers” in making an award insofar as the award compels a party to violate the law if given judicial enforcement. (See Black, supra, 43 Cal.2d at p. 798, 278 P.2d 905.) This stems from the general principle that the judiciary will not enforce a contract so as to compel the performance of an illegal act. (See Evans Products Co., supra, 159 Cal.App.3d at p. 819, 205 Cal.Rptr. 731.) Hence, the doctrine that governs the review of an award under such a claim is that pertaining to unenforceability of contracts.17 (Compare Rest.2d Contracts, §§ 178–185.)
The general rule as to unenforceability is set forth in section 178, subdivision (1) of the Restatement Second of Contracts. “A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.” Sometimes the result of application of the rule is sweeping. However, this is not necessarily so, and in many circumstances part of an agreement may be enforceable even though the rest is unenforceable. (See Rest.2d Contracts, §§ 183–185.) For example, a promise to pay interest at a rate above the highest permissible legal rate may be enforceable up to the highest permissible legal rate. (See Id. § 184, com. b, illus. 5.) With these considerations in mind we turn to Anacapa's particular claims of unenforceability.
Anacapa first claims that the effect of the NGPA is to render the determination of the question of deregulation nonarbitrable. Anacapa submits that the buyer and seller of gas could not simply determine for themselves that their transaction is not subject to NGPA ceiling prices. Hence, they cannot indirectly authorize an arbitrator to do so. However, it is not the case that any error in construction of the NGPA concerning applicability of ceiling prices in the course of arbitration warrants vacating the award as in conflict with public policy. That is overblown, as noted in Interinsurance Exch. v. Bailes (1963) 219 Cal.App.2d 830, 836, 33 Cal.Rptr. 533: “While, in one sense, all rules of adjective and substantive law set forth the ‘public policy’ of the state, there is a vast difference between the enforcement of a void contract and the mere misunderstanding or misapplication of rules of law involved in the application to a particular dispute of a [valid contract]․”
The public policy core of the NGPA is remarkably compact. If the sale of gas is for a price permitted under the act, at or below the highest applicable ceiling price if any, there is no public policy against the enforcement of the contract of sale. If the parties enter into a contract for the sale of gas and it is manifest that they have presupposed an utterly erroneous legal view of the characterization of the gas for purposes of the NGPA, that is immaterial with respect to a claim of public policy transgression so long as the price actually paid is not unlawful. The same holds true where the price is set under a contract by means of an arbitration. Hence, Anacapa's generalized claim that the award is unenforceable with respect to the repricing provision because it rests upon an incorrect view of the need for an agency certification of the character of some of the gas as section 103 gas has no merit.
The award can only be said to violate the public policy emanating from the NGPA insofar as it compels payment of a price for Anacapa's gas that exceeds an applicable ceiling price. Moreover, under the doctrine of unenforceability of contract terms, the award's terms should only be denied judicial enforcement insofar as they call for a price that exceeds a ceiling price. (See Rest.2d Contracts, § 184.) The appropriate remedy, if any, would be to correct the award pursuant to section 1286.6, subdivision (b). (See § 1286.2, subd. (d).) However, neither party in this case has sought that relief.
Any claim by Anacapa for vacation of the award on the ground that it so violates the NGPA is presented in an odd light. The claim is only posed as a stalking horse for Anacapa's argument that the arbitrators employed erroneous legal reasoning. To advance the argument Anacapa must claim that the award calls for a price higher than an applicable ceiling price.
The parties stipulated to a market value of the gas in 1985 which Anacapa asserts exceeds the 1985 ceiling price for section 109 gas.18 If so, Anacapa is not aggrieved. A contract of sale for a certain price only entails a promise by the buyer to perform by giving the seller the funds specified. The seller is not obliged to take all of the money, it is only obliged to release the goods when tendered the price. It is hard to imagine the buyer insisting that the seller take the whole amount tendered; it is even harder to imagine the buyer seeking legal enforcement of such a “duty” of the seller. Anacapa can avoid an illegal outcome by simply declining to accept more than the ceiling price it perceives to be applicable. Hence, as to Anacapa, the award cannot be said to compel payment of an unlawful price.19
In the light of these considerations and the present posture of the case, we find no warrant to uphold the action of the trial court based upon Anacapa's claim that the award may result in a violation of the NGPA. The action of the trial court was not founded upon this ground nor would the ground support the action. Anacapa is under no legal compulsion to violate the NGPA by confirmation of the award.
Let a peremptory writ of mandate issue commanding the superior court to rescind its order vacating the arbitration award and granting Anacapa ancillary relief.
1. All statutory references are to the Code of Civil Procedure unless otherwise indicated.
2. This case does not concern other statutory grounds for the vacation of an award. The integrity of the arbitration procedure is not challenged. (§ 1286.2, subds. (a), (b), (c) or (d).) Nor is relief sought for correction of the award for “an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award.” (§ 1286.6., subd. (a).)
3. Following this order the parties, on July 29, 1987, filed a stipulation in the legal action instituted by Anacapa that, in the event there is a final determination that the price PG & E pays for Anacapa's gas is subject to price redetermination as of January 1, 1985, under the 1971 and 1973 agreements, as modified by the June 30, 1980 amendments, that the fair market price for gas delivered in specified years would be as stipulated.
4. Anacapa responds that both parties thought this to be the law in the trial court; it conforms therefore to their contractual expectations, and any error which ensued was invited by PG & E. We disagree. At the time the parties entered into the contracts the law governing judicial review was unsettled. This circumstance provides no reason to believe that a given rule would be applied. The correct rule of law should therefore be applied. The problem is properly viewed as theory of trial, the application of which is discretionary with this court. (See 9 Witkin, Cal.Procedure (3d ed. 1985) Appeal, §§ 316, 322, p. 328 and p. 332.)
5. This basis for resolution of disputes has a long history. At times it has been mistakenly thought to pertain to equitable remedies administered by courts. “This conception of equity was known to the Roman jurists, and was described by the phrase, Arbitrium boni viri, which may be freely translated as the decision upon the facts and circumstances of a case which would be made by a man of intelligence and of high moral principle; and it was undoubtedly the theory in respect to their own functions, commonly adopted and acted upon by the ecclesiastical chancellors during the earliest periods of the English Court of Chancery. It needs no argument to show that if this notion should become universally accepted as the true definition of equity, every decision would be a virtual arbitration, and all certainty in legal rules and security of legal rights would be lost.” (1 Pomeroy, Equity Jurisprudence (5th ed. 1941) § 43, p. 57.)
6. The codes of 1872 do not appear in the Statutes of California, the official reports of enactments of the Legislature. (Cf. Stats. 1850, ch. 142.) They are the product of a commission established by the Legislature (Stats. 1869–70, ch. 516, § 2) and presumably ratified by it (Kleps, The Revision and Codification of California Statutes 1849–1953 (1954) 42 Cal.L.Rev. 772–779; see also Parma and Armstrong, The Codes and Statutes of California: A Bibliography (1929) 22 Law Lib.J. 41, 42.) “The 1872 codes were published as separate documents by the State Printer and sometime thereafter a private publication was offered by H.S. Crocker & Co. which contained annotations by the code commissioners. No other state publication of the 1872 codes was ever made․” (Kleps, supra, at p. 779, fn. omitted.) A set of the annotated codes is in the State Law Library.
7. At this point the opinion cites to Carsley v. Lindsay (1859) 14 Cal. 390, which says nothing about error appearing on the face of the award. It also cites to Morse, The Law of Arbitration and Award (1872) at page 296, which asserts that a general submission makes arbitrators the final judges of law and fact. “That a general submission, containing no restriction or stipulation to a contrary effect, constitutes the arbitrators final judges of both law and fact [is the settled law]. If the parties, it was said, in ‘general terms submit their respective rights depending upon considerations of law and fact, and the referees decide accordingly, such award is conclusive as well of the law as the fact; and the court upon the return of such an award will not inquire whether the referees, thus authorized, have decided correctly upon principles of law or not.’ ” (Ibid, fn. omitted.) What this has to do with what is “on the face” of the award is not entirely clear.
8. The nature of the submission agreement in Crofoot is ambiguous. It provided for arbitration of the issues that had been raised by pleadings served in legal actions brought by the parties. (119 Cal.App.2d at p. 164, 260 P.2d 156.) One certainly could infer from this that the purpose of the arbitration was to resolve those issues in the manner of a court, since the issues arising from pleadings are issues of fact and issues of law. The possibility that the arbitrator might have broader powers is not, however, expressly ruled out.
9. This recurrent inconsistency was lamented long ago in an early treatise on the subject. “We now approach the most difficult topic in the law of arbitration, to wit, the question, what will be the effect of a mistake made by the arbitrator in matter of law or of fact, not obvious on the face of the award itself? The embarrassment in dealing with this matter lies in the utter inconsistency of the judicial decisions; for so soon as we seem to have successfully educed a rule or principle from some of them, we straightaway find it contradicted by other authorities. Thus the only certain element is the entire uncertainty.” (Morse on The Law of Arbitration and Award, supra, at p. 292, fn. omitted.)
10. This has not escaped critical notice. “Our California courts keep assuring the litigants, and since their opinions are published, their readers, that the merits of the contrary between the parties award are not subject to judicial review. See, for example, Pacific Vegetable․ Nevertheless, while stating these principles of arbitration theory and law, the courts are indulging in much work reviewing, in effect, the merits of all the arbitration matters which are getting to them, even if in the end, they send the parties to arbitration, or confirm the award, or refuse to vacate it․ While the arbitration process usually wins out in the greater number of cases litigated there appears to be no reluctance on the part of unhappy contestants to litigate beyond the arbitration stage. As has been suggested before, arbitration should be the end of, not the first step in litigation.” (Feldman, Arbitration Modernized—The New California Arbitration Act (1961) 34 So.Cal.L.Rev. 413, 414, fn. 11.)
11. However, the Commission did intend to encourage arbitration and to that end provided: “The Commission recommends the addition of language to the arbitration statute to make clear that upon proceedings to compel arbitration the court is not to consider the merits of the dispute sought to be arbitrated.” (P. G–6, emphasis added.)
12. The Restatement comment, in pertinent part is as follows. “Much contract law consists of rules which may be varied by agreement of the parties. Such rules are sometimes stated in terms of presumed intention, and they may be thought of as implied terms of an agreement. They often rest, however, on considerations of public policy rather than on manifestation of the intention of the parties.”
13. PG & E also contends that the trial court acted incorrectly in overturning the award as to this matter because the arbitrators' construction is not “completely irrational.” We will consider this claim in a subsequent section of this opinion.
14. Anacapa suggests that the opinion fails to take account of the language contained in this ellipsis in the above quotation of the contract, to wit: “any successor legislation to such Act and any legislation enacted by the State of California”. It suggests that since the contracts contemplated the continuance of ceiling prices as a result of future legislative action, it is implied that all future legal developments, such as FERC's administrative interpretation of section 3331 must be incorporated into the contract as the measure of cessation of application of the ceiling prices.We disagree. The reason for the ellipsis is that there never was successor legislation. The wide ranging implication Anacapa wishes incorporated into this text is far short of the clear textual specification that might bar a contrary resolution by the arbitrators. As we later explain, Anacapa's most persuasive argument is based upon the present judicial deference to federal administrative constructions of the NGPA. However, the present federal rule granting primacy to the interpretations of the federal agency rests upon Chevron U.S.A. v. Natural Resources Defense Council, Inc. (1984) 467 U.S. 837, 843, 104 S.Ct. 2778, 2781, 81 L.Ed.2d 694, 703, decided in 1984, well after the formation of the contracts at issue.
15. Many contracts for sale of natural gas entered into after the advent of the NGPA contain pricing provisions anticipating the deregulation of natural gas prices and providing for repricing in that event. (Martin Exploration Management Co. v. F.E.R.C. (10th Cir.1987) 813 F.2d 1059, 1068, fn 11; rev. on other grounds F.E.R.C. v. Martin Exploration Management Co. (1988) 486 U.S. 204, 108 S.Ct. 1765, 100 L.Ed.2d 238.) The result of a provision pegging the contract price to the NGPA ceiling price when the market falls below that price is that the ceiling becomes a floor. The buyer is now paying more than the market price. This is apparently a widespread phenomenon. “Because by 1984 the market price of natural gas had plunged below the regulated price ceilings, these producers stood to reap higher contractual prices if their gas was regulated than if it were deregulated.” (F.E.R.C. v. Martin Exploration Management Co., supra, 486 U.S. at p. 208, 108 S.Ct. at p. 1768, 100 L.Ed.2d at p. 244.)One might ask why a buyer would agree to such a provision. Apparently, when the NGPA became law the conventional wisdom was that market prices were bound to steadily increase. (Martin Exploration Management Co. v. F.E.R.C., supra, 813 F.2d at p. 1071.)
16. Anacapa also suggests that the award on the right of PG & E to shut in Anacapa's wells is broad enough to permit PG & E unconscionably to coerce concessions in future contractual arrangements. That issue is not before us. The meaning of an award, as with an opinion, must be derived from the facts to which it is applied. On the facts here PG & E shut in the Anacapa wells during a fair weather spell when market demand for gas was low. It proposed to abort the shut in and purchase the gas from Anacapa at market prices below ceiling prices on the rationale that in periods of low demand it purchases gas from the lowest price producers. A resort to alternative sources of gas in these circumstances does not constitute an unconscionable use of the power to shut in. We decline to speculate whether the language of the award might be construed on some hypothetical facts to allow an unconscionable use of the power to shut in. That occasion may never arise and, if so, is subject to arbitration.
17. The background considerations which underpin this doctrine are noteworthy. “In general, parties may contract as they wish, and courts will enforce their agreements without passing on their substance. Sometimes, however, a court will decide that the interest in freedom of contract is outweighed by some overriding interest of society and will refuse to enforce a promise or other term on grounds of public policy. Such a decision is based on a reluctance to aid the promisee rather than on solicitude for the promisor as such. Two reasons lie behind this reluctance. First, a refusal to enforce the promise may be an appropriate sanction to discourage undesirable conduct, either by the parties themselves or by others. Second, enforcement of the promise may be an inappropriate use of the judicial process in carrying out an unsavory transaction. The decision in a particular case will often turn on a delicate balancing of these considerations against those that favor supporting transactions freely entered into by the parties.” (Rest.2d Contracts, Introductory Note to Ch. 8, Vol. 2, p. 2.)
18. We note that the error of law which Anacapa asserts, standing alone, would be harmless as to the first contract even if subject to review in the guise of the unenforceability of the award for reasons of public policy. The arbitrators' additional finding that section 105 gas had been deregulated under United States Code section 3331(a)(3) is not subject to the agency certification theory for the reason that no such certification is required. It was uncontested that other wells subject to the first contract were producing section 105 gas. Hence, deregulation and triggering of the repricing procedure as to the first contract would have been directed by the arbitrators in any event.
19. Anacapa claims that, if the award is correct in concluding that the four wells in dispute under issue B. of the statement of issues are section 109 wells, the award calls for a price for gas from those wells higher than the ceiling price for section 109 gas. These are the same four wells found to have been subject to elimination of ceiling prices as new onshore production wells, under United States Code section 3331(a)(2), under issue A. If the award is incorrect in finding that such deregulation is accomplished without a prior certification that the gas is section 103 gas then the section 109 ceiling price is still applicable. But the award logically compels the view that the price due Anacapa under the contract for gas from these wells is the market price. This follows from the consideration that the finding of deregulation allowing repricing as to these wells rests upon the theory that they are subject to deregulation as new onshore production wells.
BLEASE, Acting Presiding Justice.
SPARKS and MARLER, JJ., concur.