Arbitration Award Vacated for “Impression of Possible Bias” – Employment Law Weekly

Arbitration Award Vacated for “Impression of Possible Bias”

Given the exceedingly narrow scope of judicial review of arbitration awards, assuring both the actual and apparent impartiality of a neutral arbitrator is crucial to the legitimacy of arbitration as a dispute resolution mechanism. This month, a Court of Appeal published opinion illustrated on of the rare instances where an arbitration award was vacated for the impression of possible bias.

In January 2019, plaintiff FCM Investments, LLC (FCM) signed a Purchase Agreement to buy real property in Riverside, California from defendant Grove Pham, LLC (Grove), a company owned by Phuong Pham. Grove operated a nursing home on that property with resident patients. FCM agreed to pay Grove $7.45 million to buy the property, with an upfront deposit of $500,000. Escrow was to close in 30 days.

Disputes arose during the due diligence process, with the parties extending the escrow closing date several times. By April 2019, FCM filed a complaint in Riverside Superior Court against the sellers alleging that their dilatory tactics were preventing completion of the sale. The parties were required to mediate “any dispute or claim” and arbitrate disputes not resolved by arbitration.

Ultimately the parties stipulated to arbitrate their disputes before Honorable Judith C. Chirlin (Ret.) of Judicate West. Arbitration proceeded over two days in June 2021. The arbitrator concluded that the Phams breached the Joint Addendum by failing to provide proof of 66 live-in patients or a notarized agreement regarding the use of Longha’s license. FCM was accordingly justified in terminating escrow. FCM was awarded a return of its deposit with interest, loss-of-bargain damages of $9.1 million plus interest, $127,040 in attorney’s fees, and $20,048 in costs.

FCM filed a petition to confirm the arbitration award, while the Phams moved to vacate it pursuant to the California Arbitration Act (Code of Civ. Proc., § 1280 et seq.). Emphasizing the narrow scope of judicial review, FCM opposed the petition to vacate. Following hearings in December 2021 and January 2022, the court denied the Phams’s motion to vacate and entered judgment for FCM confirming the arbitration award.

The Court of Appeal vacated the arbitration award in the published case of FCM Investments v. Grove Pham, LLC – D080801 (October 2023).

Although the Phams asked to vacate the arbitration award on multiple grounds, the Court of Appeal largely focused on one. In making an adverse credibility finding against Phuong based on her use of an interpreter, the arbitrator’s decision creates a reasonable impression of possible bias requiring that the arbitration.

The arbitrator found the seller in breach based largely on an assessment of witness credibility. She felt the case was unique “both in 12 years of doing arbitration and 24½ years on the Los Angeles County Superior Court, in that the lack of credibility issues are so rampant and obvious.”

In the arbitrator’s view, defendant Phuong Pham lacked credibility because she used an interpreter during the arbitration proceedings. Reasoning that she had been in the country for decades, engaged in sophisticated business transactions, and previously functioned in some undisclosed capacity as an interpreter, the arbitrator felt that her use of an interpreter at the arbitration was a tactical ploy to seem less sophisticated.

While arbitration awards are “nearly immune” from attack, “one of the limited grounds for challenge is bias on the part of the arbitrator.” Courts are empowered to act where that impartiality can reasonably be questioned. “[A]ny tribunal permitted by law to try cases and controversies not only must be unbiased but also must avoid even the appearance of bias.” (Commonwealth Coatings Corp. v. Continental Casualty Co. (1968) 393 U.S. 145, 150.)

“Sensitivity toward language difficulties is the hallmark of our multi-lingual state.” (People v. Aguilar (1984) 35 Cal.3d 785, 794; see Gov. Code, § 68560, subd. (e).) Across California, “approximately 40 percent of us speak a non-English language at home; there are more than 200 languages and dialects spoken; roughly 20 percent of us (nearly 7 million) have English language limitations.”

“Arbitration proceedings were unreported, leaving us to guess what evidence, if any, was presented as to Phuong’s English proficiency during arbitration.”

“As a factual matter, FCM’s own pleadings undercut the notion that Phuong’s use of an interpreter was a ploy. In its original complaint, filed long before the relationship between the parties completely unraveled, FCM acknowledged that Phuong used her daughter as a translator during a conference call based on her daughter’s ‘proficiency in English.’ If Phuong relied on her daughter to translate a conference call before the deal unraveled, it seems unsurprising that she would use an interpreter to testify in commercial arbitration proceedings.”

Here, the arbitrator’s credibility finding “rested on unacceptable misconceptions about English proficiency and language acquisition. These misconceptions, in turn, give rise to a reasonable impression of possible bias on the part of the arbitrator requiring reversal of the judgment and vacating the arbitration award.”

Arbitration Award Vacated for “Impression of Possible Bias”

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