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W.J. Deutsch & Sons, Ltd v. the Superior Court of Sacramento County

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Sacramento)


December 6, 2010

W.J. DEUTSCH & SONS, LTD., PETITIONER,
v.
THE SUPERIOR COURT OF SACRAMENTO COUNTY, RESPONDENT; RENWOOD WINERY, INC., REAL PARTY IN INTEREST.

The opinion of the court was delivered by: Raye ,j.

Filed

W.J. Deutsch & Sons v. Superior Court CA3

NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

Real party in interest Renwood Winery, Inc. (Renwood), a vintner, sells wines under its own labels produced from grapes grown and harvested locally. Renwood entered into an exclusive marketing and distribution contract (the services agreement) with petitioner W.J. Deutsch & Sons, Ltd. (Deutsch), a national wine distributor. After the services agreement turned to sour grapes, the parties entered into a lengthy arbitration.

The arbitrator ultimately awarded Deutsch liquidated damages, other damages, and attorney fees. Deutsch filed a motion in the trial court to confirm the award. The trial court found the arbitrator exceeded his authority and granted Renwood's petition to vacate the award. Deutsch filed a petition for writ of mandate contending the trial court engaged in an impermissible review of the merits of the award, supplanted its own interpretation of the contract for that of the arbitrator, and incorrectly interpreted the contract. We agree and will grant the petition for writ of mandate, and issue a peremptory writ directing the trial court to annul its decision and conduct further proceedings consistent with the views expressed in this opinion.

FACTUAL AND PROCEDURAL BACKGROUND

Renwood produces and sells wine made from grapes harvested in Amador County. Deutsch is a national marketer, promoter, and distributor of wine, selling wine to other distributors, retailers, and restaurants.

The Services Agreement

In March 2006 Renwood and Deutsch entered into the services agreement in which Deutsch agreed to become Renwood's exclusive marketing and distribution service provider. Under the agreement, Deutsch would purchase specific Renwood wines.

Various types of wines were divided into four tiers, with different sales standards for each tier. The standards were based on Renwood's own prior sales of its products, with a yearly growth rate of 15 percent, compounded each year. Deutsch would market and distribute these wines across the country.

The services agreement defines the term "deplete" as "the sale of wine by a distributor to merchants that sell the wine to the final consumer." Deutsch would be required to "ensure that depletions of Contracted Products do not fall below 80% of the Tier Sales Standards."

The services agreement provided that its "Anniversary Date" was July 1, 2007, and each succeeding July 1. The agreement was for 10 years, in two successive five-year periods from July 1, 2006. However, the parties anticipated the agreement would be ratified prior to the anniversary date. Therefore, the agreement provided that its "Effective Date" was "April 1, 2006, so long as Authorized Execution of this agreement by all signatories . . . takes place by that date" and designated the period from the effective date to July 1, 2006, the "Transition Period."

The services agreement contains a section entitled "Transition Period," described as a period in which the parties would begin the transition in distribution, make appropriate announcements, and "commence performance of the obligations under this agreement."

During the Transition Period, the parties "will be bound by the terms of this agreement" and "will . . . commence performance of the obligations under this agreement." In addition, "all Tier Sales Standards and cure obligations/ guarantees will apply during the transition period" with three specific exceptions.*fn1

A cure procedure was set forth for failure to meet sales standards. Deutsch was required to purchase a certain amount of Renwood wine to make up for the shortfall. Under the cure requirement, Deutsch would purchase up to a level of 100 percent for Tier 1 and Tier 4 wines, and 85 percent for other tiers.*fn2

Under the services agreement, either party could unilaterally terminate if the other breached and failed to cure. The non-breaching party could recover damages for breach as well as attorney fees and costs. Either party could unilaterally terminate in the absence of a breach but would have to pay liquidated damages. The agreement mandated arbitration.

The Dispute

Unlike a fine wine, the parties' relationship did not age well. A dispute arose over Deutsch's obligation to purchase wine to cure shortfalls in depletions and the distributor's efforts to promote Renwood wines. Ultimately, Renwood terminated the services agreement, alleging fraud in Deutsch's reporting of depletions.

Renwood filed a demand for arbitration in June 2008, claiming breach of contract, breach of the covenant of good faith and fair dealing, promissory fraud, defamation, interference with prospective economic relations, unfair business practices, fraud, and declaratory relief. Deutsch filed a response, arguing Renwood terminated the services agreement without the required notice and opportunity to cure. Deutsch alleged breach of contract and requested liquidated and other damages. Months of discovery and an evidentiary hearing followed.

The Arbitration Award

In July 2009 the arbitrator issued an interim award. The arbitrator found Renwood unilaterally terminated the services agreement and awarded Deutsch damages. Renwood filed a motion to clarify the interim award, reopen the hearing, and correct the interim award. Deutsch filed a motion for attorney fees and costs.

The arbitrator issued a final award in October 2009. The arbitrator concluded the tier sales standards and cure requirements did apply during the Transition Period, beginning in April. However, the arbitrator stated it defied "logic and common sense" to apply the 80 percent depletion requirement as of that date.

Instead, the arbitrator determined the parties' services agreement required Deutsch to purchase wine to cure sales shortfalls under the tier sales standards on an annual basis, on June 30 of each year. Therefore, Deutsch had not breached the agreement by failing to cure sales shortfalls on a monthly basis. The 80 percent depletion rate was also measured on an annual basis, from July 1 through June 30 of each year.

The arbitrator awarded Deutsch liquidated damages of $739,253.00 and marketing contributions of $221,015.00, required Renwood to repurchase $1,089,359.00 in inventory, and awarded consequential damages of $36,396.00 and attorney fees and costs of $3,496,660.40, for a total of $5,582,683.40.

Petition to Confirm Award

Deutsch filed a motion in the trial court to confirm the award. Renwood filed a petition to vacate or, in the alternative, correct the award.

The trial court denied Deutsch's petition to confirm the award and granted Renwood's petition to vacate or, in the alternative, correct the award. The trial court reasoned: "An arbitrator exceeds his or her authority when the arbitrator's construction of the agreement 'presents such an egregious mistake that it amounts to an arbitrary remaking of the contract between the parties,' with the result that the remedy awarded is not rationally related to the contract and therefore is outside of the arbitrator's authority. [¶] In the current action, the arbitrator interpreted the provisions regarding the depletion rate in such a manner that it amounted to a reformation of the terms of the Services Agreement. [¶] The Services Agreement's effective date of April 1, 2006, leaves no room for interpretation as to when the Service Agreement's obligations regarding depletion rates begins. Any interpretation of these provisions that does not contemplate the start time of April 1, 2006, is improper and is not rationally related to the language of the contract." The court found the arbitrator exceeded his authority in interpreting the services agreement.

The trial court's order was entered on January 26, 2010. Petitioner now seeks a writ of mandate directing the trial court to rescind its order denying Deutsch's petition to confirm and granting Renwood's petition to vacate, and further directing the trial court to enter a new order granting Deutsch's petition to confirm and denying Renwood's petition to vacate. Having issued an alternative writ, we will grant the petition for writ of mandate.

DISCUSSION I

With limited exceptions, an arbitrator's decision is not generally reviewable for errors of fact or law, whether or not such an error appears on the face of the award and causes the parties substantial injustice. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 6 (Moncharsh).) This rule recognizes the parties' contractual choice of an arbitration forum over a judicial forum. (Id. at pp. 8-11.) However, California law allows a court to correct or vacate a contractual arbitration award if the "arbitrators exceeded their powers." (Code Civ. Proc., §§ 1286.2, subd. (a)(4), 1286.6, subd. (b).)

In Pacific Gas & Electric Co. v. Superior Court (1993) 15 Cal.App.4th 576 (Pacific Gas & Electric), we considered just what sort of arbitration decision would invoke the limited exception to the general rule against review. We determined that arbitrators do not exceed their powers merely by mistaking the law. (Id. at p. 588.) As we noted: "The purpose [of arbitration] would be wholly frustrated if the legal merits of the arbitrators' decision could be visited anew in the superior court followed by yet another appeal. That would add a layer of litigation not available in the judicial forum." (Id. at p. 589.) In addition, errors of fact are not reviewable, nor can a litigant claim the evidence was insufficient to support the factual findings of the arbitrators. (Id. at pp. 589-590.) We concluded that where an arbitration claim is tendered, the appropriate standard of review is whether the application or construction of the contract presents such an egregious mistake that it amounts to an arbitrary remaking of the contract between the parties. (Id. at pp. 592-593.)

A year later, the Supreme Court in Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362 (Advanced Micro) set forth the standard by which courts are to determine whether a contractual arbitrator has exceeded his or her powers in awarding relief for breach of contract. Under this standard, in the absence of more specific restrictions in the arbitration agreement, "the remedy an arbitrator fashions does not exceed his or her powers if it bears a rational relationship to the underlying contract, as interpreted, expressly or impliedly, by the arbitrator." (Id. at pp. 367, 381.)*fn3 The arbitrator's award "will be upheld so long as it was even arguably based on the contract; it may be vacated only if the reviewing court is compelled to infer the award was based on an extrinsic source." (Id. at p. 381.)

II

Here, the arbitrator and the trial court disagreed over a single term of the services agreement between Deutsch and Renwood: the time period during which the depletion rate was to be measured. The arbitrator determined the depletion period should be measured from July 1 through June 30 each year; the trial court disagreed and found the depletion time period began on April 1. We must determine whether the arbitrator's calculation of the depletion period bore a rational relationship to the contract between the parties. If so, the trial court erred in finding the arbitrator exceeded his authority; if not, the trial court correctly vacated the arbitrator's award.

The services agreement on the subject of depletion simply states: "Deutsch will ensure that depletions of Contracted Products do not fall below 80% of the Tier Sales Standards." No time period is specified.

During argument on the motion to vacate the arbitration award, the trial court stated, regarding the depletion time period: "I must say that I am loathe [sic] as a judge of the Superior Court to interfere with the actions of the arbitrator in this case. But from my reading of what's happened, this is a manifest injustice." However, this type of judicial rationale is exactly what the Supreme Court has warned against.

To the extent the trial court sought to reject the arbitrator's finding based on substantial injustice, the ruling is at odds with the holding in Moncharsh. As the Supreme Court explained, "an arbitrator's decision is not generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties." (Moncharsh, supra, 3 Cal.4th at p. 6.) The arbitrator's findings must be upheld if they are rationally related to the agreement. In addition, the "power to construe matters within the range of ambiguity of the [contract] language and evidence of the surrounding circumstances is assigned, with finality, to the arbitrator." (Pacific Gas & Electric, supra, 15 Cal.App.4th at p. 594.)

There is nothing manifestly unjust about the arbitrator's ruling in the present matter. The services agreement's silence as to the time frame for measurement of the 80 percent depletion obligation created an ambiguity. The arbitrator considered the agreement and determined: "It is true that the Service Agreement provides that the effective date of the agreement is April 1, 2006. It is also true that all Tier [S]ales Standards and cure obligations guarantees apply during the transition period. Nevertheless the contract fails to specify that measurement, of compliance with the Tier Sales Standard 80% depletion requirement on annualized basis, commences with the transition period. [¶] By its essence a transition period is a period not included in other periods and by this Services Agreement it was defined as the period between April 1, 2006 and July 1, 2006. It defies logic and common sense to commence the period of measurement of compliance with the 80% depletion requirement of the Tier Sales Standard with the Transition period, which was treated separately from other periods by the Services Agreement. The Arbitrator finds that the proper period for measurement of compliance is the period from July 1 through June 30."

Deutsch argues the evidence at trial showed that the Transition Period was a period when many of Renwood's pre-existing distributors were being terminated and replaced with distributors selected by Deutsch. Deutsch had no control over the sales of outgoing distributors because the wine held by them was not purchased through Deutsch. Thus, it would indeed "def[y] logic and common sense" to apply the 80 percent depletion requirement to a sales period over which Deutsch had little control.

The trial court disagreed with Deutsch and with the arbitrator's interpretation of the services agreement, finding the compliance period should begin on April 1. Our role is not to determine whether the arbitrator's interpretation of the agreement is correct. A provision requiring arbitrators to apply the law leaves open the possibility that they are empowered to apply it "wrongly as well as rightly." (Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1360 (Cable Connection).)

An agreement between parties to arbitrate ordinarily confers upon the arbitrator the power to decide any question of contract interpretation or general law the arbitrator deems necessary to reach a decision. Concomitant with this power is the possibility the arbitrator may err in deciding some aspect of the case. However, arbitrators do not ordinarily exceed their powers simply by reaching an erroneous conclusion on a disputed contractual provision. In the end, the arbitrator's resolution of disputed issues, including contract interpretation, is exactly what the parties bargained for when they agreed to arbitration. (Cable Connection, supra, 44 Cal.4th at pp. 1360-1361.)

What we have before us is a disagreement over the timing of the 80 percent depletion requirement. In determining the period to be July 1 through June 30, the arbitrator noted the services agreement provided for an anniversary date of July 1, Renwood's fiscal year is July 1 through June 30, and the Tier Sales Standards sales obligation that underpins the 80 percent depletion requirement is measured from July 1 through June 30. In contrast, as the arbitrator noted, the Transition Period is treated separately in the agreement.*fn4

Our review of the arbitrator's findings reveals they were rationally related to the services agreement and not based on an extrinsic source. (Advanced Micro, supra, 9 Cal.4th at p. 381.) Therefore, the trial court erred in granting Renwood's petition to vacate the award. The arbitrator's award should be reinstated.

DISPOSITION

The petition for writ of mandate is granted. Let a peremptory writ issue directing the trial court to annul its decision and conduct further proceedings consistent with the views expressed in this opinion. The alternative writ, having served its purpose, is discharged. Deutsch shall recover costs in this original proceeding. (Cal. Rules of Court, rule 8.493(a)(1)(A).)

We concur:

BLEASE , Acting P.J.

BUTZ ,J.


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