California Court of Appeals, Fourth District

Case no.: D085989
Date filed: March 30, 2026

A California appeals court has ruled that an arbitrator’s apparent misunderstanding of allowance provisions in a cost-plus construction contract did not provide adequate grounds for vacating the arbitration award.

MAA Palm Desert Hospitality Inc. awarded a contract to Ace Design and Construction Inc. to reconstruct a fire-damaged hotel in Palm Desert. The parties used a document published by the American Institute of Architects: “Standard Form of Agreement Between Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed Maximum Price.” The guaranteed maximum price was $5,159,503.

The contract included a schedule of values for various items of work, some of which were labeled as “allowances.” If the actual cost of this work deviated from the stipulated allowance, the guaranteed maximum price would be adjusted accordingly. The AIA General Conditions require a written change order, signed by both parties, to adjust the contract price.

The relationship between MMA and Ace had soured by the time the project was about two-thirds complete due to allegations of delay, faulty work and nonpayment. The parties agreed to submit their disputes to arbitration. After eight days of hearings, the arbitrator—not identified in the court opinion—issued detailed findings of fact and awarded Ace $1,375,679 in damages, interest and attorney fees.

MAA challenged the arbitration award in court, contending the arbitrator had exceeded his authority by misinterpreting the impact of stipulated allowances on the guaranteed maximum price. The award had stated the price and then said, “But that was subject to ‘allowances.’” The award amount indicated the arbitrator may have believed the allowances were outside the guaranteed maximum price and could be exceeded without a bilateral written change order. This significant misunderstanding of the contract, argued MAA, constituted misconduct and abuse of authority by the arbitrator. The Riverside County Superior Court rejected these arguments and affirmed the arbitration award in favor of the contractor. MAA appealed.

The California Court of Appeal, in an unpublished opinion, said judicial review of arbitration awards is extremely limited. An arbitrator’s misunderstanding of contract terms does not constitute a violation of authority or misconduct. Even if the arbitrator reached erroneous factual or legal conclusions, that does not amount to wrongdoing. When parties contractually commit to binding arbitration of disputes, they agree to accept the decision.

“By asserting the arbitrator misinterpreted the Contract’s allowance provisions and relevant law, MAA is asserting factual and legal error. We cannot review an arbitrator’s decision on these grounds, nor do they establish that the arbitrator exceeded his powers or committed misconduct. ‘The arbitrator’s resolution of these issues is what the parties bargained for in the arbitration agreement,’ and ‘[a] provision requiring arbitrators to apply the law leaves open the possibility that they are empowered to apply it ‘wrongly as well as rightly.’”

The court acknowledged the guaranteed maximum price had not been adjusted in response to overruns of allowance amounts. However, the arbitrator had excused the lack of bilateral written change orders on the basis of a pattern of conduct by the parties. “As MAA acknowledges, change order provisions in a private contract may be waived.”

The use of stipulated allowances is common in cost-plus contracts. It is crucial, however, to document the actual costs of these items of work and to properly adjust the guaranteed maximum price on a regular basis.

The court, in a footnote, observed that under California law, parties can agree that legal errors are outside arbitral authority and are subject to judicial review. There was no such agreement in this case.

Participants:
For Ace Design and Construction: Kerri M. Melucci
For MAA Palm Desert Hospitality: Daniel R. Shinoff

Before: Judges Rubin, O’Rourke, and Kelety

Opinion by: Judge Rubin

Outcome: Affirmation of arbitration award affirmed

Source: Please click here to read the complete opinion.