Advanced Micro Devices, Inc. v. Intel Corp.

KENNARD, J., Dissenting.

In Moncharsh v. Hetty & Blase (1992) 3 Cal.4th 1 [ 10 Cal.Rptr.2d 183 , 832 P.2d 899 ], a majority of this court held that an arbitrator’s error in deciding the merits of a claim cannot be judicially reviewed or corrected, even when the error is manifest on the face of the arbitrator’s decision and causes substantial injustice. In this case, the majority takes another major step in the direction of turning arbitration into a game of chance and an instrument of injustice. With Moncharsh having removed all protection against an arbitrator’s errors in deciding the merits of a claim, the majority in this case in turn abolishes any meaningful limitations on the scope of the remedies that an arbitrator may award in deciding a contract dispute: “The 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.” (Maj. opn., ante, at p. 381, italics in original.)

Under the majority’s decision an arbitrator in a commercial contract dispute may award an essentially unlimited range of remedies, whether or not a court could award them if it decided the same dispute, so long as it can be said that the relief draws its “essence” from the contract and not some other source. This standard, taken from the far different realm of federal labor law, imposes only the most minimal scrutiny on an arbitration award. In particular, it permits an arbitrator to award a remedy that a court would be prohibited from awarding.

The majority’s decision will make businesses think twice about whether they should agree to resolve disputes by arbitration. Businesses choose arbitration for the same reasons they make any business decision—because they believe that, on balance, arbitration maximizes benefits and minimizes risks and costs. By permitting arbitrators deciding commercial contract *392 disputes to award relief beyond that which a court could award and by imposing no limitation on the relief an arbitrator may award other than the minimal requirement that the award draw its essence from the contract, the majority has greatly increased the risks and uncertainty of arbitration.

In my view, an arbitrator’s award must both fall within the range of remedies that a court could award for the same claim and, in the case of a contract dispute, bear a rational relationship to the contract. Because the arbitrator’s award in this case does not meet either test, I dissent.

I

In 1982, Advanced Micro Devices, Inc. (AMD) and Intel Corporation (Intel) entered into a contract setting forth conditions under which each could acquire from the other the right to become a “second source” manufacturer for semiconductor products initially developed by the other. Under the agreement, each party could “earn” the right to manufacture and sell a particular product developed by the other party by offering in exchange to the other party, and by the other party accepting, the manufacturing rights to a product of equivalent technical complexity developed by the first party. For example, AMD could acquire the right to manufacture a particular microprocessor that Intel had developed by offering to Intel, and by having Intel accept, the rights to an AMD-developed microprocessor of equivalent technical complexity. For each product the nondeveloping party acquired the right to manufacture and sell, it would pay a royalty to the developing party. The nondeveloping party could not subcontract any right it acquired to manufacture and sell products developed by the other party. The contract included an arbitration clause.

In 1987, AMD alleged that Intel was breaching the contract and petitioned the superior court for arbitration. The parties selected an arbitrator and agreed on a series of rules for the arbitration. All of the claims referred to arbitration were for breach of contract.

After five years of arbitration, the arbitrator, a retired judge, found that Intel had breached the contract in several respects. Among other breaches, he found that Intel had breached the covenant of good faith and fair dealing when it decided that it would no longer accept any AMD products under the agreement but concealed this decision from AMD. AMD asserted that by this action Intel had prevented AMD from “earning” the right under the agreement to manufacture the Intel-developed 80386 microprocessor. AMD also asserted that Intel’s actions had delayed AMD’s efforts to independently develop, as it eventually did, its own competitive microprocessor, the Am386, by reverse-engineering the 80386.

*393 The arbitrator, however, concluded that the cause of AMD’s failure to earn the right to the 80386 was not Intel’s breach but AMD’s own failure to develop microprocessor products acceptable to Intel that would have earned AMD the right to manufacture the 80386. The arbitrator determined that while Intel’s breach had caused AMD some delay in developing the Am386, AMD’s delays were largely attributable to its own “inertia” and “myopia.” Nonetheless, the arbitrator stated that Intel’s breach had damaged AMD “immeasurably”—apparently using the term to mean not that damages were immeasurably large (he found AMD’s calculation of lost 80386 profits in the amount of $268 million to be accurate but refused to award those lost profits for lack of causation) but that the damages were not capable of ready and certain calculation.

The arbitrator awarded money damages to AMD for Intel’s breaches other than the breach of the covenant of good faith and fair dealing. For Intel’s breach of the covenant of good faith and fair dealing, the arbitrator awarded nominal damages of $1 plus equitable relief set forth in paragraphs 5 and 6 of the award. Intel had sued AMD separately in federal court, claiming that the Am386 infringed Intel’s intellectual property rights, and the arbitrator intended paragraphs 5 and 6 of his award to provide AMD with a complete defense to this litigation.

In paragraph 5 of the award, the arbitrator granted AMD a permanent, royalty-free license to all Intel patents, copyrights, and other intellectual property used in the Am386. The rights granted to AMD in paragraph 5 included both the right to make the Am386 and the right to have others make the Am386 for AMD. In paragraph 6, the arbitrator extended for two additional years, with respect to the Am386 only, a 1976 grant of certain patent and copyright licenses from Intel to AMD that the 1982 AMD-Intel agreement had extended until 1995. (Because paragraph 5 grants AMD an indefinite license to all Intel patents and copyrights used in the Am386, it is not immediately apparent what additional rights AMD gained by paragraph 6.)

After the arbitrator made his award, AMD petitioned the superior court to confirm the award and Intel petitioned to have the award corrected by deleting paragraphs 5 and 6. The court confirmed the award as made.

Intel appealed. On appeal, the Court of Appeal concluded that the arbitrator had exceeded his powers in fashioning the relief in paragraphs 5 and 6 because those paragraphs did not draw their essence from the AMD-Intel contract and lacked any rational nexus to it. The Court of Appeal corrected *394 the award by deleting paragraphs 5 and 6 and confirmed the award as corrected, determining that it was unnecessary to vacate the award because the correction did not affect the merits of the decision.

II

Under Code of Civil Procedure section 1286.2, subdivision (d), a party may petition the court to vacate an arbitrator’s award on the ground that “the arbitrator[] exceeded [his or her] powers.” In my view, there are two sources of limitations on the remedial powers of an arbitrator deciding a contract dispute. First, because our arbitration statutes merely establish a different procedure for resolving disputes, and do not create new substantive claims or remedies, an arbitrator lacks the power to award a remedy outside the scope of those that a court could award for the same claim. Second, an arbitrator deciding a contract dispute lacks the power to make an award that has no rational linkage to the agreement or its breach. To guard against such arbitrary and irrational awards, courts have recognized that in contract disputes there should be a rational relationship between the arbitrator’s interpretation of the contract and the relief awarded. This inquiry focuses on whether there is some connection between the award, on the one hand, and, on the other hand, the arbitrator’s interpretation of the agreement and his or her findings of breach. 1

Accordingly, in judicially reviewing a commercial contract arbitration, both a scope-of-available-remedies test and a rational relationship test are necessary to assess whether a remedy exceeds the arbitrator’s powers. Either alone is incomplete. For example, an award of attorney fees may be a completely rational remedy for breach of a contract that is silent as to them, yet exceed the arbitrator’s powers because the governing law precludes attorney fees as a remedy for breach of contract. Conversely, an award of compensatory damages may be within the scope of the potential remedies available for a breach of contract claim, yet lack any rational relationship to the arbitrator’s interpretation of the contract if the arbitrator interprets the contract to find that there was no breach.

A rational relationship test alone is insufficient as a standard to judge whether an arbitrator has exceeded his or her powers. Because a rational relationship test looks solely to the connection between the arbitrator’s view of the contract and the remedies he or she has selected, it fails to capture all of the ways that an arbitrator may be said to exceed his or her powers.

*395 First, as noted above, a rational relationship test ignores the limitations that exist as a matter of law on the scope of relief available for a given type of claim. Using only a rational relationship test would permit arbitrators to award remedies that courts could not. 2

Second, a rational relationship test can only be applied to review an arbitration award in a contract dispute; it cannot be applied to the arbitration of non-contract (e.g., statutory or tort) claims because there is no contract that the award can be measured against.

Third, even in contract dispute arbitrations a rational relationship test is of limited or no utility when the arbitrator does not issue a written decision, for an understanding of the arbitrator’s interpretation of the contract and his or her findings of how the contract was breached is necessary before the question of whether the remedies have their essence in the contract can be answered in a meaningful fashion. Arbitrations rarely result in the sort of extensive written decision that the arbitrator prepared here. Many, if not most, arbitrations result in only a written award of money damages without any written statement of decision giving supporting reasons and analysis. Indeed, the American Arbitration Association (AAA) encourages arbitrators to dispense with written decisions in order to immunize their awards against court challenges. (AAA, A Guide for Commercial Arbitrators (1991) p. 24, reprinted in Oehmke, Commercial Arbitration (1994 cum. supp.) appen. 5.) Without a statement of the arbitrator’s understanding of the contract, a rational relationship test cannot be meaningfully applied.

Ill

The majority holds that arbitration awards in commercial contract disputes should be judicially reviewed under the “essence” test of federal labor arbitration law. (Maj. opn., ante, at pp. 377-381.) Under this extremely deferential test, the only requirement is that “[t]he remedy awarded . . . must bear some rational relationship to the contract and the breach.” (Maj. opn., ante, at p. 381.) “The 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.” (Maj. opn., ante, at p. 381, original italics.)

*396 For the following reasons, the majority’s “essence” test is an inadequate test for reviewing whether an arbitration award is within the arbitrator’s remedial powers. First, it is incomplete because it does not address whether the arbitration award is within the range of remedies authorized by law or by agreement for the claim decided by the arbitrator. Second, the “essence” test is an unsatisfactory measure of arbitration awards in commercial contract disputes because the degree of relationship it requires between an arbitrator’s award and the contract giving rise to the dispute is about the most minimal imaginable.

The “essence” test adopted by the majority originated in the federal law of collective bargaining, and as used in that field gives arbitrators an extremely broad power to fashion remedies. (See Steelworkers v. Enterprise Corp. (1960) 363 U.S. 593 [ 4 L.Ed.2d 1424 , 80 S.Ct. 1358 ] [hereinafter Enter prise] [in which the United States Supreme Court created the “essence” test].) Under the “essence” test, any award is within the arbitrator’s power so long as it can be said to “draw[] its essence” from the contract that gives rise to the dispute, and not from some other source outside the contract. (Id. at p. 597 [ 4 L.Ed.2d at p. 1428 ].)

The minimal level of scrutiny that the majority’s “essence” test imposes on arbitration awards may not be immediately apparent from the abstract words in which the test is phrased. As it has evolved in the field of labor law, however, the “essence” test is a broad grant of power to arbitrators that provides only the barest scrutiny of the relationship between an arbitrator’s award and the collective bargaining agreement on which it is based. The “essence” test authorizes any arbitration award, no matter how “unusual and even bizarre” (Local 120 v. Brooks Foundry, Inc. (6th Cir. 1990) 892 F.2d 1283, 1288 ), unless it can be said with assurance that “the arbitrator must have based his award on some body of thought, or feeling, or policy, or law that is outside the contract” (Ethyl Corp. v. United Steelworkers of America (7th Cir. 1985) 768 F.2d 180, 184-185 , original italics).

Like the commercial contract arbitration cases from other jurisdictions on which it relies, the majority has uncritically adopted the “essence” test as the standard of review for commercial contract dispute arbitration awards, and thereby imported wholesale the specialized body of labor arbitration law interpreting that test, without rigorously analyzing whether the reasons that gave rise to the “essence” test in labor arbitration also hold true in the quite *397 different world of commercial contract arbitration. 3 As I discuss below, the policy reasons that led to the adoption and broad scope of the “essence” test in the collective bargaining arena do not support its use in the commercial contract context. 4

The broad powers and deference granted to labor arbitrators by the “essence” test reflect “[t]he federal policy of settling labor disputes by arbitration . . . .” (Enterprise, supra, 363 U.S. at p. 596 [ 4 L.Ed.2d at p. 1427 ].) “The reasons for insulating arbitral decisions from judicial review are grounded in the federal statutes regulating labor-management relations.” (Paperworkers v. Misco, Inc. (1987) 484 U.S. 29, 37 [ 98 L.Ed.2d 286, 298 , 108 S.Ct. 364 ].)

One policy reason why arbitrators in the collective bargaining context are given extraordinarily broad remedial powers is the impossibility of reducing to writing all aspects of a collectively bargained employment relationship between an employer and what may be hundreds or thousands of employees in numerous job classifications at numerous locations. “The collective bargaining agreement.... is more than a contract; it is a generalized code to govern a myriad of cases which the draftsmen cannot wholly anticipate. [Citation.] The collective agreement covers the whole employment relationship. It calls into being a new common law—the common law of a particular industry or of a particular plant. . . . [¶] . . There are too many people, too many problems, too many unforeseeable contingencies to make the words of the contract the exclusive source of rights and duties. One cannot reduce all the rules governing a community like an industrial plant to fifteen or even fifty pages. . . .’ [¶] A collective bargaining agreement is an effort to erect a system of industrial self-government.” (United Steelworkers of America v. Warrior & Gulf Navigation Co. (1960) 363 U.S. 574, 578-580 [ 4 *398 L.Ed.2d 1409, 1415-1416 , 80 S.Ct. 1347 ] [hereinafter Warrior & Gulf], fn. omitted.)

Another policy reason supporting the “essence” test in the collective bargaining context is the difference in function between labor arbitration and commercial contract arbitration. As the United States Supreme Court recognized in a companion case to the decision in which it created the “essence” test, “arbitration of labor disputes has quite different functions from arbitration under an ordinary commercial agreement . . . .” (Warrior & Gulf, supra, 363 U.S. at p. 578 [4 L.Ed.2d at p. 1415].) Labor arbitration is typically an ongoing process during the life of a collective bargaining agreement that adjusts and modifies the agreement to meet the changing conditions of the workplace. “[Arbitrators under these collective agreements are indispensable agencies in a continuous collective bargaining process.” (.Enterprise, supra, 363 U.S. at p. 596 [4 L.Ed.2d at p. 1427].)

“Courts and arbitration in the context of most commercial contracts are resorted to because there has been a breakdown in the working relationship of the parties; such resort is the unwanted exception. But the grievance machinery under a collective bargaining agreement is at the very heart of the system of industrial self-government. Arbitration is the means of solving the unforeseeable .... The processing of disputes through the grievance machinery is actually a vehicle by which meaning and content are given to the collective bargaining agreement. [¶] . . . The grievance procedure is, in other words, a part of the continuous collective bargaining process. ...[¶] .. .[¶].. . The parties expect that [the arbitrator’s] judgment of a particular grievance will reflect not only what the contract says but, insofar as the collective bargaining agreement permits, such factors as the effect upon productivity of a particular result, its consequence to the morale of the shop, his judgment whether tensions will be heightened or diminished.” (Warrior & Gulf, supra, 363 U.S. at pp. 581-582 [4 L.Ed.2d at pp. 1416-1417].)

In O’Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482, 486 [ 30 Cal.Rptr. 452 , 381 P.2d 188 ], this court recognized both the unique nature of labor arbitration and the fact that the United States Supreme Court’s decision in Enterprise was based on “the special nature of the collective bargaining agreement and the crucial role of the arbitrator in resolving disputes arising under it . . . .” (See also O’Malley v. Wilshire Oil Co., supra, at pp. 490 [referring again to “the unique nature of the collective bargaining contract and to the vital and dynamic role of the arbitrator in the area of industrial relations”], 494 [noting “the differences between a collective bargaining agreement and a standard commercial contract”].)

*399 Because of these twin policy reasons—the impossibility of reducing all aspects of a labor-management relationship to writing and the need for an ongoing process of amendment during the life of a collective bargaining agreement—the “essence” test gives labor arbitrators an expansive power to create remedies beyond those that would otherwise be available for a breach of contract. Of great significance, labor arbitrators can create additional rights and duties for the parties so long as those rights and duties are within the general framework of the agreement and are not contrary to any plain and unambiguous term of the agreement. (See Desert Palace v. Local Joint Exec. Bd. of Las Vegas (9th Cir. 1982) 679 F.2d 789, 793 ; Morgan Serv. v. Local 323, Chicago & Central States (6th Cir. 1984) 724 F.2d 1217, 1220 .)

Neither of these policy reasons supporting the “essence” test exists in the realm of commercial contracts, however. With respect to the first reason, parties to a commercial contract, in contrast to a collective bargaining agreement, normally expect that the contract, and the contract alone, will be the complete and final expression of their duties and obligations.

As to the second reason, parties to a commercial contract do not expect that matters outside the contract will later be brought within the contract by an arbitrator in an ongoing process of contract amendment and modification continuing throughout the life of the contract. (See Raytheon Co. v. Automated Business Systems, Inc. (1st Cir. 1989) 882 F.2d 6, 10-11 [“Labor arbitration is an integral aspect of the entire collective bargaining process; it is intended to be a part of a continuing and ameliorating enterprise between parties who maintain an ongoing working relationship. . . . [^Q Commercial arbitration, by contrast. . . , is normally considered a one-shot endeavor, in which the parties have chosen arbitration not as a means of ongoing dispute resolution, but as a ‘simpl[e], informal[], and expeditions]’ method of resolving a particular dispute.”].)

Nor are there other policy reasons in the commercial arbitration context that would support granting commercial arbitrators the broad authority of labor arbitrators for fashioning remedies or creating additional rights and duties under the contract. In choosing to arbitrate a dispute, parties to a commercial contract expect to receive both a speedier resolution of their dispute and a simpler procedure for resolving their dispute than would be the case if they instead went to court. Parties to an arbitration, however, would not generally expect that the arbitrator has the power to award relief that a court resolving the same dispute could not award. The possibility of unlimited and unpredictable forms of relief is not one of the “advantages” that a party normally expects to receive from choosing to arbitrate.

*400 Thus, the “essence” test was designed to grant labor arbitrators broad remedial powers in order to further policies and concerns unique to the law of collective bargaining. Because these policies and concerns conflict with the policies and concerns underlying commercial contract arbitration, the “essence” test is an inappropriate test for reviewing commercial contract arbitration awards.

IV

As discussed above, our arbitration statutes create a different process for deciding legal disputes, not different remedies for those disputes. For that reason, the potential remedies available to an arbitrator are limited to those that a court could award on the same claim. 5 Thus, in reviewing an arbitration award to determine whether it exceeds the arbitrator’s powers, a court must determine whether the award falls within the remedies authorized by law or by agreement for the legal claim the arbitrator has decided.

An arbitrator’s remedial powers, and limitations on those powers, can arise from a number of different sources. The substantive law underlying the claim being arbitrated, the contract allegedly breached (in a breach of contract case), the arbitration agreement, and the rules adopted by the parties to govern the arbitration are all potential sources that may either expand or limit the scope of the remedies available to an arbitrator. In particular, because arbitration is a creature of contract, the parties by agreement may expand the arbitrator’s arsenal of remedies to include novel and creative equitable remedies.

In deciding what remedies are potentially available to the arbitrator in a given case, a court should first look at the nature of the claims being arbitrated. Unless the parties have by agreement otherwise expanded or restricted the scope of remedies available, the nature of the claims should ordinarily determine the nature of the remedies available. The reason for this *401 is, as stated above, that parties who have agreed to a commercial arbitration are seeking a different process, not a different remedy, than they would get in court.

Here, the claims were all for breach of contract. Thus, unless the parties agreed otherwise, the scope of remedies for those claims should be limited to the normal contract remedies available in court for a breach of contract. As this court recently explained in Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 514-17, 520 [ 28 Cal.Rptr.2d 475 , 869 P.2d 454 ], when it refused to make tort remedies available for a breach of contract, there are fundamental public policy reasons for limiting the scope of remedies available for contractual breaches. These reasons are equally applicable whether the remedies are awarded by a court or by an arbitrator. Awarding equitable remedies other than specific performance to remedy a breach of contract would, like awarding tort or other non-contract damages, make the consequences of a breach of contract “uncertain and unpredictable” (id. at p. 520) and thwart “the vital commercial importance of foreseeability limitations on contract damages” {id. at p. 517). Moreover, even when the amount of contract damages are difficult to calculate, courts award damages rather than some novel equitable remedy that they might believe to be fairer than a sum of money because to do otherwise would make the consequences of a breach of contract unacceptably unforeseeable.

In this case, paragraphs 5 and 6 of the arbitrator’s award are not normal contract remedies because they are a form of equitable relief other than specific performance. Paragraph 5 authorizes AMD to use any of Intel’s intellectual property in the manufacture of AMD’s Am386 microprocessor; paragraph 6 extends for two years a separate 1976 agreement licensing certain Intel patents and copyrights, but only to the extent that AMD used those patents and copyrights in the Am386. These remedies are not specific performance because, under the contract, all that AMD could have earned was the right to manufacture Intel’s version of the 80386 microprocessor in exchange for royalties. Paragraphs 5 and 6 go beyond specific performance because AMD could not have earned the right to use Intel’s intellectual property (including intellectual property that may not be embodied in Intel’s 80386) to create its own Am386, AMD could not have earned the right to manufacture without royalty Intel’s 80386 or the Am386, and AMD could not have earned the right to have others make Intel’s 80386 or the Am386 for AMD. 6

The arbitrator himself apparently viewed the equitable relief he was awarding as something other than specific performance. The arbitrator rejected other requests by AMD for specific performance on the ground that *402 AMD was not entitled to specific performance because it was unable to tender its performance. He did not characterize paragraphs 5 and 6 as specific performance but as a “departure] from a conventional approach to relief.” Thus, unless the parties have by agreement authorized the arbitrator to award equitable remedies other than specific performance, the award of paragraphs 5 and 6 is beyond his powers.

AMD and Intel did not authorize the arbitrator to award equitable remedies beyond the traditional contract remedies of damages and specific performance. The arbitration clause of the AMD-Intel contract does not authorize equitable remedies other than specific performance. Nor does the remedies limitation clause of the AMD-Intel contract address the issue one way or the other.

In section 42 of the “Informal Rules” that the parties adopted to govern the arbitration, the parties provided: “The Arbitrator may grant any remedy or relief which the Arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.” This provision is taken from what is now rule 43 (formerly rule 42, and before that section 42) of the AAA Commercial Arbitration Rules.

Parties who incorporate the AAA rules by reference in their arbitration agreements intend by doing so merely to establish the procedure by which the arbitration will be conducted, and do not intend to substantively expand the scope of remedies beyond those that otherwise exist by law or by agreement. Accordingly, section 42 does not authorize the arbitrator to award additional forms of relief for a breach of contract that are not otherwise authorized by law or by agreement of the parties. (See Thompson v. Jespersen (1990) 222 Cal.App.3d 964 [ 272 Cal.Rptr. 132 ] [AAA rules do not authorize an arbitrator to award attorney fees in the absence of either an agreement of the parties or a rule of law authorizing attorney fees].) In Thompson v. Jespersen , the arbitrator awarded attorney fees to the prevailing party. In proceedings to confirm the arbitration award, the prevailing party contended that the arbitrator was authorized to award attorney fees by AAA Construction Industry Arbitration rule 43 (the equivalent of AAA Commercial Arbitration former section 42 that the parties adopted in this case). The Thompson court rejected that contention, holding that, by agreeing to the *403 AAA rule in question, the parties did not “subjectQ themselves, sub silentio, to expenses that, in the absence of a contract so providing, are impermissible even in traditional trial proceedings.” (Thompson v. Jespersen, supra, 222 Cal.App.3d at p. 968 .)

The AAA’s instructions to arbitrators describe only three categories of remedies for a breach of contract: money damages, specific performance, or an injunction enjoining breach. (A Guide for Commercial Arbitrators, supra, at pp. 23-24.) The AAA has provided a helpful example showing that arbitrators are not authorized to award equitable relief going beyond these categories: “For instance, ruling on a claim by a building owner against a contractor who failed to do certain work according to specifications, you might award monetary damages or direct the contractor to do the work over again. You might also dismiss the claim. An award directing the contractor to reimburse the owner by landscaping the property would be improper, however, where landscaping was not contemplated in the contract.” {Id. at p. 23.) Section 42 therefore does not authorize any additional remedies not otherwise authorized by the parties’ agreement or by the substantive law underlying the claim.

In this case, the relief awarded in paragraphs 5 and 6 is unauthorized by section 42 because it is not within the scope of the remedies otherwise authorized by contract law or by the parties’ agreement and because it is a benefit “not contemplated in the contract.” To use the AAA example just mentioned, it is the equivalent of awarding landscaping as a remedy for faulty construction of a building. Thus, paragraphs 5 and 6 exceed the arbitrator’s powers and should be vacated.

V

Moreover, as the Court of Appeal in this case properly determined, paragraphs 5 and 6 lack a rational relationship to the AMD-Intel contract as interpreted by the arbitrator, whether judged under the “essence” test or some other rational relationship test. 7

However one phrases the test of a rational connection between the arbitrator’s interpretation of the contract and the relief awarded, paragraphs 5 *404 and 6 are not a remedy that is rationally related to Intel’s breach of the covenant of good faith, given the lack of causation that the arbitrator found between Intel’s breach and the damage claimed by AMD. The arbitrator ultimately concluded that Intel’s breach of the covenant of good faith had not prevented AMD from obtaining the right to manufacture Intel’s 80386 under the contract because Intel had properly rejected the exchange products that AMD had attempted to develop to earn the right to the 80386, and that it was largely AMD’s “inertia” and “myopia” that prevented AMD from taking steps sooner than it did to reverse-engineer the 80386 to create its Am386. The arbitrator accordingly rejected AMD’s claim for hundreds of millions of dollars in damages for breach of the covenant of good faith.

Instead, paragraphs 5 and 6 are plainly the arbitrator’s attempt to give AMD “something” by solving a dispute (the federal court patent and copyright litigation between AMD and Intel over the Am386) outside the scope of the AMD-Intel contract and outside the scope of the arbitration agreement. The arbitrator’s stated purpose for paragraphs 5 and 6 was to provide AMD with a complete defense to Intel’s federal court litigation against AMD over the Am386. In place of paragraphs 5 and 6 the arbitrator initially proposed directly enjoining Intel from litigating its federal intellectual property claims, and only substituted paragraphs 5 and 6 when AMD informed him that his proposed injunction was an unconstitutional interference with the federal court litigation. Because in making paragraphs 5 and 6 of the award the arbitrator was attempting to resolve a dispute that did not arise under the AMD-Intel contract and that was not submitted to him for decision, paragraphs 5 and 6 lack any rational relationship to the AMD-Intel contract.

The relief of paragraph 5 lacks a rational connection to the arbitrator’s interpretation of the contract and findings of breach for other reasons as well. Under the contract, AMD never could have obtained the rights to manufacture the Am386 (which it claims is superior to Intel’s 80386), only *405 to manufacture the 80386. Nor could AMD have obtained the right to authorize others to manufacture for it either the 80386 or the Am386. Nor could AMD have manufactured either the 80386 or an infringing Am386 without making royalty payments to Intel. Furthermore, Intel’s breach did not cause or make it necessary for AMD, in creating the Am386, to do so in a manner that infringed the 80386.

Moreover, paragraphs 5 and 6 fail even under the majority’s “essence” test. The gist of the arbitrator’s decision in those paragraphs was that although AMD, independent of Intel’s breach, had failed to comply with the conditions precedent for earning the right to the 80386, it was nevertheless equitable to give AMD the rights to the Am386. Even under the “essence” test used to review labor arbitrations, a remedy fails to draw its essence from the contract if it awards a contractual benefit subject to a condition precedent to a party that, for reasons unrelated to the breach, has failed to comply with the condition precedent. (See Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at p. 185 [“[I]f the arbitrator here had said or implied that although the workers had not complied with a condition precedent to earning their paid vacations [the contractual benefit at issue in that case] fairness required that they get vacations . . . , the district judge would have been right to set aside the award [under the ‘essence’ test].”].)

VI

Although in this case the Court of Appeal correctly determined that the arbitrator had exceeded his powers in his choice of remedies in paragraphs 5 and 6 of the award, the court erred in deciding that rather than being vacated, the award could be corrected and then confirmed by deleting paragraphs 5 and 6. Under Code of Civil Procedure section 1286.2, subdivision (d), when an arbitrator’s award exceeds the arbitrator’s powers, the award must be vacated unless it can be “corrected without affecting the merits of the decision upon the controversy submitted.” Here, the arbitrator did find that Intel had breached the covenant of good faith; deleting the only remedies the arbitrator awarded for that breach necessarily affects the merits of the arbitrator’s decision on that issue.

VII

Arbitration has many attractions to businesses as a method of resolving commercial disputes. These attractions include the potential for swiftness, procedural informality and simplicity, reduced costs, and the possibility of selecting a decisionmaker with specialized experience. Underlying these procedural attractions, however, is the assumption that the range of possible *406 outcomes is the same in arbitration as it would be if the dispute were instead resolved in court.

As a result of the majority’s decision, however, an arbitrator’s deck of remedies is now full of wild cards. By refusing to limit arbitrators in a commercial contract dispute to the range of remedies that a court could award for the same dispute and by applying only the minimal scrutiny of the “essence” test to arbitration awards, the majority has made the potential outcomes of an arbitration impossible for the parties to predict. This uncertainty can only make arbitration substantially less desirable to many. In making arbitration a more uncertain and less attractive alternative, the majority’s decision will ultimately, if unwittingly, discourage arbitration.

In my view, the better rule and the one that ultimately encourages arbitration is to require that arbitration awards both fall within the range of remedies that a court could award for the same claim and, in cases of contract dispute arbitration, bear a rational relationship to the contract. Accordingly, I would affirm that portion of the Court of Appeal’s judgment holding that the arbitrator exceeded his powers in ordering the remedy set forth in paragraphs 5 and 6 of his award, and I would reverse that portion of the judgment holding that the award should be corrected rather than vacated.

Mosk, J., and Spencer, J., * concurred.

The parties can by agreement vary the standard of court review of an arbitrator’s award, just as they can vary other aspects of arbitration. (See Pacific Gas & Electric Co. v. Superior Court (1993) 15 Cal.App.4th 576, 588 [ 19 Cal.Rptr.2d 295 ].)

For instance, under the majority’s test it is theoretically possible for an arbitrator to order the losing party to be placed in the stocks or the pillory, or to direct that the contractual relationship be repaired by ordering the marriage of the parties’ first-born children. Although it is, of course, highly unlikely that any arbitrator would ever select any of these remedies, it is not difficult to conceive of less drastic but still bizarre forms of equitable relief that would be permitted by the majority’s “essence” test, and which an arbitrator might order to settle a contract dispute, but which were uncontemplated by the contracting parties.

The majority claims that although it is adopting the Enterprise “essence” test of federal labor arbitration, it is not thereby “incorporating] the entire body of labor arbitration law applying that test.” (Maj. opn., ante, at p. 379.) The majority, however, nowhere explains what aspects of the “essence” test it is not adopting. In this case, for example, the majority relies extensively and unqualifiedly on federal labor arbitration cases in formulating and applying its test for reviewing commercial contract arbitration awards. (Maj. opn., ante, at pp. 377-383, 384, 386.)

None of the cases on which the majority relies offers any comparative analysis of labor arbitration and commercial contract arbitration or any reasoned explanation as to why the “essence” test used to review labor arbitration awards should also be used to review commercial contract awards. (See Pacific Reinsurance v. Ohio Reinsurance (9th Cir. 1991) 935 F.2d 1019 , 1024; Anderman/Smith Co. v. Tenn. Gas Pipeline Co. (5th Cir. 1990) 918 F.2d 1215, 1218 ; Engis Corp. v. Engis Ltd. (N.D.I11. 1992) 800 F.Supp. 627, 629 ; Hecla Min. Co. v. Bunker Hill Co. (1980) 101 Idaho 557 [ 617 P.2d 861, 866, fn. 4 ]; Malekzadeh v. Wyshock (Del. Ch. 1992) 611 A.2d 18, 22 ; Beaver Cty. Comm. Col. v. Society of the Faculty (1986) 99 Pa. Commw. 641 [ 513 A.2d 1125, 1127 ].)

Contrary to the majority’s assertion, a scope-of-available-remedies analysis is quite deferential to the arbitrator. It does not seek to determine whether the award is legally or factually justified, either on its face or in light of the evidence, but only whether it falls within the outer limit of relief potentially available from a court for the claim being litigated. Accordingly, the scope-of-available-remedies analysis is consistent with Moncharsh v. Heily & Blase, supra, 3 Cal.4th 1 , and does not seek to reexamine the factual or legal sufficiency of the arbitrator’s decision, either on its face or in light of the evidence supporting it. It asks only the legal question of whether the arbitrator’s remedy is within the range of potential remedies made available by law or by agreement of the parties (as the agreement is interpreted by the arbitrator) for the claims submitted. Nor does the scope-of-available-remedies analysis permit second-guessing of an arbitrator’s decision to award any remedy within the scope of the arbitrator’s powers.

As a second source for the Intel 80386, AMD would not only have paid royalties to Intel but also would have offered the identical product that Intel sold, both factors that would limit *402 the competitive effect on Intel of AMD’s sale of the 80386. By contrast, the award to AMD of rights to Intel’s intellectual property used in the Am386 gives AMD a greater competitive advantage than it would have received under the contract, not only because it does not pay royalties to Intel but also because, according to AMD, the Am386 is superior in performance to the Intel 80386.

The majority interprets the Court of Appeal’s statement that its review was “de novo” to mean that the court was reviewing de novo the connection between the arbitrator’s remedy and the contract without deference to the arbitrator’s interpretation of the contract or his determination that the remedy was appropriate in light of the contract. (Maj. opn., ante, at pp. 371, 375-376.) It appears, however, that what the Court of Appeal meant was that it was reviewing de novo (as the majority agrees it should, maj. opn., ante, at p. 376, fn. 9) the superior court’s order confirming the award without any deference to the superior court’s determination that the award was within the arbitrator’s powers. In reviewing the relationship *404 of the arbitrator’s award to the arbitrator’s powers, the Court of Appeal expressly applied the highly deferential (to the arbitrator) “essence” test adopted by the majority. The Court of Appeal indicated that it was making this distinction between de novo review of the superior court’s order and deferential review of the arbitrator’s award when in the same sentence it said both “the question of the arbitrator’s remedial powers remains one of law, subject to our de novo review” and, quoting the high court’s decision in Enterprise, supra, that “the standard must be whether the remedial provision in issue ‘draws its essence from the . . . agreement.’ ” Similarly, the Court of Appeal stated that “we . . . give credence to an arbitrator’s rational assessment of the . . . underlying agreement.” Thus, in my view the majority’s criticism of the Court of Appeal on this point is not well taken, for the Court of Appeal did adopt and apply a deferential standard for reviewing the connection between the arbitrator’s choice of remedies and the arbitrator’s view of the contract.

Presiding Justice, Court of Appeal, Second Appellate District, Division One, assigned by the Acting Chairperson of the Judicial Council.