While the Golden State Warriors continue to sit out this season’s playoffs for the first time since 2012, the team was dealt a blow last month by the California Court of Appeal in the case Oakland-Alameda County Coliseum Authority v. Golden State Warriors, LLC, A157688, (August 18, 2020 San Francisco County Super. Ct. No. CPF-19-516542). In its decision, the First District affirmed a trial court’s judgment confirming an arbitration award entered against the Golden State Warriors that requires the Warriors to continue servicing the debt incurred years ago to renovate the team’s former home—Oracle Arena in Oakland, California—until 2027.
The dispute centered on a provision in the parties’ 1996 agreement concerning the basketball team’s use of the arena (the License Agreement) that governed the Warriors’ obligations to pay the debt that was incurred in connection with renovating the arena. That section of the agreement provided that, if the Warriors “terminate[d] th[e] License Agreement for any reason prior to June 30, 2027,” the team would be required to continue servicing the incurred debt.
After declaring its intention to move to San Francisco, the Warriors let the “initial term” at Oracle expire on June 30, 2017. It was at this point that the team declined to exercise its first of two 5-year renewal options. Although the team did not exercise that option, due to construction delays with the team’s new stadium in San Francisco, the Warriors negotiated a limited, 2-year extension to the agreement, allowing the Warriors to continue to play at Oracle for two more seasons.
In October 2017, the same month Kevin Durant made his debut with the team, the Warriors initiated arbitration proceedings seeking a declaration that the team was no longer required to make debt payments if it allowed the agreement to expire, rather than terminating it.
At the arbitration, the Coliseum Authority argued that the Warriors “terminated” the agreement by opting not to renew it because the word “terminates” in the pertinent section of the agreement encompassed “termination by nonrenewal”—an interpretation that it contended was substantiated by various categories of extrinsic evidence. The Warriors, however, contended that the contract was clear on its face and that “allowing [the] contract to expire by its own terms [wa]s [not] the same as terminating the agreement.”
The arbitrator applied the familiar two-step analysis for determining the admissibility of extrinsic evidence for the purpose of interpreting terms in an integrated contract. Initially, the arbitrator provisionally admitted—and considered—the pertinent parol evidence, solely for the purpose of determining whether the terms of the agreement were susceptible to the parties’ competing interpretations. Finding that the provision at the heart of the dispute could, in fact, be reasonably construed in line with both parties’ proffered constructions of the term “terminates,” the arbitrator then proceeded to the second step of the analysis, which required the arbitrator to provide the ultimate construction of the ambiguous language at issue, in light of the plain language of the agreement as well as the extrinsic evidence submitted by the parties. After considering such evidence and the parties’ arguments, the arbitrator adopted the Coliseum Authority’s interpretation of the agreement, and in so finding, refused to unburden the Warriors of its obligation to continue servicing the renovation debt for another decade.
Judicial Review of the Arbitrator’s Award
After the trial court denied the Warriors’ petition to vacate the award, granting the Coliseum Authority’s petition to confirm it instead, the Warriors appealed the trial court’s decision, contending both the arbitrator and trial court erred in adopting the Coliseum Authority’s construction of the word “terminates.” Before addressing the substance of the Warriors’ contention, the Court of Appeal analyzed a court’s authority to review the arbitrator’s decision in the first place.
The First District started its analysis by observing that the merits of an arbitrator’s decision are not ordinarily reviewable for error, unless the parties “clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts.” Here, the Court of Appeal held that, because a separate section of the agreement permitted either party to file an application to correct or vacate an award “for de novo review on all questions of law based on the arbitrator’s finding[s] of fact,” the parties had, therefore, agreed that both trial courts and appellate courts alike had the authority independently to review the arbitrator’s conclusions of law. The Court of Appeal was careful to explain however that neither it, nor the trial court, had the authority to review the arbitrator’s findings of fact.
In considering the arbitrator’s decision, the Court of Appeal held, initially, that the threshold determination of whether the provision at issue was ambiguous was a question of law, subject to independent review. Because this was a legal question, the First District concluded it was proper to review it. Based on the appellate court’s preliminary consideration of the extrinsic evidence, it agreed with the arbitrator that it was fully plausible to interpret the word “terminates” as including “termination by nonrenewal,” as urged by the Coliseum Authority.
Turning to the second step in the analysis, however, the Court of Appeal concluded that, the arbitrator’s ultimate interpretation of the provision was factual, rather than legal in nature, because it was based on her consideration of conflicting extrinsic evidence, including the testimony of various witnesses and the parties’ negotiating history, among other things. Accordingly, because the interpretation of the word “terminates” addressed a question of fact, not law, it was beyond the court’s judicial review.
However, the Court of Appeal also found, that even if the ultimate interpretation of the provision at issue were a question of law, it still would have affirmed the arbitrator’s decision because the extrinsic evidence strongly indicated that the parties intended the phrase “terminates” to encompass the Warriors’ failure to exercise an option to renew—not just an affirmative exercise of a right by a party to bring the agreement to an end within its term, as urged by the team. For example, contemporaneous memoranda suggested that, when the pertinent provision was amended during the drafting history, the parties intended to broaden the Warriors’ obligation to continue making debt payments, not narrow it. Similarly, the team’s agreement with a bank to obtain financing—which stated “that other than a termination due to a default under the Assigned Agreements, the undersigned has no right to terminate or cancel the Assigned Agreements until the Project Debt (as defined in the License Agreement) has been fully paid”— reflected the Warriors’ contemporaneous understanding that a failure to renew did not relieve the team of its payment obligations.
While this recent decision’s financial consequences probably will not be significant enough to impact the team’s quest to sign Giannis Antetokounmpo and create another super team in the process, its legal implications are a reminder of how liberal California’s approach to parol evidence has become. In light of that liberality, parties should carefully consider whether including provisions in their arbitration agreements that permit broader judicial review, not just of questions of law, but also of questions of fact would be a prudent way of mitigating risks associated with adverse and possibly unanticipated interpretations of their contractual obligations, as the Warriors contended the arbitrator adopted in its dispute.