Opinion
WERDEGAR, J. 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. (d), 1286.6, subd. (b).) In Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 28 [10 Cal.Rptr.2d 183, 832 P.2d 899], we held arbitrators do not exceed their powers merely by erroneously deciding a contested issue of law or fact; we did not, however, have occasion there to further delineate the standard for measuring the scope of the arbitrators’ authority. This case requires us to decide the standard by which courts are to determine whether a contractual arbitrator has exceeded his or her powers in awarding relief for a breach of contract.
[367]An arbitrator determined the Intel Corporation (Intel) had breached portions of its 1982 technology exchange agreement with Advanced Micro Devices, Inc. (AMD), including the implied covenant of good faith and fair dealing. The superior court confirmed the award, but the Court of Appeal, holding the arbitrator had exceeded his authority in awarding AMD the right to use certain Intel intellectual property, ordered the award corrected by eliminating the disputed relief.
We conclude that, in the absence of more specific restrictions in the arbitration agreement, the submission or the rules of arbitration, 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 and to the breach of contract found, expressly or impliedly, by the arbitrator. The remedy fashioned by the arbitrator here was within the scope of his authority as measured by that standard. We therefore reverse the contrary judgment of the Court of Appeal.
Facts and Proceedings1
AMD and Intel are both engaged in the creation, design, production and marketing of complex integrated circuits, also known as computer chips. In the period 1978-1981 both AMD and Intel were pursuing strategies for producing and marketing 16-bit microprocessors and the 32-bit microprocessors that were expected to follow. AMD was attempting to secure entry into this market through an agreement with a third chip maker, Zilog, while Intel had developed its own 16-bit microprocessor, the 8086. Intel, needing another producer to “second source”2 the 8086, approached AMD.
Intel hoped to establish the 8086’s basic architecture, known as iAPX, as the market standard, guaranteeing future sales of the 8086’s expected progeny as well. AMD, having had what it saw as a bad experience in a previous second-source agreement with Intel, wanted to be sure it would not be cut off from second-sourcing future generations of the 8086 family. In addition, reaching an agreement with Intel would mean abandoning AMD’s relationship with Zilog; AMD therefore sought a long-term arrangement.
[368]The parties entered into the contract at issue in February 1982. According to its preamble, the agreement was intended “to establish a mechanism for exchanging technical information so that each party acquires the capability to develop products suitable for sale as an alternate source for products developed by the other party.” During the 10-year term of the contract (cancelable after 5 years on one year’s notice by either party), either company could elect to be a second source for products offered it by the other. The nondeveloping company would receive technical information and licenses needed for it to make and sell the part. The developing company would receive a royalty. In addition, the developing company would earn the right to be a second source for products developed by the other party. The terms of exchange—the respective value of the products—were to be calculated by a specified equation from the complexity and size of the parts.
The parties had fundamentally different views of the contract. AMD believed the agreement created a partnership or joint venture under which the two companies would agree in advance on products to be developed by each of them, avoiding duplicative research expenditures and guaranteeing each a more complete product line. Intel, on the other hand, saw the agreement as “little more than an armed truce,” in which each proposed second-source agreement was to be the subject of combative bargaining with no continuing obligations from episode to episode. The arbitrator rejected both extremes, finding that, “while a party was not obligated to act substantially against its self interest in deciding to transfer or accept a part, there was an implied covenant to make the relationship work which obligated a party to consider in good faith ... the purposes of the contractual relationship . . . and to negotiate reasonably to accomplish this purpose. If it could not do this it should terminate the arrangement—as Intel finally did.”3 The purposes of the agreement, according to the arbitrator, were expansion of product line and savings on research and development.
The contract provided for arbitration of “disagreements aris[ing] under this Agreement . . . .” Arbitration was to be by a single arbitrator, whose decision would be considered “a final and binding resolution of the disagreement.” Disagreements over product exchanges led AMD to petition the superior court to compel arbitration in April 1987. The parties agreed on an arbitrator and to the rules he would follow, including section 42, entitled “Scope of the Award,” which 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.” Section 41 further instructed the arbitrator to “interpret and apply these Rules insofar as they relate to his powers [369]and duties.” After hearings in superior court, a temporary judge (who was also the chosen arbitrator) made an order of reference stating the issues for arbitration and providing, as to each issue, that “the Arbitrator is authorized to fashion such remedy as he may in his discretion determine to be fair and reasonable but not in excess of his jurisdiction.”
The arbitration lasted four and one-half years and included three hundred and fifty-five days of hearings. As the current dispute focuses narrowly on two items of relief awarded, only a small portion of the arbitrator’s extensive findings need be summarized here.
Under the contract AMD could initially obtain second-source rights to Intel’s 8086 chip and other specified products for cash. After 1985, AMD would have open access to Intel’s product line if Intel accepted AMD products of sufficient value, as determined from the complexity-size formula. In 1984 the parties negotiated an amendment to the contract, under which AMD was to second source the successors of the 8086—the 80186 and 80286—in exchange for substantial royalties to Intel. Intel also agreed at that time to accept certain AMD products then in development, conditional in some instances on final specifications. The arbitrator found that “[i]f Intel took all these products, or even some of them, AMD would have access to the Intel line of products without restriction—and no royalties.”
The arbitrator found Intel extensively breached its obligations to act in good faith and deal fairly. Beginning in mid-1984 Intel, anxious to be the sole source for the 80386 (its 32-bit chip, which was to prove vastly successful) and convinced the contract was to its disadvantage, decided to frustrate the operation of the contract by taking no more products from AMD. Intel also resolved to keep this decision from AMD and the public, leaving AMD and others in the industry with the belief AMD would be a second source for the 80386. This “ke[pt] AMD in the Intel competitive camp” and avoided public knowledge of Intel’s sole-source strategy for the 80386, a strategy Intel feared could limit its market if known.4 The plan succeeded: AMD continued for about two years to believe, incorrectly, its agreement with Intel “had a future.”
[370]One concrete example of Intel’s failure to negotiate in good faith was its treatment of AMD’s Quad Pixel Display Manager (QPDM), a graphics chip. Although Intel promised in 1984 to accept the QPDM from AMD provided the parties agreed on its specifications, the arbitrator found Intel made no actual attempt to negotiate the remaining differences as to specifications. Instead, partly in order to avoid having both to give AMD the 80386 and to eliminate royalties on other products, Intel summarily rejected the QPDM. In doing so, the arbitrator found, Intel breached the implied covenant of good faith and fair dealing as well as “its implied covenant to negotiate reasonably to further the goals of the relationship between the parties . . . .”
The arbitrator also found, however, Intel was not obliged under the contract to accept the QPDM or other products that would have earned AMD the 80386 rights. Apart from Intel’s breach, moreover, the arbitrator found AMD had unnecessarily delayed in seeking alternative ways to enter the 32-bit chip market. Having inferred by mid-1985 that Intel was not going to accept the AMD parts that could earn AMD the 80386, AMD should have sought arbitration at that time or immediately begun reverse engineering the 80386 when it became available in July 1986.5 Instead, AMD did not begin reverse engineering the 80386 until a later time and did not produce its own 80386 chip—known as the Am386—until March 1991. “In short, Intel’s plan succeeded . . . because of AMD’s inertia.” For this reason, the arbitrator declined to award AMD the hundreds of millions of dollars it sought in lost 80386 profits.
Despite AMD’s delay, the arbitrator found AMD had actually been damaged by Intel’s breach: “One knows that AMD lost some goodwill as the result of the Intel conduct; one knows that AMD lost some profits from not having the 80386 as the result of the Intel conduct , . . . The actual damages are immeasurable; and nominal damages only are inequitable.” (Underlining in original.) The proper remedy, the arbitrator decided, was to relieve AMD from “legal harassment by Intel over AMD’s alleged use of Intel intellectual property in the reverse engineered AMD 386.”
The arbitrator therefore awarded AMD a permanent, nonexclusive and royalty-free license to any Intel intellectual property embodied in the Am386 (paragraph 5 of the award). He also awarded AMD a further two-year extension of certain patent and copyright licenses, insofar as they related to [371]the Am386, that originated in a 1976 agreement between the parties, which had been extended under the 1982 contract to 1995 (paragraph 6 of the award).6 The arbitrator designated these items as remedies for breach of the covenant of good faith and fair dealing, as well as for failure to negotiate in good faith over the QPDM specifications and for other breaches.
AMD petitioned the superior court to confirm the award (Code Civ. Proc., § 1286); Intel petitioned for the award to be corrected (Code Civ. Proc., § 1286.6) by vacating paragraphs 5 and 6, on the ground they exceeded the arbitrator’s powers. The superior court confirmed the award, but the Court of Appeal reversed. Although it recognized the scope of judicial review did not extend to redeciding the merits of the controversy, the court believed the extent of the arbitrator’s remedial powers was reviewable “de novo.” The Court of Appeal found itself unable to locate a “rational nexus” between paragraphs 5 and 6 of the award and the contract itself. Therefore, the court concluded, the arbitrator had improperly “rewritten] the parties’ agreement” in paragraphs 5 and 6 of the award. Determining those paragraphs could be treated as surplusage without affecting the merits of the decision, the court [372]ordered the award corrected and confirmed rather than vacated. We granted review.
Discussion
I. Standard of Review of the Remedies Fashioned by a Private Arbitrator
A. Review of Arbitrability
Although this court has not previously articulated a detailed standard for review of the remedies fashioned by an arbitrator, we have considered the related question how to review determinations of arbitrability, that is, whether an arbitrator exceeded his or her authority by deciding a particular issue. On that point, our decisions teach that courts should generally defer to an arbitrator’s finding that determination of a particular question is within the scope of his or her contractual authority.
Code of Civil Procedure section 1283.47 provides the arbitrator’s written award shall determine all submitted questions “necessary in order to determine the controversy.” Construing that section in Morris v. Zuckerman (1968) 69 Cal.2d 686, 690 [72 Cal.Rptr. 880, 446 P.2d 1000], this court held it is for the arbitrators to determine what issues are “necessary” to the ultimate decision. We continued: “Likewise, any doubts as to the meaning or extent of an arbitration agreement are for the arbitrators and not the court to resolve.” (Ibid.; accord, Taylor v. Crane (1979) 24 Cal.3d 442, 450 [155 Cal.Rptr. 695, 595 P.2d 129]; Van Tassel v. Superior Court (1974) 12 Cal.3d 624, 627 [116 Cal.Rptr. 505, 526 P.2d 969].)
Although section 1286.2 permits the court to vacate an award that exceeds the arbitrator’s powers, the deference due an arbitrator’s decision on the merits of the controversy requires a court to refrain from substituting its judgment for the arbitrator’s in determining the contractual scope of those powers. (Morris v. Zuckerman, supra, 69 Cal.2d at p. 691; see also O’Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482, 493 [30 Cal.Rptr. 452, 381 P.2d 188] [contractual clause precluding arbitrator from modifying contract did not permit court to reach merits of controversy in deciding limits of arbitrability]; Weiman v. Superior Court (1959) 51 Cal.2d 710, 714 [336 P.2d 489] [court’s duty to determine if there was a “disagreement” to be arbitrated did not authorize prior judicial decision on merits of dispute].)
[373]Giving substantial deference to the arbitrators’ own assessments of their contractual authority is consistent with the general rule of arbitral finality we recently reaffirmed in Moncharsh v. Heily & Blase, supra, 3 Cal.4th at pages 8-13 (hereafter Moncharsh). As we stated there, parties to private, nonjudicial arbitration typically expect “ ‘their dispute will be resolved without necessity for any contact with the courts.’ ” (Id. at p. 9, quoting Blanton v. Womancare, Inc. (1985) 38 Cal.3d 396, 402, fn. 5 [212 Cal.Rptr. 151, 696 P.2d 645, 48 A.L.R.4th 109].) The decision to arbitrate disputes is motivated in part by the desire to avoid the delay and cost of judicial trials and appeals. “Ensuring arbitral finality thus requires that judicial intervention in the arbitration process be minimized.” (Moncharsh, supra, 3 Cal.4th at p. 10.) A rule of judicial review under which courts would independently redetermine the scope of an arbitration agreement already interpreted by the arbitrator would invite frequent and protracted judicial proceedings, contravening the parties’ expectations of finality. (See Van Tassel v. Superior Court, supra, 12 Cal.3d at p. 627 [trial “de novo” of jurisdictional facts would defeat purposes of choosing arbitration].)
B. Review of Remedies
Intel contends that even if California precedents require deference to an arbitrator’s assessment of arbitrability, a different, less deferential rule applies to an arbitrator’s choice of remedies. Intel’s position is neither logically persuasive nor supported by precedent.
In providing for judicial vacation or correction of an award, our statutes (§§ 1286.2, subd. (d), 1286.6, subd. (b)) do not distinguish between the arbitrators’ power to decide an issue and their authority to choose an appropriate remedy; in either instance the test is whether the arbitrators have “exceeded their powers.” Because determination of appropriate relief also constitutes decision on an issue, these two aspects of the arbitrators’ authority are not always neatly separable.
Morris v. Zuckerman, supra, 69 Cal.2d 686, illustrates this overlap between arbitrability and remedies. A contract required plaintiff and defendant to sell jointly owned land on demand of another party. When the demand was made, however, the plaintiff proposed selling to a company he controlled, and the defendant refused to comply. (Id. at pp. 687-689.) The arbitrators decided the plaintiff and defendant were fiduciaries, and the proposed sale to a company controlled only by the plaintiff was an inequitable attempt to “ ‘squeeze out’ ” the defendant. The arbitrators therefore declined to require the defendant to sign the new sale contract as written; [374]instead they found he was obliged to execute the contract only if it was modified to include him as a one-half partner in the purchase. (Id. at pp. 689, 691-694 & fn. 4.) This court, upholding the award, held it was within the arbitrators’ power to decide the parties were fiduciaries, to consider that relationship in fashioning their award, and to make an award designed to prevent one party from taking “unfair advantage” of the other. (Id. at pp. 693-694.)
Although in Morris v. Zuckerman we did not explicitly state the issue in such terms, we there in fact upheld the arbitrators’ choice of relief against a claim they exceeded their contractual authority. (69 Cal.2d at pp. 690-691.) The plaintiff contended the arbitrators had no authority to add conditions to the new sale contract; we held they could do so if they found equity and the parties’ relationship required such relief. In reaching this conclusion we applied a rule of substantial deference to the arbitrators’ jurisdictional determinations. (Morris v. Zuckerman, supra, 69 Cal.2d at p. 690.) Morris thus implies an arbitrator’s discretion to determine the extent of remedies is as great as his or her discretion to determine the related question of what issues are necessary to the decision.
Deference to the arbitrator is also required by the character of the remedy decision itself. Fashioning remedies for a breach of contract or other injury is not always a simple matter of applying contractually specified relief to an easily measured injury. It may involve, as in the present case, providing relief for breach of implied covenants, as to which the parties have not specified contractual damages. It may require, also as in this case, finding a way of approximating the impact of a breach that cannot with any certainty be reduced to monetary terms. Passage of time and changed circumstances may have rendered any remedies suggested by the contract insufficient or excessive. As the United States Supreme Court explained in the leading case on review of arbitral remedies in the collective bargaining context, the arbitrator is required “to bring his informed judgment to bear to reach a fair solution of a problem. . . . There the need is for flexibility in meeting a wide variety of situations. The draftsmen may never have thought of what specific remedy should be awarded to meet a particular contingency.” (Steelworkers v. Enterprise Corp. (1960) 363 U.S. 593, 597 [4 L.Ed.2d 1424, 1428, 80 S.Ct. 1358].)
The choice of remedy, then, may at times call on any decisionmaker’s flexibility, creativity and sense of fairness. In private arbitrations, the parties have bargained for the relatively free exercise of those faculties. Arbitrators, unless specifically restricted by the agreement to following legal rules, [375]“ ‘may base their decision upon broad principles of justice and equity . . . .’ [Citations.] As early as 1852, this court recognized that, ‘The arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono [according to what is just and good].’ [Citation.]” (.Moncharsh, supra, 3 Cal.4th at pp. 10-11.)8 Were courts to reevaluate independently the merits of a particular remedy, the parties’ contractual expectation of a decision according to the arbitrators’ best judgment would be defeated.
Independent reevaluation by a court, moreover, is unlikely to be either expeditious or accurate. Arbitrations may, as this case demonstrates, be lengthy and complicated. The proceedings may be informal and a complete stenographic record may not be prepared. A reviewing court is thus not in a favorable position to substitute its judgment for that of the arbitrators as to what relief is most just and equitable under all the circumstances. Further, independent review of remedies, no less than of other arbitrated questions, would tend to increase the cost and delay involved. “If the courts were free to intervene on these grounds [disagreement with the arbitrators’ “honest judgment” as to remedy] the speedy resolution of grievances by private mechanisms would be greatly undermined.” (Paperworkers v. Misco, Inc. (1987) 484 U.S. 29, 38 [98 L.Ed.2d 286, 299, 108 S.Ct. 364].)
We do not, by the above, intend to suggest an arbitrator’s exercise of discretion in ordering relief is unrestricted or unreviewable. Such an extreme position enjoys no support in our statutes or cases. The powers of an arbitrator derive from, and are limited by, the agreement to arbitrate. (Moncharsh, supra, 3 Cal.4th at p. 8.) Awards in excess of those powers may, under sections 1286.2 and 1286.6, be corrected or vacated by the court. Unless the parties “have conferred upon the arbiter the unusual power of determining his own jurisdiction” (McCarroll v. L.A. County etc. Carpenters (1957) 49 Cal.2d 45, 65-66 [315 P.2d 322]), the courts retain the ultimate authority to overturn awards as beyond the arbitrator’s powers, whether for an unauthorized remedy or decision on an unsubmitted issue.
What does follow from the considerations discussed above is that review of remedies cannot be, as the Court of Appeal characterized it in this case, [376]“de novo.”9 Nor are Intel and allied amici curiae correct in describing judicial review of remedies as “independent.” To the contrary, an appropriately deferential review starts not from the beginning, but from the arbitrator’s own rational assessment of his or her contractual powers and is dependent on (that is, rests on acceptance of) this and any other factual or legal determination made by the arbitrator. The principle of arbitral finality, the practical demands of deciding on an appropriate remedy for breach, and the prior holdings of this court all dictate that arbitrators, unless expressly restricted by the agreement or the submission to arbitration, have substantial discretion to determine the scope of their contractual authority to fashion remedies, and that judicial review of their awards must be correspondingly narrow and deferential.
C. Standard of Review
Having rejected the extremes of “de novo” review on the one hand, and complete unreviewability on the other, we must attempt to articulate a standard capturing the middle ground of deferential yet meaningful review. We begin by surveying similar efforts in the Courts of Appeal and in other jurisdictions.
Recent decisions in the Courts of Appeal have employed two formulas to determine whether an arbitrator’s award exceeded his or her powers. The courts have asked whether the award rests on a “completely irrational” construction of the contract (e.g., Tate v. Saratoga Savings & Loan Assn. (1989) 216 Cal.App.3d 843, 855 [265 Cal.Rptr. 440]; Summit Industrial Equipment, Inc. v. Koll/Wells Bay Area (1986) 186 Cal.App.3d 309, 320 [230 Cal.Rptr. 565]; Hacienda Hotel v. Culinary Workers Union, supra, 175 Cal.App.3d 1127, 1133) or whether it amounts to an “arbitrary remaking” of the contract (e.g., Blue Cross of California v. Jones (1993) 19 Cal.App.4th 220, 228 [23 Cal.Rptr.2d 359]; Pacific Gas & Electric Co. v. Superior Court (1993) 15 Cal.App.4th 576, 592 [19 Cal.Rptr.2d 295]; Southern Cal. Rapid [377]Transit Dist. v. United Transportation Union, supra, 5 Cal.App.4th at p. 423). These tests were combined in Southern Cal. Rapid Transit Dist. v. United Transportation Union, supra, 5 Cal.App.4th at page 423, into a single formula: “Generally, a decision exceeds the arbitrator’s powers only if it is so utterly irrational that it amounts to an arbitrary remaking of the contract between the parties.”
These statements of the standard tend to focus the inquiry on the arbitrator’s construction of the contract. Useful as such an examination may sometimes be, it is incomplete as a test of whether arbitrators have exceeded their powers in awarding a particular item of damages or other relief.10 The critical question with regard to remedies is not whether the arbitrator has rationally interpreted the parties’ agreement, but whether the remedy chosen is rationally drawn from the contract as so interpreted. This case illustrates the distinction; Intel argues not that the arbitrator misconstrued the contract, but that the remedy he fashioned bore an insufficient relationship to the agreement as he interpreted it.
In contrast to the California cases, decisions from the federal courts applying the “essence” test announced in Steelworkers v. Enterprise Corp., supra, 363 U.S. at page 597 [4 L.Ed.2d at page 1428] (hereafter Enterprise) properly focus on the source of the arbitrators’ chosen remedy.11
In Enterprise, a labor arbitrator ordered several workers reinstated with backpay upon finding their dismissal improper. The collective bargaining agreement authorizing the arbitration, however, had expired after the workers’ dismissal but before the award. The company argued the award of [378]reinstatement, and of backpay after expiration of the agreement, was therefore unenforceable. (Enterprise, supra, 363 U.S. at pp. 595-596 [4 L.Ed.2d at pp. 1427-1428].) The high court held the award could not be refused enforcement on this ground. If the arbitrator was relying solely on statutory requirements extraneous to the contract, he exceeded his powers under the submission. But if the award derived from the arbitrator’s construction of the agreement, even an erroneous construction, it was within his authority. Ambiguity on this point, which the court found to exist, was insufficient grounds to refuse enforcement. (Id. at pp. 597-599 [4 L.Ed.2d at pp. 1428-1429].)
In reaching its holding the high court explained the limits on an arbitrator’s authority to fashion remedies as follows: “[A]n arbitrator is confined to interpretation and application of the collective bargaining agreement; he does not sit to dispense his own brand of industrial justice. He may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement. When the arbitrator’s words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award.” (Enterprise, supra, 363 U.S. at p. 597 [4 L.Ed.2d at p. 1428], italics added.)
Judicial review of remedies as outlined in the Enterprise decision thus looks not to whether the arbitrator correctly interpreted the agreement, but to whether the award is drawn from the agreement as the arbitrator interpreted it or derives from some extrinsic source. As the court explained in a later labor case, where an arbitrator is authorized to determine remedies for contract violations, “courts have no authority to disagree with his honest judgment in that respect. . . . [A]s long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision.” (Paperworkers v. Misco, Inc., supra, 484 U.S. at p. 38 [98 L.Ed.2d at p. 299] [hereafter Misco].)
In addition to governing federal court review of labor arbitration awards, the standard enunciated in Enterprise and Misco has been applied by federal courts reviewing commercial arbitration awards, as well as by state courts. (See, e.g., Anderman/Smith Co. v. Tenn. Gas Pipeline Co., supra, 918 F.2d at p. 1218; Pacific Reinsurance v. Ohio Reinsurance (9th Cir. 1991) 935 F.2d 1019, 1024; Engis Corp. v. Engis Ltd. (N.D.I11. 1992) 800 F.Supp. 627, 629; 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].) Indeed, the “essence” test “has displaced all its rivals in the marketplace of judicial formulas.” (Ethyl Corp. v. United Steelworkers of America (7th Cir. 1985) 768 F.2d 180, 184.)
[379]The dissent argues the Enterprise!Misco standard should not be applied in the commercial context, apparently on the ground commercial arbitrators do not have the same need for flexibility in fashioning remedies as labor arbitrators. (Dis. opn., post, pp. 396-400.) The dissent, we think, overstates the difference: while many commercial arbitrations involve single transactions in which a finding of breach suggests well-defined contractual damages, others—including the present one—involve lengthy and complicated dealings between the parties, in which the breaches are numerous, extended or repeated, and monetary damages are either indeterminable or inadequate. We nonetheless recognize differences do exist, and our employment of the Enterprise!Misco formulation does not, as the dissent suggests, incorporate the entire body of labor arbitration law applying that test.
The need for expeditious and informal procedures to resolve disputes— and hence for a deferential standard that will minimize judicial intrusion—is at least as great in the commercial context as in labor relations. Although the present parties may both be able to bear the costs of fully litigating their claims, many commercial arbitrations involve small businesses and consumers, for whom avoiding the court system’s high cost is of utmost importance. The more rigorous the standard of judicial review of arbitral remedies, the more time and money consumer plaintiffs, for example, will be forced to spend confirming and preserving awards in their favor.
We recognize certain aspects of labor arbitration may be unique, and not all rules established for resolution of disputes over collective bargaining agreements are applicable to commercial contracts. On the issues discussed here, however, Enterprise and other federal labor decisions have been influential in the commercial arbitration context because they are grounded on “considerations of judicial policy” equally applicable to review of commercial arbitration awards. (Hecla Min. Co. v. Bunker Hill Co. (1980) 101 Idaho 557, fn. 4 [617 P.2d 861, 866].) In both labor and commercial arbitrations, the choice of remedies calls on the arbitrator’s flexibility and informed judgment (Enterprise, supra, 363 U.S. at p. 597 [4 L.Ed.2d at p. 1428]); in both areas, independent judicial reevaluation of remedies would tend to defeat the contractual intent to resolve disputes efficiently and by private mechanisms (Misco, supra, 484 U.S. at p. 38 [4 L.Ed.2d at p. 299]).
Two federal appellate decisions provide useful elaborations on the Enterprise! Misco test. In Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d 180, 184, the arbitrator had awarded vacation pay for the year 1982 to workers laid off from a plant at the end of 1981, although under a literal reading of the collective bargaining agreement they could not have earned [380]the vacation pay, since they did not work 200 hours during 1982 as the contract required. {Id. at pp. 182-183.) The Court of Appeals held the district court erred in setting aside this award as beyond the arbitrator’s powers. (Id. at pp. 183-184.)
The court explained an award does not exceed the arbitrator’s powers if it is based on an interpretation—“unsound though it may be”—of the contract: “It is only when the arbitrator must have based his award on some body of thought, feeling, or policy, or law that is outside the contract . . . that the award can be said not to ‘draw its essence from the collective bargaining agreement’ . . . .” (Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at pp. 184-185.)
Although the Enterprise test emphasizes the source from which the arbitrator drew the award, it nevertheless is objective. The arbitrator cannot shield his decision from scrutiny “simply by making the right noises—noises of contract interpretation . . . .” (Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at p. 187.) Rather, the question is whether the award is “so outré that we can infer that it was driven by a desire to do justice beyond the limits of the contract.” (Ibid.) Restated, the test asks “ ‘whether the arbitrator’s solution can be rationally derived from some plausible theory of the general framework or intent of the agreement.’ ” (Id. at p. 186.)
Local 120 v. Brooks Foundry, Inc. (6th Cir. 1990) 892 F.2d 1283 is particularly instructive, as it deals with the difficult problem of choosing remedies for a real but unquantifiable injury. After the union agreed to a wage concession for all workers, the company improperly protected one favored employee from the reduction. In the arbitrated grievance, the union requested an award of $130,000, the aggregate amount of the wage concession for all employees. The arbitrator found such a massive award would be inappropriate and beyond the company’s ability to pay and instead awarded 10 percent of the amount, $13,000, which he stated was intended as “ ‘damages’ ” to “ ‘cushion’ ” the harm to the union from the company’s breach. (Id. at pp. 1284, 1287.)
The Court of Appeals reversed the district court’s ruling vacating the award. Acknowledging the amount of the award was not drawn directly from measurement of the injury done the union (Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d at p. 1288), the court held it was nonetheless within the arbitrator’s powers. “[Determining damages appropriate for an inchoate injury is not always an exact exercise, susceptible to strict logical explication.” (Id. at p. 1287.) The arbitrator did not abuse his authority in taking [381]into account “the economic facts of life which prompted the pay cut provision” or in viewing it in “the realistic light of the history that brought it about.” (Id. at p. 1288.) The court concluded the award, although “unusual and even bizarre,” drew its essence from the contract because it was “related to arguably proper compensatory damages . . . .” (Ibid.)
We distill from these cases what we. believe is a meaningful, workable and properly deferential framework for reviewing an arbitrator’s choice of remedies. Arbitrators are not obliged to read contracts literally, and an award may not be vacated merely because the court is unable to find the relief granted was authorized by a specific term of the contract. (Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at pp. 184, 186.) The remedy awarded, however, must bear some rational relationship to the contract and the breach. The required link may be to the contractual terms as actually interpreted by the arbitrator (if the arbitrator has made that interpretation known), to an interpretation implied in the award itself, or to a plausible theory of the contract’s general subject matter, framework or intent. (Ibid.) The award must be related in a rational manner to the breach (as expressly or impliedly found by the arbitrator).12 Where the damage is difficult to determine or measure, the arbitrator enjoys correspondingly broader discretion to fashion a remedy. (Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d at p. 1287.)
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. (Enterprise, supra, 363 U.S. at p. 598 [4 L.Ed.2d at pp. 1428-1429]; Misco, supra, 484 U.S. at p. 38 [98 L.Ed.2d at p. 299]; Ethyl Corp. v. United Steelworkers of America, supra, 768 F.2d at pp. 184-185.) In close cases the arbitrator’s decision must stand. (Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d at p. 1289.)
D. Relationship of Relief to Rights Under Contract
Intel maintains that, whatever the general standard, the cases establish one “bright-line” rule: “[Arbitrators may not award a remedy that conflicts with express terms of the arbitrated contract.” To the extent this means arbitrators may not award remedies expressly forbidden by the arbitration agreement or submission, the point is well taken. How the violation of “ ‘an express and [382]explicit restriction on the arbitrator’s power’ ” (Hecla Min. Co. v. Bunker Hill Co., supra, 617 P.2d at p. 869) could be considered rationally related to a plausible interpretation of the agreement is difficult to see.
Thus, for example, where a collective bargaining agreement provided for arbitration solely of “ ‘grievance[s],’ ” and defined a grievance as “ ‘a complaint or claim against the employer,’ ” the arbitrator was without power to award the employer damages against the union. (Carpenter Local 1027 v. Lee Lumber & Bldg. Material (7th Cir. 1993) 2 F.3d 796, 798-799.)13 Even where the parties’ original contract included a broad arbitration clause, the arbitrator’s powers may be restricted by the limitation of issues submitted. (See, e.g., Totem Marine Tug & Barge v. North Am. Towing (5th Cir. 1979) 607 F.2d 649, 650-651 [where arbitrated claim sought only “return expenses,” and claimant’s brief in arbitration conceded “charter hire” was not at issue, arbitrator exceeded powers in awarding charter hire as damages].)
To the extent Intel is advocating a broader rule—that arbitrators may not award a party benefits different from those the party could have acquired through performance of the contract—the cases do not support its position. No exact correspondence is required between the rights and obligations of a party had the contract been performed and the remedy an arbitrator may provide for the other party’s breach.
In Morris v. Zuckerman, supra, 69 Cal.2d 686, for example, we held it within the arbitrator’s power, as a remedy for the plaintiff’s breach of fiduciary duties, to excuse the defendant from executing a document the parties’ underlying contract required him to execute; the arbitrator properly created a condition to the required sale, although the original contract had no such limitation. (Id. at pp. 688, 694.) Similarly, the union in Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d 1283, had no contractual right to a payment of $13,000, but the award was proper to alleviate the effects of the company’s breach. In Anderman/Smith Co. v. Tenn. Gas Pipeline Co., supra, 918 F.2d 1215, a dispute over the pricing of natural gas, the court approved an award requiring certain prices to remain in effect for one year and [383]requiring any future price changes to be approved by the arbitrators, although the contract contained different, comprehensive provisions for price changes. (Id. at pp. 1217, 1219-1220; see also Engis Corp. v. Engis Ltd., supra, 800 F.Supp. at pp. 629-630 [arbitrator within powers in requiring one party to delete “Engis” from its corporate name, even though contract specifically granted it right to use name]; Hecla Min. Co. v. Bunker Hill Co., supra, 617 P.2d at p. 870 [arbitrator could invalidate price schedule imposed by party while in breach although schedule was otherwise valid under contract]; Malekzadeh v. Wyshock, supra, 611 A.2d at pp. 22-23 [in dispute between general and limited partners, arbitrator could, as practical necessity, delegate managerial duties to independent third party, although contract assigned those duties to general partner].)
As these examples demonstrate, arbitrators, unless expressly restricted by the agreement of the parties, enjoy the authority to fashion relief they consider just and fair under the circumstances existing at the time of arbitration, so long as the remedy may be rationally derived from the contract and the breach. The rights and obligations of the parties under the contract as it was to be performed are not an unfailing guide to the remedies available when the contract has been breached. It follows that parties entering into commercial contracts with arbitration clauses, if they wish the arbitrator’s remedial authority to be specially restricted, would be well advised to set out such limitations explicitly and unambiguously in the arbitration clause. Because parties to arbitration agreements do have the power to limit possible remedies in this manner (as the dissent acknowledges), we do not believe our holding will, as the dissent speculates, discourage arbitration.
II. Application to This Case
As mentioned, section 42 of the rules of arbitration agreed upon by the parties authorized the arbitrator to grant “any remedy or relief which the Arbitrator deems just and equitable and within the scope of the agreement . . . .” The order of reference similarly empowered him to “fashion such remedy as he may in his discretion determine to be fair and reasonable but not in excess of his jurisdiction.” The arbitration clause itself contained no special limitations.
Section 42 is identical to a provision of the Commercial Arbitration Rules of the American Arbitration Association (AAA). (AAA, Commercial Arbitration Rules (1993) rule 43, p. 17.) The AAA rule has been described as “a broad grant of authority to fashion remedies” (Totem Marine Tug & Barge v. [384]North Am. Towing, supra, 607 F.2d 649 at p. 651), and as giving the arbitrator “broad scope” in choice of relief (Malekzadeh v. Wyshock, supra, 611 A.2d at p. 22; see also De Laurentiis v. Cinematographica De Las Americas, S.A. (1961) 9 N.Y.2d 503 [215 N.Y.S.2d 60, 64 174 N.E.2d 736] [AAA rule was grant of authority so broad no particular items of damages claimed could be eliminated in advance of arbitration]). Nothing in the contract’s arbitration clause, section 42 of the rules adopted here, or the order of reference indicates an intent to place any special restrictions on the arbitrator’s discretion to fashion remedies.
Intel emphasizes that the question of what remedies could be awarded was discussed prior to arbitration by the parties and the arbitrator (sitting as a temporary judge of the superior court), and that all concerned agreed the arbitrator’s choice of remedies would be subject to later judicial review. A review of the cited portions of the record, however, reveals the parties and the arbitrator agreed only that any relief awarded could be judicially reviewed for excess of jurisdiction. The record does not reflect an agreement for any heightened review beyond that already available by statute, namely, review to determine if the award “exceeded [the arbitrator’s] powers.” (§§ 1286.2, subd. (d), 1286.6, subd. (b).)
Paragraphs 5 and 6 of the award did not exceed the arbitrator’s power under the standard previously stated. The contested items of relief were rationally drawn from the arbitrator’s conception of the contract’s subject matter and the effects on AMD of Intel’s breach. The available facts do not compel the conclusion the arbitrator fashioned a remedy by reaching outside the contract to some extrinsic source; we are not constrained, in other words, to find he attempted “to dispense his own brand of industrial justice.” (Enterprise, supra, 363 U.S. at p. 597 [42 L.Ed.2d at p. 1428].)
In this case the arbitrator, somewhat atypically, explained at length his understanding of the contract and Intel’s breach, as well as his reasons for making the award at issue. Although the following discussion consequently compares the award and breach in some detail, not all cases will allow or require such an analysis. In general arbitrators enjoy greater flexibility than juries and courts in fashioning remedies, and relief that could legally have been ordered by a trial court or jury is also within the normal authority of a contractual arbitrator. Indeed, in many cases the required rational relationship between breach and award may be found in the fact the arbitrator has awarded the injured party relief of the same general type as that a jury or court could have provided had the claim been litigated, even if the quantity, extent or parameters of the award differ in some respects from that to which
[385]the party was legally entitled. (See Moncharsh, supra, 3 Cal.4th at p. 28 [arbitrator does not exceed his powers merely by making legal error].)
As already explained, the arbitrator found the framework of the contract required good faith negotiation over technology exchanges, for the purpose of allowing both parties to expand their product lines. In particular, AMD, having foregone other alliances that might have gained it entry into the 32-bit chip market in order to help Intel establish the iAPX architecture as the industry leader, required a mechanism by which it could reasonably hope to become a second source for the successors of the 8086, as well as for the 8086 itself. If a party could or would not negotiate in good faith, it should terminate the agreement pursuant to the cancellation clause.
Intel breached this implied covenant, as well as the implied covenant of good faith and fair dealing, by secretly deciding not to accept any more AMD products, while maintaining the public posture that AMD would be a second source for the 80386. One example of this breach was its summary rejection of the QPDM, as to which it was obliged to negotiate specifications in good faith. Intel’s strategy succeeded, in that for about two years AMD continued to believe the contract offered it future rewards. Although AMD also delayed unnecessarily in turning to alternative strategies (e.g., reverse engineering the 80386 or forming an alliance with a different chip maker) after concluding it would not be able to obtain the 80386 under the contract, the arbitrator found AMD had indeed lost some “immeasurable” amount of profits and goodwill as a result of Intel’s bad faith conduct.
Paragraph 6 of the award, which extends for two years (insofar as they related to the Am386) certain licenses to Intel patents and copyrights originally granted AMD in 1976 and extended to 1995 under the 1982 agreement, bears a clear and rational relationship to the contract and the effects of Intel’s breach. Having found Intel succeeded in keeping AMD in the Intel camp for about two years through its bad faith conduct, the arbitrator extended for that same period rights that AMD had enjoyed under the contract and that could be useful to it in recovering from the breach’s effects.
Paragraph 5 awards AMD a nonexclusive, royalty-free license to any Intel copyrights, patents, trade secrets or maskwork rights contained in the Am386. Because the question whether AMD had appropriated any Intel intellectual property in creating the Am386 was apparently one of the issues between the parties in federal litigation at the time this award was made, Intel contends the arbitrator went outside the scope of the arbitration in [386]fashioning paragraph 5 of the award. Intel points to language the arbitrator used that suggests extrinsic concerns. In the award itself the arbitrator stated he intended paragraph 5 to provide AMD a defense in the pending federal litigation. In the accompanying opinion he explained paragraphs 5 and 6 were intended to end “the incessant warfare” between the parties, and in his final summary he added his “hope[]” the additional competition “will be beneficial to the parties . . . and to the consumer world wide through lower prices.”14
Whatever optimism the arbitrator expressed about the effects of his award, the record demonstrates paragraph 5 derived rationally from his interpretation of the contract and the breach he found Intel to have committed. As already discussed, the arbitrator found AMD had been damaged by Intel’s breach: the breach “to some extent contributed to AMD’s delay in reverse engineering the 80386.” Finding the amount of actual damages indeterminable and nominal damages alone inequitable, the arbitrator determined the “proper remedy” was to block Intel’s interference with AMD’s own attempts to mitigate its damage by marketing its reverse-engineered 32-bit chip. The award was thus rationally related to the arbitrator’s plausible findings as to the subject matter of the contract and the effects of the breach. We repeat that in doubtful cases the arbitrator’s choice of remedies must stand. (Local 120 v. Brooks Foundry, Inc., supra, 892 F.2d at p. 1289.)
Intel emphasizes paragraph 5 gave AMD rights it had not earned in performance of the contract. As we have explained, however (see pt. I.D., ante), a valid award for breach of contract does not require exact correspondence with the particular benefits the injured party would have received had the contract been fully performed. The arbitrator acted within his powers by fashioning a remedy rationally designed to alleviate the unfair results of Intel’s breach, a breach that was not specifically anticipated in the parties’ [387]agreement. The parties’ general restriction on the arbitrator’s powers—that he fashion relief he deemed “just and equitable and within the scope of the agreement”—did not preclude him from choosing a remedy consonant with his construction of the contract’s implied covenants and rationally related to the effects of a breach he found to have occurred.15
That the arbitrator found AMD had not “earned” the Intel 80386 is, under the circumstances, not significant. The award sought not to implement a technology exchange required by the contract, but to alleviate the effects of Intel’s breach of the contract’s implied covenants. Because of Intel’s breach, AMD had been delayed for an indeterminate period in finding another way of entering the 32-bit chip market, whether by reverse-engineering the 80386 or by allying itself with another company. While AMD should have mitigated its damages from the breach by beginning the reverse-engineering process earlier, the arbitrator reasonably determined fairness now required AMD be free to proceed on its own path without “legal harassment” from the breaching party. By interfering with—and further delaying—AMD’s exploitation of its own chip, Intel would keep AMD in the noncompetitive posture Intel had imposed partly through its deliberate breach of contract. The arbitrator, empowered to decide the controversy ex aequo et bono, had the power to make an award he believed would protect AMD from interference as it attempted to recover from Intel’s breach by exploiting its own 32-bit chip. He did not exceed his jurisdiction in fashioning a remedy to prevent Intel from taking advantage of its own bad faith conduct. (See Civ. Code, § 3517.)
[388]Finally, Intel argues the award “sanction[s] illegal conduct,” to wit, AMD’s (hypothetical) appropriation of Intel intellectual property in the Am386. This attack also fails. The arbitrator awarded AMD a license to use Intel intellectual property in the future to the undetermined extent such property was contained in the Am386. Awarding such a license, as has been seen, was within the scope of authority the parties gave the arbitrator. AMD’s use, if any, of the property under license is not misappropriation; nor is it illegal or against public policy for any other reason.16
The dissent, while accepting the principle an award must be rationally linked to the contract or breach, would hold in addition that “the potential remedies available to an arbitrator are limited to those that a court could award on the same claim.” (Dis. opn., post, at p. 400.) In the present dispute over a breach of the implied covenant of good faith and fair dealing, the dissent would limit the possible equitable remedies to specific performance as it could have been ordered by a court, and would vacate the award because it does not order performance in the exact terms of the contract, i.e. because the licenses awarded in paragraphs 5 and 6 do not correspond precisely to licenses that could have been earned under the contract’s technology exchange provisions. (Dis. opn., post, at pp. 401-403.)
We believe this approach is inconsistent with the principles of contractual arbitration and with the agreement of the parties in this case. As already discussed, arbitrators are not generally limited to making their award “ ‘on principles of dry law.’” (Moncharsh, supra, 3 Cal.4th at p. 11.) For that reason, parties who submit their disputes to arbitration “ ‘ “may expect not only to reap the advantages that flow from the use of that nontechnical, summary procedure, but also to find themselves bound by an award reached by paths neither marked nor traceable and not subject to judicial review.” [Citations.]’ ” (Ibid.)
As New York’s highest court expressed the same idea, “[i]n the final analysis ‘Arbitrators may do justice’ and the award may well reflect the spirit rather than the letter of the agreement [citation]. ... In other words a court may not vacate an award because the arbitrator has exceeded the power the court would have, or would have had if the parties had chosen to litigate, rather than arbitrate the dispute. Those who have chosen arbitration as their forum should recognize that arbitration procedures and awards often differ from what may be expected in courts of law.” (Rochester City School Dist. v. [389]Rochester Teachers Assn. (1977) 41 N.Y.2d 578 [394 N.Y.S.2d 179, 362 N.E.2d 977, 981], italics added.)
This principle applies fully to arbitral awards of nonmonetary relief. “Arbitrators have broad discretion in fashioning a remedy for the injustice which is found to have occurred.” (Baltimore County v. Mayor & City Council of Baltimore (1993) 329 Md. 692 [621 A.2d 864, 871].) Because the parties to an arbitration have the freedom to determine the rules by which their dispute will be resolved, including the scope of available relief, “courts will uphold awards of specific performance by arbitrators in instances in which the equitable remedy would not have been available if the dispute had originally been litigated in court.” (1 Domke on Commercial Arbitration (rev. ed. 1994) § 30.01, p. 441.) As one federal court succinctly stated, “[a]n arbitration panel may grant equitable relief that a Court could not.” (Sperry International Trade, Inc. v. Government of Israel (S.D.N.Y. 1982) 532 F.Supp. 901, 905, affd. 689 F.2d 301 (2d Cir. 1992).)
The parties in the present case did not by agreement restrict the arbitrator to remedies available in a court of law. To the contrary, they adopted an AAA rule authorizing the arbitrator to grant “any remedy or relief which the Arbitrator deems just and equitable and within the scope of the agreement . . . .” Although the dissent cites Thompson v. Jespersen (1990) 222 Cal.App.3d 964 [272 Cal.Rptr. 132] for the proposition the AAA rule restricts the arbitrator to remedies authorized by law or express agreement (dis. opn., post, at p. 402), that case neither states nor stands for such a rule. The Thompson court vacated an arbitral award of attorney fees on the ground the fee issue was neither submitted to arbitration nor within the “ ‘terms’ ” of the parties’ contract. The award thus bore, in the court’s view, an insufficient relationship to the agreement itself. (Id. at pp. 967-968.) At issue in Thompson was an award of litigation “expenses” (id. at p. 968), not damages for breach of contract; the decision does not articulate any general rule that an arbitrator is limited to substantive relief available to a court. (See also Swift Industries, Inc. v. Botany Industries, Inc. (3d Cir. 1972) 466 F.2d 1125, 1135-1136 [upholding an award of attorney fees, as a matter of contract interpretation within the authority of the arbitrator, despite the lack of any explicit reference to fees in the parties’ agreement or the AAA rules]; Raytheon v. Automated Business Systems, Inc. (1st Cir. 1989) 882 F.2d 6, 10 [under the AAA rule, damages or relief available to a court is the “minimum” available to arbitrator].)
Nor, contrary to the dissent’s contention, does the AAA’s published guide for commercial arbitrators suggest arbitrators are limited to relief available [390]from a court. The guide first states a general standard governing relief: “The award must be consistent with the agreement of the parties.” (AAA, A Guide for Commercial Arbitrators (1991) p. 23, reprinted in Oehmke, Commercial Arbitration (1994 cum. supp.) appen. 5, p. 821.) The guide states no particular standard for consistency; AAA rule 43, as previously noted, requires only that the remedy must be one the arbitrator deems “within the scope” of the agreement. The general guidance is followed by three “example[s]” of appropriate relief: monetary damages, specific performance of the contract, and an injunction against breach. Nothing in the brief and general guidance suggests these examples are intended to be exclusive.
The test proposed by the dissent would impermissibly embroil the courts in reviewing the legal correctness of an arbitrator’s decision on submitted issues. To determine whether a remedy is within the range a court could award on the same claim, a reviewing court would inevitably have to interpret the contract and resolve factual and legal disputes on questions such as the nature of the breach and the extent of the cognizable injury to the nonbreaching party. Reference to “normal contract remedies” (dis. opn. post, at p. 401) is not sufficient, because what remedies are legally and equitably available for breach of contract may depend on the nature of the contract, the breach and the injury. Consequently, the dissent’s approach would require judicial reexamination of the award’s legal and factual sufficiency, an enterprise we disapproved in Moncharsh. In addition, to measure the award of an arbitrator, who may have been chosen for practical experience or technical expertise rather than legal training, strictly against the legal limits of contract damages is, we believe, unrealistic and contrary to the parties’ expectations.
Equitable relief is by its nature flexible, and the maxim allowing a remedy for every wrong (Civ. Code, § 3523) has been invoked to justify the invention of new methods of relief for new types of wrongs. (11 Witkin, Summary of Cal. Law (9th ed. 1990) Equity, §3, p. 681.) In actions founded on contract, courts have available for use in appropriate cases, in addition to specific performance, equitable remedies based on reformation, excuse of conditions and rescission (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, §§ 382, 772, 883-885, pp. 347-348, 697, 791-794), as well as quasi-specific performance by constructive trust (11 Witkin, Summary of Cal. Law, supra, Equity, § 28, pp. 706-707), and indirect enforcement of a covenant by negative decree (id., § 61, pp. 737-738).
In light of the inherently flexible nature of equitable remedies, the principle of arbitral finality which forbids judicial inquiry into the legal correctness of the arbitrator’s decisions on submitted issues, and the related principle that remedies available to a court are only the minimum available to an [391]arbitrator (unless restricted by agreement), we cannot agree with the dissent the relief in this case was beyond the arbitrator’s powers simply because the license awarded did not correspond in all its terms with a license that could have been earned through performance of the agreement.
Conclusion
We conclude the challenged portions of the arbitrator’s award were within his authority to fashion remedies for a breach of contract. The superior court correctly confirmed the award under section 1286. The judgment of the Court of Appeal, reversing that of the superior court, is reversed.
Lucas, C. J., Arabian, J., and George, J., concurred.
The facts stated are taken primarily from the arbitrator’s award and memoranda of decision. As the parties recognize, courts may not review for sufficiency the evidence supporting an arbitrator’s award. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 11.) We therefore take the arbitrator’s findings as correct without examining a record of the arbitration hearings themselves; indeed, the appellate record contains neither a reporter’s transcript of the hearings nor the exhibits introduced therein.
The chip makers’ customers, computer manufacturers, frequently prefer a product be made by more than one source, as this helps ensure competition and a reliable supply. Hence the common practice of second sourcing, in which the company developing a product licenses to another company the right, for a royalty, to make and sell it.
Intel gave notice of termination in April 1987, after AMD petitioned for arbitration.
The arbitrator relied on numerous Intel internal memoranda produced during the arbitration. An October 1984 memorandum states the Intel strategy succinctly: “*Assure AMD they are our primary source through regular management contact and formal meetings. [IQ* Take no more AMD products under the current agreement.” In 1985 an Intel manager described the company’s objective this way: “Keep AMD in the Intel camp.” The same note continues: “Key point—we are in no hurry. We don’t need a 386 2nd source, especially since everyone assumes AMD will be one.” A 1986 memorandum articulates this strategy: “Maintain a second-source, business as usual posture in the marketplace. . . . Our strategy is to keep talking .... We do not want them [AMD] to go on to Hitachi or NEC, and should not stimulate them to do so.”
A chip may be “reverse engineered” by disassembling, studying and analyzing its structure. “This knowledge may be used to create an original chip having a different design layout, but which performs the same or equivalent function as the existing chip, without penalty or prohibition [under the federal Semiconductor Chip Protection Act].” (Brooktree Corp. v. Advanced Micro Devices, Inc. (Fed. Cir. 1992) 977 F.2d 1555, 1565.)
For Intel breaches involving other products, AMD was awarded more than $10 million plus prejudgment interest, as well as manufacturing rights to the Intel 8087 chip. These aspects of the award are no longer in dispute.
Paragraphs 5 and 6 of the award, the relief at issue here, state more fully: “[¶] 5. AMD is hereby awarded a permanent, royalty-free, non-exclusive, non-transferable, worldwide right (but not the right to assign, license or sublicense such right to any other party) under any and all Intel copyrights, patents, trade secrets and maskwork rights contained in the current versions of AMD’s reverse-engineered 80386 family of microprocessors, to make, have made by a third party solely for AMD, use and sell the prior, current and future revisions and modifications of those products.... The intent of this paragraph is to provide a complete and dispositive defense to AMD as to the Intel claims against AMD regarding the technology and intellectual property used in AMD’s current versions of the 80386 in such lawsuits as Intel Corp. v. Advanced Micro Devices, Inc. (A 91 CA 800) in the United States District Court for the Northern] District of California, and Intel Corp. v. Advanced Micro Devices, Inc. (C 90 20572 WAI) in the United States District Court for the Northern District of California, and to preclude and defeat other potential Intel intellectual property infringement claims with respect to the technology used in AMD’s aforedescribed past and current versions, and future revisions and modifications, of the 80386 . ... [¶] By this award, I do not intend to express or imply an opinion as to whether any Intel intellectual property rights are incorporated in any of the AMD 80386 family of microprocessors or whether any of the AMD 80386 family of microprocessors infringes any Intel intellectual property rights, the intent of the award (as indicated above) being to grant AMD all rights necessary to allow AMD to produce and sell its AMD 80386 family of microprocessors, and revisions and modifications, thereof, free from harassment by Intel. HQ 6. In addition to the nominal damages awarded AMD for Intel’s breaches as set forth in paragraphs 1 and 4 hereof it is ordered that the rights conferred upon AMD under the 1982 AMD/Intel Agreement (which extended until 1995 the patent and copyright licenses originally granted by an agreement between the parties in 1976) are hereby extended two years from their present date of expiration only insofar as they relate to or concern the AMD 80386 and its revisions or modifications, if any.”
All further statutory references are to the Code of Civil Procedure unless otherwise specified.
Intel asserts Moncharsh held questions regarding remedies, unlike other arbitrated questions, are reserved to the courts. Apparently Intel’s allusion is to our statement in Moncharsh, supra, 3 Cal.4th at page 12, that the statutes provide for review “in circumstances involving serious problems with the award itself. . . .” Neither that statement, however, nor our actual holdings in Moncharsh, suggest any different standard of review for choice of remedies. Like other “serious problems with the award,” a remedial choice is subject to judicial vacation or correction if it exceeded the arbitrators’ powers. Intel also cites Hall v. Superior Court (1993) 18 Cal.App.4th 427, 436 [22 Cal.Rptr.2d 376], for the same proposition, but that case offers no support, as it drew no such distinction between judicial review of remedies and judicial review of arbitrability.
The Court of Appeal cited Southern Cal. Rapid Transit Dist. v. United Transportation Union (1992) 5 Cal.App.4th 416, 423 [6 Cal.Rptr.2d 804] as holding that whether an award is in excess of the arbitrator’s powers “ ‘is a question of law we review de novo on appeal.’ ” The Southern Cal. Rapid Transit Dist. court’s reference to the “de novo” standard as one applied “on appeal,” accompanied by a citation to Hacienda Hotel v. Culinary Workers Union (1985) 175 Cal.App.3d 1127, 1133-1134 [223 Cal.Rptr. 305], in which the Court of Appeal reversed a superior court decision vacating an award, indicates the Southern Cal. Rapid Transit Dist. court intended its “de novo” standard to describe its review of the superior court’s order rather than the arbitrator’s award. To that extent it was correct. (See Andermanl Smith Co. v. Tenn. Gas Pipeline Co. (5th Cir. 1990) 918 F.2d 1215, 1218, fn. 2 [court of appeals reviews award deferentially, but reviews district court order confirming award "de novo’’].)
We need not decide here whether an arbitrator’s interpretation of a contract is subject to review for “irrationality” or “arbitrariness.” The present case involves an arbitrator’s choice of remedies, rather than interpretation of the agreement. We reiterate, however, that an award generally may not be vacated or corrected, under California law, for errors of fact or law. For this reason one Court of Appeal has referred to the “completely irrational” standard as “a questionable pre-Moncharsh statement of law.” (Hall v. Superior Court, supra, 18 Cal.App.4th at p. 434.)
Despite the subsequent divergence in wording, both the “arbitrary remaking” and “completely irrational” formulas used by the Courts of Appeal are related in their origins to Enterprise’s “essence” test. In Posner v. Grunwald-Marx, Inc. (1961) 56 Cal.2d 169 [14 Cal.Rptr. 297, 363 P.2d 313], this court held California labor arbitration law was in conformity with the federal law as stated in Enterprise. {Id. at p. 185.) At the same time we joined in criticism of other federal cases that could be interpreted “as indicating a complete judicial retreat from the field of arbitration in collective bargaining cases, which could result in the arbitrary remaking of the collective bargaining agreement by an arbitrator contrary to the intentions of the parties.” (Id. at p. 184; italics added.) The “completely irrational” language was first quoted in Lesser Towers, Inc. v. Roscoe-Ajax Constr. Co. (1969) 271 Cal.App.2d 675, 701 [77 Cal.Rptr. 100], from a New York case (National Cash Register Co. v. Wilson (1960) 8 N.Y.2d 377 [208 N.Y.S.2d 951, 955, 171 N.E.2d 302]), which in turn cited other New York cases and Enterprise.
The award is rationally related to the breach if it is aimed at compensating for, or alleviating the effects of, the breach. We need not decide here under what circumstances a contractual arbitrator is authorized to award punitive damages. (See Tate v. Saratoga Savings & Loan Assn., supra, 216 Cal.App.3d at p. 855; Todd Shipyards Corp. v. Cunard Line, Ltd. (9th Cir. 1991) 943 F.2d 1056, 1062-1063.)
In contrast to the broad remedial authority the parties gave the arbitrator here, commercial arbitration agreements sometimes direct the arbitrator to award very specific damages for specific breaches. For example, an arbitration rule of the American Spice Trade Association, incorporated into trading agreements, provides: “ ‘Whenever it shall be decided by arbitration that either party has failed to fulfill the terms of the contract, and is therefore in default, arbitrators shall determine the difference between the contract price and market value on the date of default as found by them (on the basis of contract weight without leeway) and award such difference to the seller or to the buyer as the case may be.’ ” (1 Domke on Commercial Arbitration (1984) § 30.02, p. 444.)
Intel also complains the arbitrator referred to his own remedial powers as “awesome, magisterial . . . .” Although the accuracy vel non of his claim to “awesome” powers is immaterial, we note the President of the American Arbitration Association, for one, agrees with that characterization: “An arbitrator is given awesome powers by the parties and by the law.” (Coulson, Business Arbitration: What You Need to Know (1980) p. 21.) Intel fails to note the arbitrator went on to say he would use his powers sparingly, following the law as much as possible. Indeed, the arbitrator feared his restraint—the fact he did not award AMD the very large monetary damages it requested—would lead some to believe Intel “has been dealt with too lightly . . . .” He explained he was aware of the problem but believed he had reached the only just result: “Were [I] permitted by contract law to award punitive damages [I] would have imposed some; and were [I] permitted by law to slice out arbitrarily from Intel’s bountiful income from the 80386 a share of money to ‘even out the balance’ ... for AMD [I] would have done that too. But neither of these things can be done without sacrificing the integrity of this decision. There is no lawful way to compensate AMD other than those set forth herein . . . .”
Intel argues more specifically the arbitrator deviated from the contract in four ways: (1) by not requiring AMD to have created an exchange product that earned it the 80386; (2) by not requiring AMD to pay royalties on the licensed Intel intellectual property; (3) by giving AMD “have-made” rights to the Intel intellectual property; and (4) by giving AMD rights to Intel “custom circuitry.” As to all four points, we repeat that the award was designed not to implement contractual performance, but to prevent further damage to AMD from Intel’s breach of the contract; that purpose did not require imposition of royalties, further technology exchanges, or exact correspondence with the terms of a technology exchange license described in the contract. In addition, “have-made” rights—the right of a licensee to have a chip made for it by a third party foundry—were not expressly excluded under the 1982 contract, and in the absence of any finding by the arbitrator we cannot say they were not included in the contractual right to make and sell a licensed product. Rights to “custom circuitry”—special circuitry used for emulation, diagnostics and development—were excluded from the transfer provisions in the 1984 amendment, but are nowhere mentioned in paragraphs 5 and 6 of the award; without a finding by the arbitrator, this court could not find these were among the rights licensed in the award. In any event, for the reasons already given, the award was valid despite any divergence between it and the exchange license described in the contract. We therefore deny as containing irrelevant material the parties’ motions for judicial notice received October 18,1994, and October 28,1994. (See Mangini v. R.J. Reynolds Tobacco Co. (1994) 7 Cal.4th 1057, 1063 [31 Cal.Rptr.2d 358, 875 P.2d 73].) We have examined the materials; they would not affect our decision.
Because we conclude the award should have been confirmed, we do not reach AMD’s further contention vacation and rehearing, rather than correction, was the proper course if the challenged remedies exceeded the arbitrator’s powers.