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High Court Rejects Arbitration Agreements That Expand Judicial Review

By Henry R. Chalmers, Litigation News Associate Editor – August 13, 2008

The U.S. Supreme Court has added greater finality to arbitration awards, which should prompt attorneys to revise the standard arbitration provisions they include in their clients’ contracts.

The Court confirmed in Hall Street Associates, LLC v. Mattel, Inc. [PDF] that the handful of grounds explicitly enumerated in the Federal Arbitration Act are the exclusive grounds for vacating, modifying, or correcting an arbitration award and cannot be expanded upon, even by agreement of the parties.

“The decision recognizes that the sine qua non of arbitration is speed, efficiency, and cost-savings,” says Neal M. Eiseman, New York, cochair of the Arbitration Subcommittee of the Section of Litigation Alternative Dispute Resolution Committee. “The business decision whether to litigate or arbitrate is an either-or proposition; arbitration should not be an opportunity to combine the two,” Eisman says.

After three years of litigation, the parties in Hall Street agreed to arbitrate their remaining claim. The district court approved the parties’ agreement, which provided for entry of judgment on any arbitration award, but required the court to vacate, modify, or correct the award if the arbitrator’s findings of fact were not supported by substantial evidence, or if the arbitrator’s conclusions of law were erroneous.

When the arbitrator ruled against the plaintiff based on an apparent error of law, the plaintiff moved the district court to vacate the award.

The Supreme Court ruled that vacatur was not available in this case. The Court held that the narrow grounds set forth in sections 10 and 11 of the FAA were the exclusive grounds for vacatur, modification, and correction and that the parties’ agreement improperly tried to expand upon those grounds.

The Court opined that the FAA should be seen as “substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway.”

“Any other reading opens the door to the full-bore legal and evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process,” the Court reasoned.

In the Hall Street opinion, the Court suggests that state statutes and common law might offer a separate avenue into court for parties wanting review of arbitration awards, but Eiseman is skeptical. “The FAA trumps state arbitration law whenever issues of interstate commerce are involved,” says Eiseman. “That leaves very few instances in which courts will not be bound by the FAA.”

Lower courts may not be foreclosed entirely from vacating awards based on what is known as “manifest disregard” of the law, says Mark Fleming, Boston, cochair of the International Subcommittee of the Section’s Alternative Dispute Resolution Committee.

Hall Street suggests “that this avenue may not be available, but stops short of actually closing the door on it,” Fleming notes. “Parties may be able to repackage manifest disregard arguments under one of the existing FAA grounds for vacatur or modification,” he says.

In the wake of the Hall Street decision, attorneys should review their standard arbitration provisions to ensure they do not provide for a scope of review broader than the FAA’s explicit terms. Parties uncomfortable with this change must decide whether to include arbitration provisions in their contracts at all.

Edward Mullins, Miami, cochair of the Section’s Alternative Dispute Resolution Committee, sees Hall Street as a departure from the High Court’s former deference to parties’ freedom to structure their arbitration agreements. Mullins expresses concern that “this mentality might lead the Court to disregard other aspects of parties’ contracts as well.”

Eiseman, on the other hand, is unsympathetic to those who bemoan any narrowing of judicial power to vacate, modify, or correct. “To be blunt, parties who arbitrate have agreed to abide by the arbitrator’s legal decision, thereby assuming the competence (or incompetence) of their arbitrators.”

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