In the United States, the methods of enforcing a judgment are not available to prevailing parties in an arbitration until the arbitration award is confirmed by a court – thereby converting it into an enforceable judgment. The Federal Arbitration Act (the FAA) provides expedited judicial review in the federal courts either to confirm an arbitration award or to vacate, modify or correct it on certain narrow grounds specified in the FAA (e.g., if the award was procured by corruption or fraud, or if the arbitrators were guilty of misconduct or exceeded their powers).
An issue that had split the federal appeals courts was whether the parties to an arbitration agreement can broaden the scope of judicial review of awards by specifying a more exacting standard of review in their arbitration agreement. The Supreme Court's recent decision in Hall Street Assoc., L.L.C. v. Mattel, Inc. resolved this split in the negative, holding that – when parties employ the FAA's expedited procedures for judicial review of arbitration awards – the limited bases for vacating, modifying, or correcting such awards set forth in the FAA are exclusive.
Hall Street commenced litigation in federal court in Oregon against Mattel alleging breach of a lease arising out of Mattel's decision to terminate its tenancy and deny Hall Street indemnification for environmental remediation costs. After the district court ruled that Mattel's termination did not breach the lease, the parties agreed to arbitrate the remaining indemnification question, which was whether Mattel's alleged breach of an Oregon drinking water quality statute violated environmental law. The parties' arbitration agreement, which the district court approved and entered as an order, broadened the scope of judicial review of any arbitration award, providing that the district court "shall vacate, modify or correct any award: (i) where the arbitrator's findings of facts are not supported by substantial evidence, or (ii) where the arbitrator's conclusions of law are erroneous."
An arbitrator issued an award in Hall Street's favor, concluding that the Oregon statute was a health law, not an environmental law. The district court held that the arbitrator's conclusion of law was erroneous (applying the broad standard or review to which the parties had agreed) and vacated the award. The United States Court of Appeals for the Ninth Circuit reversed and reinstated the award, holding that the limited grounds for judicial review of arbitration awards under the FAA are exclusive. The Supreme Court accepted review to resolve the circuit split.
In a 6–3 decision, the Supreme Court held that the plain language of the FAA does not permit parties to contract out of the statutory limitations imposed upon expedited judicial review of arbitration awards. The statutory limitations focus on "egregious departures from the parties' agreed-upon arbitration: 'corruption,' 'fraud,' 'partiality,' 'misconduct' ..." Given the FAA's emphasis on such extreme conduct, "a statute with no textual hook for expansion cannot authorize contracting parties to supplement review for specific instances of outrageous conduct with review for just any legal error," as the parties did in Hall Street. The Court recognized that the FAA promotes a national policy favoring arbitration generally, and enforcement of arbitration agreements negotiated between the parties specifically. Nevertheless, the Court observed that "[i]nstead of fighting the text, it makes more sense to see the [FAA], as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway."
The Supreme Court's decision applies only to arbitration awards reviewed under the FAA, and its opinion notes that alternate bases for vacatur or modification may be available if parties seek to confirm awards under state or common law rather than through the expedited procedures under the FAA. In addition, the Court remanded the case so the court below could consider a procedural issue not initially raised by the parties: whether the district court's vacatur of the arbitration award should be viewed as an exercise of that court's discretion under Rule 16 of the Federal Rules of Civil Procedure (which affords a district court broad authority to manage its cases), rather than as a review under the FAA, because the arbitration agreement had been entered as an order by the district court.
Conclusion
Parties confronted with requests to arbitrate complex disputes should consider whether the benefits that arbitration purports to offer – such as lower costs or speedy decisions – are worth the risks associated with the limitations on judicial review of arbitration awards. The decision in Hall Street affirms those limitations and may even tighten them. Several federal courts have held that "manifest disregard of the law" is a basis for vacating an arbitration award, even though the FAA does not so provide. The Supreme Court did not address this issue directly in Hall Street, but its opinion implies that federal courts should not apply any standard of review not expressly set forth in the FAA, so the "manifest disregard" cases may be questionable. Moreover, the parties' ability to avoid the FAA in favor of state or common law is likely not as simple as Hall Street suggests. The Court made no effort to square its statement that the FAA "is not the only way into court for parties wanting review of arbitration awards" with the FAA's broad jurisdictional reach (i.e., Section 2 of the FAA provides that the FAA governs all arbitration agreements that "involve commerce"). In addition, many states (including New York) have arbitration statutes that are quite similar to the FAA in authorizing only limited judicial review of arbitration awards.
In the end, parties who seek a more comprehensive level of review of an arbitration award may be best served by agreeing to procedures for review of the award by a panel of appellate arbitrators. Such procedures are available under the rules of the American Arbitration Association and other dispute resolution organizations.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
