Businesses that are parties to arbitration agreements should review a recent decision by the Supreme Court of the United States where the Court held that parties to an arbitration agreement may not contract for expanded grounds of judicial review. In the 6-3 decision in Hall Street Associates, LLC v. Mattel, Inc., 2008 WL 762537 (U.S. 2008), the Court concluded that the grounds for judicial review established by the Federal Arbitration Act (“FAA”) are exclusive and cannot be varied by agreement.
The case arose out of a dispute over a commercial lease. The parties agreed to submit the issue to arbitration, and their agreement to arbitrate was entered as an order by a federal district court. The agreement provided, inter alia, that the arbitration award could be vacated, modified, or corrected by a court if the arbitrator’s findings were not supported by substantial evidence or if the arbitrator made erroneous conclusions of law.
The FAA establishes a limited basis on which an arbitrator’s award may be corrected, vacated, or modified by a court. The federal appellate courts had split on the question of whether the parties to an agreement may contract for expanded judicial review. After the arbitration, the district court vacated the award on the grounds that the arbitrator failed to follow the applicable law. The Ninth Circuit reversed, holding that the terms of the parties’ arbitration agreement with respect to judicial review were unenforceable.
In an opinion by Justice Souter, the Supreme Court held that the specific grounds set forth in the FAA are the only bases on which an arbitration award may be vacated, modified, or corrected. In particular, the court rejected the argument that because arbitration is a creature of contract, the parties should have the authority to establish the features of the arbitration proceeding, including how an award may be reviewed. Instead, the court found that the text of the FAA compelled a reading of the judicial review grounds as exclusive. According to the court, the text of the FAA establishes “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 three dissenters disagreed, rejecting the majority’s narrow interpretation of the FAA.
The court, however, did not merely affirm the Ninth Circuit’s decision. Instead, the court noted that the arbitration agreement in this case was reduced to an order by the district court. The court remanded the case for an analysis of whether the agreement should “be treated as an exercise of the District Court’s authority to manage its cases” under the federal rules. This determination leaves open the possibility that parties might have the ability to modify the way an arbitration award will be reviewed by invoking a district court’s authority to manage its cases.
Full opinion text: http://www.supremecourtus.gov/opinions/07pdf/06-989.pdf