by Kirk J. McCormick, Associate

Imagine your company is involved in a lawsuit in federal district court.  The suit involves two distinct, yet related, issues, and your company and the opposing party agree to arbitrate one of the issues.  The arbitration agreement requires the court in which the lawsuit is pending to vacate, modify, or correct any award if the arbitrator’s conclusions of law are erroneous.  The court reviews the arbitration agreement and approves.

The parties proceed to arbitration, and the arbitrator issues an award.  However, the arbitrator fails to apply the correct statute to the case, resulting in an unfavorable decision for your company.  Understandably dissatisfied with the result, your company moves the district court to vacate the award based on the arbitrator’s legal error.  Empowered by the arbitration agreement to vacate the award for legal error, the court agrees and vacates the award.

At this point, it looks like your company got just what it hoped for when it agreed to the arbitration agreement: the court corrected the arbitrator’s mistake.  This would appear to be a victory both for your company and for the rights of litigants to choose how closely a judge will review an arbitration award, right?

Wrong.  In a case with facts very similar to those described above, the United States Supreme Court recently declared that under the Federal Arbitration Act, 9 U.S.C. § 10 (the “FAA”), parties to an arbitration agreement cannot require a court to set aside an award for mere “legal error.”

In Hall Street Associates v. Mattel, after the district court had vacated the arbitrator’s initial award, the parties engaged in several subsequent rounds of arbitration and litigation, and the case ultimately made its way to the Supreme Court.  There, the issue presented to the Court was whether, under the FAA, the parties could contractually require a judge to set aside an arbitrator’s award for mistakes of law.

The Court began its analysis by addressing the plain language of the FAA.  Under that statute, a court reviewing an arbitrator’s award “must” confirm the award unless one of several specific grounds is present.  Generally, these grounds are:

•    where the award was procured by corruption, fraud, or undue means;
•    where there was evident partiality or corruption in the arbitrators;
•    where the arbitrators were guilty of misconduct in refusing to postpone the hearing;
•    arbitrator misconduct in refusing to hear material evidence;
•    other arbitrator misbehavior by which the rights of any party have been prejudiced; or
•    where the arbitrators exceeded their powers.

After examining this language, the Court turned its attention to the arguments submitted in favor of heightened judicial review of arbitration awards.

First, the Court quickly rejected the argument that expanded judicial review of such awards has been accepted by courts for years.  Next, the Court addressed the argument that the FAA was enacted out of a desire to enforce parties’ contractual agreements, and that allowing parties to contractually decide upon greater judicial oversight of arbitration awards was consistent with that goal.  The Court turned back to the plain language of the statute to dismiss this argument, as well.

Under the FAA, upon an application for an order to confirm an arbitration award, the court “must grant” the order unless one of the statutory exceptions applies.  The exceptions to mandatory enforcement being only for such “egregious departures from the parties’ agreed upon arbitration” such as fraud, evident partiality, and corruption.  According to the Court, the text of the FAA makes enforcement mandatory, and the parties to an arbitration agreement cannot alter the statute’s standard for enforcing awards.  In the absence of “extreme arbitral conduct,” there is “no hint of flexibility” in the FAA, and enforcement of arbitration awards is required.  The Court noted that if Congress intended the FAA to allow courts to set aside awards for mere mistakes of law, Congress could have included language to that effect.  In the words of the Court, “fraud and a mistake of law are not cut from the same cloth.”

Finally, the Court noted that its decision actually served the broader purposes of the FAA by fostering prompt, non-judicial resolution of disputes.  “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.” In other words, allowing courts to second-guess arbitration awards for mere mistakes of law would lead to the same costly and time-consuming judicial trials that arbitration was intended to avoid in the first place.

The Court’s opinion casts significant doubt on the enforcement of arbitration provisions that call for judicial review of an arbitrator’s or panel’s award beyond the terms of the FAA.  While you may desire the scrutiny and protection of judicial review, terms of review exceeding those of the FAA will not likely be of use to you.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.
 
Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.