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The benefits of resolving civil disputes through binding arbitration are the subject of constant debate. The primary arguments favoring arbitration are that it is faster and cheaper than going to court, a “knowledgeable” arbitrator can decide the case, and proceedings are usually confidential. These perceived qualities can be attractive to partners in a close enterprise or other business relationships where privacy has a high value in their affairs. However, experience shows that arbitration can be more expensive than litigation in state or federal courts, and most agreements compelling binding arbitration leave no relief from even an “arbitrary” decision unless the arbitrator is involved in dishonesty or fraud or exceeds the powers conferred under the agreement. After parties spend significant time and money preparing, negotiating, and documenting their rights and responsibilities in the contract between them, the legitimate question arises why disputes should be resolved by someone who can ignore those carefully crafted terms, as well and the facts and the law, in deciding the merits of a dispute arising under that contract. The Federal Arbitration Act and similar state Arbitration Acts do not by their terms permit recourse for even gross errors of law or unsupported factual findings by an arbitrator. However, if integrity in the dispute resolution process is valued higher than finality, and the decision to arbitrate and its scope is simply one of many terms of the broader agreement between the potential disputants, can parties to a contract simply agree to eliminate the risk of the “arbitrary” arbitrator by agreeing that the scope of review by a court of competent jurisdiction will be broad enough to correct errors the parties want to avoid?
The short answer is that it depends on whether the enforcement action is in federal or state court and the state law governing the parties’ agreement. If the dispute ends up in Federal Court, the Federal Arbitration Act (“FAA”) found in 9 U. S. C. §§1 et seq. (2021) applies. If the relationship is governed by state law and a state court is asked to enforce or vacate a arbitrator’s award, the courts look to their own Arbitration Acts, most of which are modeled after the Uniform Arbitration Act (UAA). See, e.g., Massachusetts General Laws Chapter 251, §1 et seq.; Georgia Arbitration Code O.C.G.A. §§ 9-9-1 et seq.; CA Civ Pro Code Title 9, §§ 1280-1294.4. With few exceptions, the FAA and UAA require enforcement of arbitrator decisions absent conduct akin to fraud or the arbitrator deciding an issue not subject to arbitration.
The United States Supreme Court addressed the issue in Hall Street Assocs. L.L.C. v. Mattel, Inc. 552 U.S. 576 (2008), ruling that the FAA provided the exclusive (and extremely limited) grounds for an appeal of an arbitration award and parties to an arbitration agreement are powerless to change it. However, the court in Hall Street specifically held that states are free to reach a different result on grounds of their own statutory or common law. Nevertheless, certain state courts have followed the logic of Hall Street and found unenforceable agreed-upon arbitration review standards when they were inconsistent with the narrow statutory standards in the state Arbitration Act. The reasons given start with the statutory language in the various arbitration acts. Those statutes typically say, on the front end, that an agreement to arbitrate “shall” be enforced by a court if necessary, and on the back end, that the arbitration decision “shall” be confirmed (absent demonstration of the limited statutory grounds for vacatur, such as fraud). In other words, once parties agree to arbitrate, a court’s role is limited to enforcing the agreement to arbitrate and then enforcing the decision rendered by the arbitrator. Courts also rely on public policy reasons, including the desire for predictability, certainly and effectiveness of the arbitration forum voluntary chosen by the parties, and a loss of the efficiency arbitration provides if a cumbersome or a time-consuming judicial review process is added. For example, the highest courts of Massachusetts, New York, and New Jersey have followed Hall Street and severely limited review of arbitration decisions in those states.
On the other hand, other state courts have rejected the Hall Street approach, finding of paramount importance the value of the parties’ freedom to contract. These courts see the arbitration provisions as no different from other terms of the parties’ agreement that warrant respect and enforcement. Examples of states where their courts consider the intent of the parties paramount to any efficiency or finality purposes of arbitration and will enforce parties’ agreements to protect themselves from errors made by an arbitrator through broader judicial review are Texas, New Hampshire, and California.
The takeaway is that parties desiring to formulate an alternative dispute resolution process that protects them from the proverbial “runaway” arbitrator must be mindful of the law governing the contract and what court will ultimately enforce it. The highest courts in many states have not addressed the issue. Therefore, if broad appellate rights of an arbitration decision are desired, particular attention must be given to the language negotiated and the applicable state law and options, if any, it affords.
Please contact your FMG attorney for more information on this subject. Find an FMG labor attorney here.