The United States Supreme Court recently held that parties cannot evade certain provisions of the Federal Arbitration Act (“FAA”) through the terms of their private contracts, specifically, those FAA rules concerning the vacating or modifying of an arbitration award. Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989, 2008 WL 762537 (Mar. 25, 2008). Thus, the Court held parties may not draft an arbitration agreement that either supplements the statutory grounds for vacatur, or provides for heightened judicial review under the FAA. The Court did, however, allow for the possibility of heightened review of awards issued in arbitrations that are not governed by the FAA.
The FAA provides expedited judicial review to confirm, vacate, or modify arbitration awards. Under Section 9 of the FAA, a court must confirm an award unless it is vacated, modified, or corrected as prescribed in Sections 10 and 11. Section 10 of the FAA lists grounds for vacating an award, including where the award was procured by “corruption,” “fraud,” or “undue means,” and where the arbitrators were “guilty of misconduct,” or “exceeded their powers.” Under Section 11, the grounds for modifying or correcting an award include “evident material miscalculation,” “evident material mistake,” and “imperfect[ions] in [a] matter of form not affecting the merits.”
In Hall Street Associates, L.L.C. v. Mattel, Inc., Mattel, which leased commercial space from Hall Street, notified Hall Street of its intent to terminate the lease after the discovery of environmental contamination on the premises. Hall Street filed a lawsuit contesting the termination and sought indemnification for the clean-up costs. After the district court resolved the termination issue in Mattel's favor, the parties agreed to submit the indemnification dispute to arbitration under an agreement providing that, "[t]he 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."
After the arbitrator ruled in favor of Mattel on the indemnification dispute, Hall Street filed a motion to vacate pursuant to the arbitration agreement, arguing that the arbitrator's conclusion of law was erroneous. The district court vacated the award and remanded the matter to arbitration. On remand, the arbitrator issued an award in favor of Hall Street. The district court upheld the second award, but on appeal, the Ninth Circuit held that the arbitration agreement's provision for judicial review for errors of law was unenforceable, based upon Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003) (en banc).
Noting a circuit split on this issue, the Supreme Court granted certiorari to decide whether the grounds for vacatur and modification provided by Sections 10 and 11 of the FAA are exclusive. In a 6-3 ruling, the Court held that, based on the FAA’s statutory language, Sections 10 and 11 do provide the exclusive grounds for expedited vacatur and modification of arbitration awards, and that parties cannot contract for greater review.
In reaching its conclusion, the Court rejected Hall Street's arguments that, (i) "manifest disregard of the law" – widely regarded as basis for vacatur – is not among the statutory grounds; and (ii) that the freedom of contract principles underlying the FAA compel enforceability of the agreement’s judicial review provision. The Court suggested that "manifest disregard" fits within the statutory framework as an instance of either arbitrator misconduct or an arbitrator exceeding their powers. Further, the Court concluded that freedom of contract cannot override the statutory text of the FAA which "carries no hint of flexibility." In so ruling, the Supreme Court declined to expand the role of the judiciary in reviewing arbitration awards under federal law.
Significantly, the Hall Street opinion is exclusively applicable to FAA cases. The Court expressly noted that its rule does not apply to state laws governing the review of arbitral awards. As a result, a company needs to consider whether it wants state law or the FAA to apply to consideration of an arbitral award when drafting contracts that contain arbitration provisions.
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