Supreme Court Says "No" to Contractual Expansion of FAA Judicial Review
Fellas, John, Elul, Hagit, Dispute Resolution Journal
In a much-anticipated decision, the U.S. Supreme Court has held (in a 6-3 split) in Hall Street Associates, L.L.C. v. Mattel,1 that the statutory grounds to vacate or modify an arbitration award stated in the Federal Arbitration Act "are exclusive." Therefore, parties cannot expand those grounds by drafting an arbitration agreement that calls for heightened judicial review.
Aside from the certain impact of this decision on future drafting of arbitration agreements and judicial review of arbitral awards, the Court's decision is noteworthy in several other respects. First, the Court grounded its decision in a textual analysis of the FAA and declined to weigh policy arguments in favor of or against expanded judicial review of arbitral awards. Second, the Court expressed strong skepticism about the breadth of the judicially created "manifest disregard of the law" doctrine, which expands judicial review of awards outside of the FAA. Third, the Court's decision does not conclusively resolve whether parties can contract for expanded judicial review of arbitration awards on a ground other than the FAA. Finally, the Court's decision suggests how the court might analyze whether parties may narrow the grounds of judicial review under the FAA. We discuss each of these points below.
FAA Provisions on Judicial Review
Section 10 of the FAA provides that a district court may vacate an arbitration award when: (1) the award was "procured by corruption, fraud or undue means," (ii) there was "evident partiality or corruption in the arbitrators," (iii) "the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy" and (iv) "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made."
Section 11 of the FAA allows modification of an award when (i) there was an evident material miscalculation of figures or evident material mistake in the description of any person, thing or property; (ii) the arbitrators awarded upon a matter not submitted to them; or (iii) the award is imperfect in matter of form not affecting the merits of the controversy.
The Facts in Hall Street
In Hall Street the Supreme Court held that these statutory grounds of review may not be expanded by agreement of the parties.
The dispute arose when Mattel leased a manufacturing site from Hall Street. Following the discovery of environmental contamination, Mattel notified Hall Street of its intent to terminate the lease. Hall Street subsequently filed a lawsuit, contesting Mattel's termination of the lease and seeking indemnification for 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. Their agreement provided 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."
The arbitrator decided the indemnification dispute in Mattel's favor. However, the district court vacated the award after finding that the arbitrator committed an error of law. On remand, the arbitrator decided the dispute in Hall Street's favor. On appeal by Mattel, the 9th Circuit held that the above-quoted provision allowing for judicial review of errors of law exceeded the scope of the FAA and, therefore, was unenforceable.
The Supreme Court granted review to resolve a split between the circuits, with the 9th and 10th Circuits holding that parties may not contract for expanded judicial review under the FAA, and the 1st, 3rd, 5th and 6th Circuits holding that they can.
The Court grounded its decision in a close reading of §§ 10 and 11 of the FAA.2 After examining each type of egregious arbitrator misconduct identified in these provisions, it concluded that the text of the statute "compels a reading of the §§ 10 and 11 categories as exclusive. …