The Supreme Court in Hall Street Associates, L.L.C. v. Matte Inc., 128 S.Ct. 1396, No.06-989 (March 25, 2008), recently decided that when a party to an arbitration agreement seeks expedited vacatur or modification of an arbitral award under §§ 10-11 of The Federal Arbitration Act ("FAA"), the grounds for doing so cannot derive from an expansion by contract of the limited scope of judicial review specified under those provisions of the FAA. The Court left open the possibility that the parties could agree on broader judicial review of arbitral awards outside the purview of the FAA's expedited judicial review mechanisms.
The Hall Street decision arose out of a lease dispute lawsuit brought by Hall Street (the landlord) against Mattel (the tenant) in federal court in Oregon. The federal district court resolved some, but not all, of the issues in dispute. After attempting mediation, the parties entered into an agreement to submit the issue of Mattel's obligation to indemnify Hall Street for certain environmental clean-up costs to arbitration. The agreement to arbitrate, which was approved by order of the federal court, provided that the court "shall vacate, modify, or correct" any award "where the findings of facts are not "supported by substantial evidence" or "where the arbitrator's conclusions of law are erroneous." That contractual scope of judicial review of an arbitral award exceeded the narrow scope of judicial review afforded by §§ 10-11 of the FAA.(1) The case has a rather convoluted history of arbitral, district court and appellate court decisions, but ultimately the federal district court vacated the arbitrator's award based on the broader contractual scope of judicial review and the matter ended up before the Supreme Court.
The Court held that §§ 10-11 of the FAA "provide the FAA's exclusive grounds for expedited vacatur and modification" and cannot be expanded by agreement of the parties. Hall Street argued that a prior Court decision suggested that courts could vacate an arbitral award based on a "manifest disregard of the law" and therefore it follows that parties should be able to agree on such a non-statutory basis for judicial review of arbitral decisions. The Court disagreed. The Court rejected the argument that its prior decision permitted courts to vacate arbitral awards on grounds not specified in the FAA. The Court also rejected Hall Street's argument that enforcing the standard of review embodied in the arbitration agreement furthered the intent of the FAA to enforce the private agreements of the parties. The Court acknowledged that the FAA gives parties freedom to provide for various features of arbitration by contract, but that the FAA had textual features at odds with enforcing a contract-expanding post-arbitration judicial review.
The Court determined that the text of §§ 10-11 of the FAA is clear in setting forth a limited basis for judicial review, and furthered a "national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway." "Any other reading," the Court reasoned, "opens the door to the full-bore legal and evidentiary appeals that can 'rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process,'. . . and bring arbitration theory to grief in post-arbitration process."
The Court's ruling was explicitly limited to the application of expedited judicial review under §§ 10-11 of the FAA. The Court left open the possibility that parties may find other avenues for enforcement of agreements providing for broader judicial review of arbitral awards by pointing out that the parties "may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable." Here, because the arbitration agreement in Hall Street was part of a district court order, the Court suggested (without deciding) that the broader judicial review in the agreement might be enforceable based on the authority of the district court to manage its cases under Rule 16 of the Federal Rules of Civil Procedure, rather than under the FAA, and the Court remanded the case for potential consideration of that issue.
Parties should consider the implications of the Hall Street decision when drafting arbitration agreements, and deciding strategies with respect to enforcement of arbitral awards. However, the Hall Street decision may not materially impact many businesses that prefer to provide for dispute resolution by arbitration and are comfortable with limited judicial review of arbitration decisions.
(1) Section 10 of the FAA permits a court to vacate an arbitral award in such circumstances as where the award "was procured by corruption fraud, or undue means," or where the arbitrators "exceeded their powers." Section 11 of the FAA provides for modification of an arbitral award where there was an "evident material miscalculation" or "evident material mistake," where the arbitrators "awarded upon a matter not submitted to them," or "where the award is imperfect in matter of form not affecting the merits of the controversy."