HIGHEST COURT HOLDS FEDERAL ARBITRATION ACT PROVISIONS EXCLUSIVE

The United States Supreme Court has held that two sections of the Federal Arbitration Act (“the Act”) provide the exclusive grounds for vacating or modifying an arbitration award on an expedited basis under the Act. Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U. S. ___, 128 S. Ct. 1396, 1403 (2008). The Court noted that agreements seeking to expand or change those exclusive grounds are unenforceable. However, it left open the question of whether federal courts’ authority to manage litigation permitted the District Court of Oregon to vacate an arbitration award for manifestly disregarding the law when the parties had agreed it could apply such a standard and the court had entered an order approving that agreement.

Although scores of federal court decisions over the years have referred “manifest disregard of the law” as a potential ground to vacate an arbitration award, the Supreme Court noted the Act does not so state. The Court found Congress intended that only the four grounds stated in § 10(a) of the Act permit a federal district court to vacate an award. Those grounds are: (1) award “procured by corruption, fraud or undue means”; (2) where one or more arbitrator was evidently partial or corrupt; (3) arbitrators “guilty of misconduct” in refusing to postpone, to hear evidence, or “of any other misbehavior by which the rights of any party have been prejudiced”; and (4) arbitrators exceeded their powers or “so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” See Title 9 U. S. C. § 10 (2000 ed.). The Court also found that three grounds stated in § 11 of the Act constitute the exclusive grounds for modifying or correcting an award. Those grounds are: (1) an evident material miscalculation of figures or mistake describing a person, thing or property; (2) arbitrators awarding on a matter not submitted to them yet affecting the merits of the submitted matter; and (3) imperfection in the form of the award. See 9 U. S. C. § 11.

Hall Street resolved a split in the federal circuit courts over whether these statutory grounds were exclusive when the parties take what the Court called the “FAA shortcut to confirm, vacate, or modify an award”. See 9 U. S. C. § 9. The court noted that the Tenth Circuit Court of Appeals, which includes Colorado, had held previously that parties may not contract for expanded judicial review. See Bowen v. Amoco Pipeline Co., 254 F. 3d 925, 936 (10th Cir. 2001). But see Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir.2001). However, four other federal circuit courts had held otherwise and a fifth had agreed with those four in an unpublished opinion. Hall Street thus provides certainty for parties whose arbitration awards are subject to challenge under the Act (provided that the agreement is subject to the Act, for instance as one “involving commerce.”) (9 U. S. C. § 2.) However, the Court noted that it was not saying that the Act excludes “more searching review based on authority outside the statute.” Hall Street, 128 S. Ct. at 1406. Parties may, in appropriate circumstances contemplate enforcement of arbitration awards under state statutes or common law where they might argue for a different type of judicial review.

One panel of the Colorado Court of Appeals previously declined to apply the “manifest disregard” standard for determining whether an arbitration award should be vacated. See Coors Brewing Co. v. Cabo, 114 P.3d 60 (Colo. App. 2004) (discussing treatment of manifest disregard of the law in the Federal Circuits). Another very recent Colorado Court of Appeals decision, citing Sheldon, has observed that many courts applying the Act have referred to judicially created reasons for vacating an arbitration award, including an arbitrator’s “manifest disregard of the law.” Ahluwalia v. QFA Royalties, LLC, ___P. 3d ___, 2009 WL 262466 (Colo. App. 2009) (petition for certiorari pending, 2009 S. C. 230). It remains to be seen whether the Colorado Supreme Court will accept certiorari of the Ahluwalia decision in light of the United States Supreme Court decision in Hall Street.

The sweep of the Act in extremely broad, since it applies to all contract “involving commerce.” Thus, it arguably covers each and every commercial contract containing an arbitration provision. This would include commercial leases, employment agreements, contracts for the sale of goods and services, and purchase and sale agreements of many and varied types. When the Act applies, state and federal courts alike, under Hall Street, are limited to the statutorily listed grounds for vacating or for modifying or correcting an arbitration award upon application by a party. Hall Street is now the ultimate authority on whether parties are free to contractually alter those statutory grounds. However, many arbitration provisions alter or add to such grounds in contracts “involving commerce”.

The moral of this story is that the law evolves, creating certainty, but able lawyers have proved over the years that “where there is a will, there is a way” to protect and advocate creatively for their clients. Parties and their counsel have proved zealous by seeking to enforce the provisions they have drafted and previously agreed upon, including standards for enforcing awards. Hall Street is most likely not the last word in the age old prize fight. “In this corner we have the challenger, battling to achieve finality by expeditiously resolving commercial disputes through arbitration. And in the other corner, we have the reigning champion, fighting to guaranty fair application of substantive legal rules and principles. May the best person win!”

Post By Wesley B. Howard, Esq.