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U.S. Supreme Court Limits Grounds for Reviewing Arbitration Awards Under FAA
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April 21, 2008
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By Jessica Singh
Thelen Reid Brown Raysman & Steiner LLP
The U.S. Supreme Court has ruled that §§10 and 11 of the Federal Arbitration Act provide the exclusive grounds for vacating and modifying arbitration awards for parties seeking expedited review under the FAA.
Contractual arbitration agreements providing for judicial review broader than the grounds in the FAA are not enforceable under the FAA, the court held. Rather, when the FAA is invoked, a court “must” confirm an arbitration award unless it finds that one of the grounds set out in §§10 and 11 for vacating or modifying awards is applicable. Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989, 552 U.S. ___, 2008 WL 762537 (March 25, 2008).
Hall Street Associates, L.L.C. and Mattel, Inc. had a lease dispute. Hall Street, as landlord, claimed that Mattel, the tenant, was obligated to indemnify Hall Street for the cost of cleaning up pollutants found in well water at the leased site. After a bench trial before a U.S. District Court on whether Mattel could terminate the lease, the parties, with the District Court’s approval, agreed to submit the indemnification issue to arbitration.
The parties drew up an arbitration agreement, and the District Court approved and entered the arbitration agreement as an order. The agreement made reference to the FAA. But, a provision in it permitted broader review than under the FAA, requiring the court to “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 arbitration was held, and the arbitrator ruled for Mattel. Hall Street filed a motion for an order vacating, modifying and/or correcting the arbitration award on the ground that one of the arbitrator’s conclusions of law was erroneous. The District Court agreed and vacated the award. In doing so, the court expressly invoked the “erroneous legal conclusion” standard of review set forth in the parties’ arbitration agreement. It relied on then-applicable appellate court authority for the proposition that the parties could, by contract, set rules for arbitration and provide for an alternative standard of review.
On remand, the arbitrator changed his decision and found in favor of Hall Street. Subsequently, each party sought modification of the award. The District Court again applied the parties’ “erroneous legal conclusion” standard of review, and this time upheld the award except for correcting the award of interest. On appeal, the U.S. Court of Appeals for the 9th Circuit reversed and held that under new authority, Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003), the terms of an arbitration agreement expanding judicial review were unenforceable and severable. On remand, the District Court again held for Hall Street, and the 9th Circuit again reversed.
The U.S. Supreme Court granted certiorari to decide whether the grounds for vacatur and modification provided by §§10 and 11 of the FAA are exclusive or whether they are open to expansion by agreement. The Supreme Court held that §§10 and 11 of the FAA provide exclusive regimes for vacatur and modification of arbitration awards when the FAA’s “streamlined” procedures are invoked. The court held that the grounds set out in §§10 and 11 may not be expanded by agreement.
Rejecting arguments that prior cases had permitted expanded review, the court explained that the FAA has textual features at odds with contractual provisions seeking to expand judicial review of arbitration awards. Sections 10 and 11 of the FAA list egregious and specific grounds for vacating or modifying award and give no textual indication that the list may be supplemented by contract. The court explained that because the FAA has no textual hook for expansion, the court cannot authorize contracting parties to supplement the bases for review.
While acknowledging that arbitration is a creature of contract, the court explained that expanding by contract the grounds set out in §§10 and 11 would rub too much against the grain of the language of §9, which carries no hint of flexibility. Rather, §9 provides that upon application for an order confirming an arbitration award, the court “must grant” the order “unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.” The court explained that there is nothing malleable about the “must grant” language, which unequivocally tells courts to grant confirmation in all cases except when one of the “prescribed” exceptions applies.
The court noted: “Any other reading 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.’ “
Because the particular arbitration at issue was agreed in the context of U.S. District Court trial proceedings, the Supreme Court remanded the case for determination of whether the arbitration agreement, as drafted, should be enforceable not under the FAA but under the U.S. District Court’s inherent authority to manage its own cases.
The Supreme Court also expressly declined to extend its holding outside the realm of the FAA, noting that the ruling did not apply to enforcement under state statutes or the common law.
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For more information about the issues covered in this report, please contact Jessica Singh in our New York office at 212-895-2808 or at jsingh@thelen.com or contact your Thelen attorney. For more information about Thelen’s Construction and Government Contracts Department, click here.
©2008 Thelen Reid Brown Raysman & Steiner LLP
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