The Lawletter Vol 34 No 10, November 4, 2010
Paul Ferrer, Senior Attorney, National Legal Research Group
In a recent issue of The Lawletter, see Paul Ferrer, Class Arbitration Requires Specific Agreement, Lawletter Vol. 34, No. 6, at 24, it was noted that the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16, is based on the fundamental precept that arbitration is a matter of consent, not coercion. See Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758, 1773 (2010). As such, parties are "generally free to structure their arbitration agreements as they see fit," and courts and arbitrators are bound to "give effect to the contractual rights and expectations of the parties," as expressed in their agreement. Id. at 1774 (internal quotation marks omitted). In short, "the FAA lets parties tailor some, even many features of an arbitration by contract, including the way arbitrators are chosen, what their qualifications should be, which issues are arbitrable, along with procedure and choice of substantive law." Hall St. Assocs. v. Mattel, Inc., 552 U.S. 576, 586 (2008). As a result, arbitration provisions should be tailored to meet the particular needs of the parties rather than simply cut-and-pasted verbatim from a form book.
Note, however, that there is one area in which the parties may not have the freedom to contract around the provisions of the FAA. In situations where the FAA applies, i.e., any arbitration contract involving interstate "commerce," see 9 U.S.C. §§ 1, 2–the parties have available a "shortcut" for seeking confirmation, vacation, modification, or correction of the arbitrator's award by filing an application, which will get streamlined treatment as a motion, with a federal district court, assuming there is an independent jurisdictional basis, see id. §§ 9-11; Hall St. Assocs., 552 U.S. at 582. On application for an order confirming the arbitration award, the district court "must grant" the order "unless the award is vacated, modified, or corrected as prescribed" in §§ 10 or 11 of the FAA. 9 U.S.C. § 9. The Supreme Court has read this mandatory language as confining the district court's ability to vacate, modify, or correct an arbitration award solely to those grounds listed in §§ 10 and 11 of the FAA. See Hall St. Assocs., 552 U.S. at 586. As such, the district court may not enforce an arbitration agreement that permits review on a broader basis than the exclusive §§ 10 and 11 categories, as, for example, to correct any "legal error" by the arbitrator. See id. at 585.
Interestingly, as the Court noted in the Hall Street Associates case, §§ 10 and 11 permit vacation, modification, or correction of an award only in cases of "outrageous" or "extreme arbitral conduct," id. at 586, including "corruption," "fraud," "evident partiality," "misconduct," "misbehavior," "evident material miscalculation," "evident material mistake," and "award upon a matter not submitted," 9 U.S.C. §§ 10, 11. Because the grounds for upsetting an arbitrator's award are so limited, it remains to be seen whether the strong public policy in favor of having disputes resolved by arbitrators rather than by courts will be furthered by the decision in Hall Street Associates, as parties may prefer the greater avenues available for review of an unfavorable decision in the court system. Indeed, some evidence already suggests that, with the increasing costs of commencing an arbitration proceeding, parties may be moving away from arbitration as an alternative mechanism for resolving disputes and heading back into the courts. The Court itself recognized this possibility in Hall Street Associates, but felt constrained by the plain language of the FAA. 552 U.S. at 588-89 (responding to argument that "parties will flee from arbitration if expanded review is not open to them": "[W]hatever the consequences of our holding, the statutory text gives us no business to expand the statutory grounds [for vacating, modifying, or correcting an award].").