Drafting Arbitration Clauses Post-"Hall Street"

The Dispute Resolution Committee of the ABA Section on Business Law presented a superb program on the practical implications of last term’s Hall Street decision.

Panelists Hiro Aragaki, Marc J. Goldstein and Lawrence D.W. Graves interpreted the Hall Street decision closely in an effort to determine the current status of judicially crafted addenda to the statutory criteria for confirmation of arbitral awards. 

The conclusion is not evident, and the problem becomes increasingly murky the more one one investigates.  The question presented to the Court in Hall Street was whether private parties may contractually modify the statutory criteria for judicial vacatur of an arbitral award.  On that question, the Court’s response was a firm “No.”  Private parties may not, by agreement, add to or delimit the statutory bases for judicial review set for in Section 10 of the Federal Arbitration Act

However, over the years there have been certain concepts added to the express words of Section 10 that have been crafted not by parties, but by courts, in their review of awards for enforcement under Section 9 of the Act.  These are common law exceptions and include vacatur of arbitral awards that are contrary to public policy, are arbitrary or capricious, or exhibit “manifest disregard of law.” (This last term is not to be equated with “error of law.”  The arbitrator didn’t just make a legal misjudgement; she acknowledged that the controlling law was applicable and required a finding of “X,” and yet she purposely and consciously made an award inconsistent with, and disregarding, that controlling law.)

Professor Aragaki argued that manifest disregard and the other judicially crafted bases may survive Hall Street because they could be read to be included in Section 10.  Prior to Hall Street, there was no split in the circuits as to the viability of manifest disgregard, said Aragaki, and the Court had no occasion to reach that issue when it held, in the context of private agreements seeking to modify Section 10, that the statutory grounds were the “exclusive” bases on which a court could vacate an award.  If the judicially crafted bases are understood to give meaning to Section 10, rather than being independent appendages of the statute, then Section 10’s “exclusivity” does not undermine the continued viability of those principles.

Mr. Goldstein was less confident.  Section 9 provides that a court “must” enter a judgment on the award unless one of the specific conditions in Section 10 has been found — including corruption, fraud, partiality, and so on, but pointedly not including manifest disregard of the law, inconsistentcy with public policy, or capriciousness.  Manifest disregard, he said, is a pernicious gloss on Section 10, achieving exactly what the legislature tried to prevent: a nonstatutory basis for appeal that can prolong the proceedings, compromise the finality of the arbitration, increase cost, inject uncertainty, and prompt a settlement for an amount less than the award.  It also makes the United States a poor situs for international arbitration.

Mr. Graves proposed four approaches for counsel who do not want to expose their clients’ arbitration agreements to such uncertainty.

  • FIRST APPROACH:  Draft the “powers” section of the agreement in such a way as to limit the arbitrator to the application of the substantive and procedural laws of the agreed-upon jurisdiction; prohibiting decisions ex aequo et bono; and stating that the award may not be denied enforcement on the ground of error of law.  This way, an arbitrator’s application of any legal ground other that the one contractually chosen will constitute an exceeding of powers within the express language of Section 10, rather than manifest disregard in the “penumbras” of the statute.
  • SECOND APPROACH: Select an institutional provider whose rules include quality control over the award drafter (such as the ICC’s International Court of Arbitration).
  • THIRD APPROACH: Opt out of the FAA entirely, and conduct the proceeding under state law.  For example, both California and Minnesota allow parties to modify standards of judicial review and permit vacatur for error of law.
  • FOUTH APPROACH: Negotiate, or mediate, or litigate.  Or seek an early neutral evaluation.  Have a mini-trial.  Empower the arbitrator to engage in mediation as a hybrid process.  That is, don’t arbitrate in the first place.

The two interpretations of Hall Street‘s holding of Section 10 “exclusivity” are equally compelling.  On the one hand, judicially-crafted bases for vacatur are important in order legitimize the arbitration process and prevent unacceptable, commercially irrational, or unconscionable outcomes.  On the other hand, the basis for arbitral vacatur is not for judges to decide on a case-by-case basis.  Congress has purposely restrained the court from imposing extra-statutory requirements on the arbitration process, and parties who elect to arbitrate should be able to do so without wondering what standard this or that judge will apply in enforcement.  Congress has had many opportunities to add judicially crafted standards to the Act, and it has always declined to do so.

1 Comment
  1. I am so grateful for you, Peter, for covering important events I can’t get to, and covering them in-depth. I have some concerns about Mr. Goldstein’s first approach to avoiding vacatur: doesn’t it seem that the third prong of that paragraph could intefere with a reviewing court’s ability to give effect tot he first prong?

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