Agreements to expand the scope of judicial review of arbitration awards.

• Author: Younger, Stephen P.

It has long been considered axiomatic in arbitration that parties who agree to submit their disputes to arbitrators engage in a sort of quid pro quo: in exchange for reduced costs and speedier resolution, parties agree to limit their right to appeal. Consistent with this philosophy, judicial review of arbitration awards has been extremely limited. The few statutory grounds available for appeal are aimed at procedural irregularities. Consequently, any substantive grounds for appeal are narrowly interpreted.

Entering into arbitration naturally entails risks beyond those normally associated with litigation. Arbitrators, like judges, make mistakes. When the mistakes fall within a foreseeable range, parties are generally willing to accept the risks as part of the price of arbitration. On the other hand, the risk that an arbitrator grossly misinterprets a contract or grants hugely disproportionate remedies is clearly less acceptable. Since few grounds for appeal exist, the party afflicted by such maverick arbitration awards is often left with no recourse. This is of particular concern as the use of arbitration is expanding into a wide range of new fields.

In recent years there has been a growing concern over the "Russian Roulette" nature of arbitration. In several conspicuous, high stakes disputes and untold lower profile arbitrations, arbitrators have rendered decisions that have fallen well outside the reasonable expectations of the parties.(1)

One possible alternative is for the parties to agree in their arbitration clause that awards may be subject to more extensive judicial review than that available for arbitration awards under most statutes.(2) The prevailing view, which is most consonant with recent Supreme Court precedent, holds that parties may broaden the scope of judicial review via contract.(3) On the other hand, the court in UHC Management Co. v. Computer Sciences Corp.,(4) which appears to be in the minority, has called into doubt the ability of parties to expand judicial review of arbitration awards contractually.(5) The Eighth Circuit indicated that "it is yet a foregone conclusion" that parties can agree to ignore provisions of the Federal Arbitration Act (the Act or the FAA).(6) Although the majority of authority appears to support the contractual expansion of judicial review of arbitration awards, this article addresses a difficult question: whether or not parties should agree to judicial review and risk losing the time and cost savings that make arbitration so attractive.

1. BASIC STANDARDS OF JUDICIAL REVIEW

   1. The Federal Arbitration Act

      Generally, courts have interpreted the FAA(7) as establishing extremely limited grounds for judicial review of arbitration awards.(8) Section 10(a) of the Act sets forth only a few narrow grounds on which an award may be vacated:(9)

      (1) Where the award was procured by corruption, fraud, or undue means. (2) Where there was evident partiality or corruption in the arbitrators, or either of them. (3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced. (4) Where the arbitrators exceeded [the scope of] their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.(10) The first three of these grounds are essentially procedural in nature: their concern is not with the content or merit of the award, but with the means used by the arbitrators (and, in the case of Section 10(a)(1), the parties) in reaching the award.

      Section 10(a) does address the substance of the award, but in a somewhat oblique fashion. Pursuant to this provision, courts may strike down awards where the arbitrators decide issues not submitted to them or grant relief not authorized by the parties.(11) However, where the subject matter or remedy is deemed within the arbitrator's authority, a reviewing court will generally not second-guess the merits of the arbitrator's decision.(12) Moreover, even within this narrow scope, courts generally give the grounds for review under this provision the "narrowest of readings,'"(13) declining to vacate awards unless the disputed subject matter or remedy is explicitly excluded by the arbitration agreement.(14)

      Courts have generally interpreted the FAA as establishing a presumption in favor of enforceability of arbitration awards, as well as arbitration agreements.(15) Thus, absent one of the enumerated grounds for vacatur, courts will most likely presume that the arbitrator "took a permissible route to the award."(16) For instance, courts generally will not vacate an award which contains an error of fact or has only "slender" support in the record.(17) This policy has been deemed necessary to ensure that arbitration will "serve as a quick, inexpensive and informal means of private dispute resolution."(18) In short, if any grounds can be found to support the award, a court will generally enforce it.(19)

   2. Possible Non-Statutory Grounds for Review

      Many courts have supplemented the statutory grounds for judicial review of arbitration awards with one or more policy-based, non-statutory grounds of review.(20) Specifically, courts will sometimes examine whether the award was rendered in "manifest disregard"(21) of the law, whether it conflicts with well-established "public policy," or whether it is "arbitrary and capricious" or "completely irrational."(22)

      The availability of such non-statutory grounds for review of arbitration awards has been unpredictable at best. Some courts expressly refuse to look beyond the FAA for a basis on which to review commercial arbitration awards.(23) Other courts have been entirely inconsistent on the question, applying and rejecting the nonstatutory grounds for review, from one opinion to the next, without apparent rationale.(24)

      Even courts that look beyond the narrow confines of the FAA in reviewing arbitration awards apply these non-statutory standards with marked restraint. The "manifest disregard" standard, for instance, has been held to be of "extremely limited" applicability.(25) For an award to be set aside under this standard, the arbitrator must "understand and correctly state the law, but proceed to disregard the same."(26) This disregard for the law must be obvious to a qualified arbitrator.(27) But some courts appear to have relaxed the application of this high standard, while paying lip service to its stringent requirements, particularly where there was a concern about the arbitrators' adjudication of a fundamental right.(28)

      Given the slim precedential authority and lack of statutory basis for a substantive review of an arbitration award, parties who wish greater protection against irrational arbitration awards should not count on the availability of judicial relief.

   3. State Rules on Enforceability of Awards

      State courts are as reluctant as federal courts to review arbitration awards, if not more so.(29) The majority of state arbitration statutes are derived from the Uniform Arbitration Act(30), which provides the same narrow grounds for vacating, modifying or correcting awards as the FAA.(31) In addition, several states' highest courts have held that the scope of judicial review of arbitration awards is extremely limited.(32)

      The California Supreme Court, for example, has held that "an arbitrator's decision is not generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties."(33) In New Jersey, the Supreme Court in Tretina Printing, Inc. v. Fitzpatrick & Associates., Inc.,(34) held that "`[a] rbitration awards ... [are] final [and] not subject to judicial review absent fraud, corruption, or similar wrongdoing on the part of the arbitrators.' Thus, in most cases, ... [courts may] not vacate an award even though it might be based on a mistake of law."(35)

      While some states do allow judicial review under the same nonstatutory grounds available under some federal court decisions, their application is as equally narrow and inconsistent as on the federal level.(36) The majority view, at least among states adhering to the Uniform Arbitration Act, is similar to that in New Jersey after Tretina; arbitration awards can be reviewed only under narrowly interpreted statutory grounds.(37)

2. MAVERICK ARBITRATORS AND ABERRANT AWARDS

   Parties often view limited judicial review as part of the bargain that is implicit in an agreement to arbitrate.(38) After all, among arbitration's primary attractions are the finality, speed, and cost savings that can result from an unappealable award. Litigation itself also becomes more expensive when parties must take numerous technical precautions to ensure that the record is complete for the purposes of an appeal. On the other hand, this bargain may be less attractive if parties must live with awards that stray far outside their reasonable expectations. Such outcomes, which some have called "knucklehead" awards, are clearly unacceptable; the continued popularity of arbitration reflects in part the fact that parties have generally found cost savings and increased efficiency of arbitration to outweigh the risk of maverick awards.(39) Nevertheless, the mere possibility of arbitrator excess has undermined the viability of arbitration in the eyes of some.(40)

   1. The Intel Arbitration

      One widely reported tale of arbitrator excess occurred in California in an arbitration between Intel Corp. and Advanced Micro Devices (AMD).(41) The underlying contract, which was concluded in 1982, provided for the parties to exchange product technology and licenses under specified conditions.(42) Under one scenario, AMD could earn "second source" rights to Intel's 80386 computer chip, which was then under development.(43) AMD would...