Bowen v. Amoco: Contracting for Expanded Judicial Review under the Federal Arbitration Act

• Author: Brandon W. Letulier
• Position: J.D./B.C.L. candidate
• Pages: 463-483

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J.D./B.C.L. candidate. I would like to thank Professor Catherine Rogers for her encouragement and helpful insight in the writing of this article. ¹I would also like to thank my family and friends for their support throughout my law school career, especially my always patient wife Beth.

I Introduction

Arbitration is generally defined as "[a] process of dispute resolution in which a neutral third party (arbitrator) renders a decision after a hearing at which both parties have an opportunity to be heard."² Arbitration is intended to yield benefits for both the parties to the dispute and the court. For parties, arbitration is generally less expensive, quicker, less formal, and more private than a trial.³ In addition, parties contracting for arbitration have virtually unlimited control over the arbitration process. For instance, they may select the arbitrator(s) who will decide their dispute,⁴ and may even create their own discovery process and procedural devices.⁵ Courts benefit from arbitration by saving time and expense that would otherwise be spent litigating those disputes.⁶ This is true of federal courts under the Federal Arbitration Act (FAA)⁷ because all disputes pursuant to the FAA must have independent grounds for subject matter jurisdiction.⁸ Thus, disputes that are not arbitrated under the FAA would likely be litigated in the federal district courts,⁹ placing an additional strain on court resources.

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In light of these benefits, it is not surprising that commercial arbitration is becoming more popular.¹⁰ Recently however, many parties to arbitration have become frustrated with the outcome of arbitrators' decisions.¹¹ As one scholar has commented, "[i]n 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."¹² The primary problem for parties who have experienced or are concerned about such aberrant awards is the FAA's extremely high standards for review. These narrow standards are set out in Title 9, Section 10(a) of the United States Code which provides:

In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration-

(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 their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

(5) Where an award is vacated and the time within which the agreement required the award to be made has not expired the court may, in its discretion, direct a rehearing by the arbitrators.¹³

As if these standards to vacate arbitration awards are not high enough, the FAA does not require arbitrators to render written opinions,¹⁴ which further raises the bar for federal district judges to correct anomalous awards. When there is no written opinion, as is Page 465 often the case,¹⁵ it is quite a challenge for a judge to decide whether the FAA's standards have been violated.

As a result, many parties have attempted to contractually expand the extremely limited FAA standards of judicial review in order to avoid unfair results.¹⁶ Parties who purport to expand this standard usually do so by providing in their arbitration contract that the arbitration award may be vacated on the basis of errors of law and/or fact.¹⁷ In addition, more and more parties may consider rejecting arbitration in favor of adjudication for fear of aberrant awards.¹⁸

Thus far, several federal cases have addressed whether parties may contractually agree to expand the judicial standards of review under the FAA. While the Fifth and Ninth Circuits have held that agreements to expand judicial review in arbitration proceedings are permitted,¹⁹ the Seventh and Eighth Circuits have suggested in dicta that they would not enforce such contracts.²⁰ Recently, in Bowen v. Amoco, the Tenth Circuit held that parties may not contractually expand the FAA's standards of review,²¹ thus creating a definitive split among the federal circuits.

As this note will demonstrate, parties should be able to contractually expand the scope of judicial review set out in the FAA, subject to only a few practical limitations. Arbitration is essentially a contractual arrangement of dispute resolution that should be honored according to the terms agreed upon by the parties. Contractually expanded review is consistent with Supreme Court precedent and FAA policy. Moreover, allowing expanded review under the FAA benefits the parties to the dispute, as well as the federal judiciary and the legal system as a whole.

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Part II of this note discusses the legal background surrounding this issue, including a discussion of the FAA's general purpose and cases leading up to Bowen. Part III is a brief statement of the Bowen case, while Part IV analyzes the Tenth Circuit's reasoning and provides practical limitations concerning the extent to which expanded review should be permitted. Finally, Part V concludes that parties should be allowed to contractually expand the scope of judicial review beyond that provided for in the FAA.

II Legal Background

A The FAA's Primary Purpose

It is well settled that "Congress's intent in enacting the FAA was to ensure judicial enforcement of private arbitration agreements."²²Although arbitration derived from English common law, early American courts often refused to enforce agreements to arbitrate future disputes.²³ While purporting to enforce arbitration awards already rendered, courts would implement virtually unlimited judicial review and often vacated arbitrational awards.²⁴ This practice frustrated the intentions of parties who wished their arbitration award to be final.²⁵

In response to American courts' hostility to honor arbitration agreements, Congress enacted the FAA in 1925.²⁶ The FAA was Page 467 designed to make executory agreements to arbitrate legally enforceable.²⁷ Limited judicial review was codified in order to assure the finality of arbitration awards, as finality was important to most, if not all, parties to arbitration agreements in that era.²⁸ Against this backdrop, it is not surprising that the Supreme Court has articulated the FAA's primary purpose as one "of ensuring that private agreements to arbitrate are enforced according to their terms."²⁹

B Cases Leading Up To Bowen

First, a brief summary of the Supreme Court's decision in Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University³⁰ will be presented. This decision has been central to the issue of expanded judicial review, and has been discussed by many courts, including the Tenth Circuit in Bowen, who have wrestled with this issue. Second, a general discussion of pre-Bowen cases on point will be presented for two purposes: to provide examples of contractual language purporting to expand arbitrational judicial review; and to introduce the major arguments made by previous courts on this issue.

1. The Volt Decision

In Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University,³¹ the parties entered into a construction contract that contained an agreement to arbitrate all disputes between the parties arising out of the contract.³² The contract also contained a choice-of-law provision providing that the contract would be governed by the law of California.³³ After a dispute arose concerning the contract, Volt Information Systems (Volt) formally demanded arbitration.³⁴ The Board of Trustees (Stanford) responded by filing actions in California Superior Court against Volt and two other companies involved in the construction project.³⁵ Volt moved to compel arbitration pursuant to Section 4 of the FAA³⁶ and a parallel Page 468 provision of the California Arbitration Act.³⁷ The court refused to compel arbitration, and instead granted Stanford's motion to stay arbitration pursuant to a California statute that "permits a court to stay arbitration pending resolution of related litigation between a party to the arbitration agreement and third parties not bound by it, where 'there is a possibility of conflicting rulings on a common issue of law or fact.'"³⁸The California Court of Appeal affirmed,³⁹ and the California Supreme Court denied Volt's petition for discretionary review.⁴⁰ The United States Supreme Court granted writs.

The United States Supreme Court dismissed Volt's contention that the California Court of Appeal's decision essentially found that Volt had waived its right to compel arbitration under the FAA.⁴¹ While recognizing that the FAA was designed to place arbitration agreements "upon the same footing as other contracts,"⁴² the Court found that Section 4 of the FAA did not grant a right to compel arbitration at any time, but instead grants only "the right to obtain an order directing that 'arbitration proceed in the manner provided for in [the parties'] agreement.'"⁴³ After noting that the interpretation of private contracts is usually a question of state law,⁴⁴ the Court held that the...