Fall 2008 - #16. Arbitration Vacatur: The Supreme Court Bars One Route and Muddles the Other-Manifest Mistake Is Dead.

Author:by Albert G. Besser, Esq.

Vermont Bar Journal


Fall 2008 - #16.

Arbitration Vacatur: The Supreme Court Bars One Route and Muddles the Other-Manifest Mistake Is Dead

The Vermont Bar Journal #175, Volume 34, No. 3 FALL 2008

Arbitration Vacatur: The Supreme Court Bars One Route and Muddles the Other-Manifest Mistake Is Dead!by Albert G. Besser, Esq.In my article, The Arbitrator Blew It! Now What?(fn1) I commented critically about the growing disposition of courts to vacate arbitral awards that have "manifestly" disregarded the law, even though this criterion is not specifically spelled out as a vacatur ground in the Federal Arbitration Act (FAA)(fn2) or any comparable state statute.

At the same time that courts by judicial fiat had been vacating awards that "manifestly" disregarded the law, parties themselves began contracting to expand the scope of judicial review to that akin to recognized common law precepts. Federal courts were "split over the exclusiveness of [the] statutory grounds when parties take the FAA shortcut to confirm, vacate, or modify an award, with some saying the recitations are exclusive, and others regarding them as mere threshold provisions open to expansion by agreement."(fn3) The Supreme Court in this case has now settled the issue: such agreements are invalid; arbitral awards may be vacated only for the reasons exclusively spelled out in Sec. 10 of the FAA. Hall Street also signifies very strongly (and post-Hall federal decisions unanimously have held) that "manifest disregard" of the law no longer is a basis for vacating arbitration awards.

In Hall, a bench trial had upheld the tenant's (Mattel's) right to terminate its lease. The parties, with the district court's approval and order, then agreed to arbitrate the landlord's claim for cleanup expenses, agreeing further that the resulting award could be vacated, modified, or corrected "if the arbitrator's conclusions of law were erroneous." An award for Mattel first was vacated, the district court applying the agreement's legal review standard in accordance with the Ninth Circuit's earlier ruling in LaPine Technology Corp. v. Kyocera Corp.(fn4) On remand, the arbitrator then ruled for Hall (the landlord) and the award was confirmed by the district court. The Ninth Circuit reversed, this time on the strength of Kyocera Corp. v. Prudential,(fn5) which overruled LaPine and held that contracts changing the mode of judicial review were unenforceable. The Supreme Court affirmed, the six justice majority finding that the Federal Arbitration Act, 9 U.S.C. Secs 9-11, deliberately limited vacatur only to the grounds specifically provided therein. The holding is clearly mandated by the text of the statute, which, in accordance with traditional principles of statutory construction, must be strictly construed.

9 U.S.C. Sec. 10(a) lists only four bases for vacating: (1) if procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators were guilty of misconduct; or (4) where they exceeded their powers. Sec. 11 permits modification only where "there was an evident miscalculation of figures or evident material mistake." Otherwise, the court "must" (not "may") confirm! 9 U.S.C. Sec. 9 and 12 V.S.A. Secs. 56775678 are virtually the same.(fn6) As Hall Street declared:

. . . [T]he text compels a reading of the Sections 10 and 11 categories as exclusive. To begin with, even if we assumed Sections 10 and 11 could be supplemented to some extent, it would stretch basic, interpretive principles to expand the stated grounds to the point of evidentiary and legal review generally. Sections 10 and 11, after all, address egregious departures from the parties' agreed-upon arbitration: `corruption,' `fraud,' `evident partiality,' `misconduct,' `misbehavior,' `evident partiality,' `exceed(ing) . . . powers,' `evident material miscalculation,' `evident material mistake,' `awards upon a matter not submitted' . . . Given this emphasis on extreme arbitral conduct, the old rule of ejusdem generic has an implicit lesson to teach here. Under that rule, when a statute sets out a series of specific items ending with a general term, that general term is confined to covering subjects comparable to the specifics it follows. Since a general term included in the text is normally so limited, then surely a statute with no textual hook for expansion cannot authorize contracting parties to supplement review for specific instances of outrageous conduct with review for just any legal error . . . `Fraud' and a mistake of law are not cut from the same cloth.(fn7)

Dissenting, Justice Stevens wrote: "Sections 10 and 11 are best understood as a shield meant to protect parties from hostile courts, not a sword with which to cut down parties' valid, irrevocable and enforceable agreements to arbitrate their disputes subject to judicial review for errors of law."(fn8) The majority disagreed. For the expedient of arbitration and its more flexible procedural and evidentiary rules and speedy confirmation process, parties sacrifice among other things the traditional standard of appellate review. Expanding the scope of judicial review undercuts the basic premise of arbitration, namely "that the arbitration process may be more expeditious and less costly than ordinary litigation."(fn9) In a footnote, Justice Stevens conceded that "Congress significantly...

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