Viability of mandatory arbitrations: are companies still allowed to pick their own poison?

• Author: Dotseth, Keith A.

This article was originally presented at the IADC Annual Meeting in Bermuda in July, 2007. (1)

ARBITRATION has traditionally been understood as a creature of contract. It has been valued because of its flexible nature which allows parties to structure their agreement in order to address their specific needs. The control that parties have in tailoring the process provides a significant advantage over other forms of dispute resolution. Increasingly, however, it seems parties are losing control over the process.

This growing lack of power is coming to a head in the next year in regard to at least one critical element of power the parties can exercise over the process; that is, the level of review that is available to a court when considering whether a Panel has made a critical legal determination error. As courts have defined and made more rigorous the available means of vacating an arbitration award on the basis of legal error by the Panel, parties have increasingly attempted to adopt specific terms in their arbitration clauses that attempt to protect themselves from unpredictable or incorrect legal determinations by Panels. In many federal circuits, these explicit and more flexible standards of review over Panel legal determinations error. As courts have defined and made more rigorous the available means of vacating an arbitration award on the basis of legal error by the Panel, parties have increasingly attempted to adopt specific terms in their arbitration clauses that attempt to protect themselves from unpredictable or incorrect legal determinations by Panels. In many federal circuits, these explicit and more flexible standards of review over Panel legal determinations are routinely enforced and recognized as important in enforcing the parties' intentions. However, some federal circuits have refused to follow these explicit and more flexible standards of review, despite the clarity with which these standards evidence the parties' intent to allow such review by the courts. This ultimate loss of control, if endorsed by the Supreme Court when resolving the current split in the law between the federal circuits, will further undermine the viability of arbitration as parties lose confidence that they will have a feasible means to protect themselves from "run-away" tribunals.

The Supreme Court will have its first and best opportunity to choose a side in this important split between the federal circuits this term as a result of its decision to grant certiorari in the case of Hall Street v. Mattel. (2) As this article will explain, at stake in the Supreme Court's review of this case might very well be the long-term viability of arbitration clauses in certain industries.

1. Failure of Purpose--A Growing Lack of Control

   Over the last decade, arbitration has become increasingly afflicted with the traditional complexity of other adjudicative processes. It now is rarely what it was: simple, informal, and expedient. All of the usual benefits of the arbitration process are being strained.

   For example, confidentiality, one of the purported benefits of arbitration, seems to have failed in its purpose. It is often not strictly followed. And even when it has been enforced, it has arguably just led to inconsistent outcomes and prevented industries from gaining the benefits of guidance on important issues which may have allowed parties to avoid disputes in the first instance. (3) Additionally, the arbitration process is growing more and more formal and, in light of growing costs, no longer inexpensive. Arbitration may only save parties a few months in the resolution of the dispute over the alternative judicial proceeding. This calculation does not take into account the often lengthy amount of time spent in the process of getting an eventual award confirmed or vacated by a court. Finally, parties are no longer realizing the benefit of a more experienced Panel as a result of the frequent use of lawyer-advocates as arbitrators.

   One of the last vestiges of benefit left for arbitration is the notion that the parties have control over the proceeding and the level of review allowed over the legal determinations made by a Panel. However, depending on which side of the current circuit split the Supreme Court selects in the Hall Street case, this last benefit, too, might be at risk.

2. Level of Review Over Panels' Legal Determinations--Limitations on Power to Seek Vacatur

   The Federal Arbitration Act (FAA) provides four statutory grounds under which a court may vacate an arbitration award. Section 10 of the FAA indicates that courts may vacate an award only where:

   (1) the award was procured by corruption, fraud, or undue means.

   (2) there was evident partiality or corruption in the arbitrators, or either of them.

   (3) 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) 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. (4)

   Most state arbitration clauses contain similar grounds for vacating an arbitration award. (5)

   In addition to the statutory grounds expressly listed in the FAA, "manifest disregard of the law" has been adopted as a non-statutory ground for vacatur. (6) Case law demonstrates, however, a reluctance of courts to find a "manifest disregard of the...