Occasionally, parties find themselves saddled with an arbitration award that is not only against them, but appears to be so divorced from the parties’ agreement (including their arbitration agreement) that it cannot even arguably be considered to be a legitimate product of the parties’ agreement to arbitrate and the arbitration itself. A party may have good grounds on which to believe that one or more of the arbitrators was biased against it or partial to the other party. A party may have been prejudiced by the arbitrator’s unjustifiable exclusion of pertinent and material evidence, the unjustifiable denial of a continuance or by some other fundamentally unfair procedural ruling. Or the award violated a clear and unmistakable limitation on arbitral remedial or substantive authority.
We are not referring here to a situation where a party sustains a loss that they consider to be unfair or even the result of an egregious mistake of law or fact. The limited grounds under which a Federal Arbitration Act governed award may be vacated are ones that do not merely cause a party to be shocked, angry or both, but are ones that also constitute clear, material breaches of the arbitration agreement that deprive a party one of the few, modest legitimate expectations that the Federal Arbitration Act deems part of every arbitration agreement.
Even many sophisticated business people do not, at the time they agree to arbitrate, necessarily understand or fully appreciate what they are giving up in terms of judicial review when they agree to arbitrate. This is the United States of America and our notions and expectations of fairness, and adherence to the rule of law, are as dear to us as apple pie and baseball.
So when a party is on the wrong end of an arbitration award that he, she or it thinks is fundamentally unfair, tainted by impropriety, or disconnected from the agreement the arbitrator was supposed to interpret and apply, the first question that naturally comes to mind is “Can I appeal the award to a court?” The answer, which comes as a surprise to many when they first hear it, and when it is too late to do anything about it, is “no.”
Grounds to Vacate Awards under Federal Arbitration Act Section 10
The Federal Arbitration Act does not authorize courts to review arbitration awards under an appellate standard of review, even if the parties consent to a court applying such a standard. Parties can agree before or after a dispute arises to an arbitration procedure that empowers another arbitrator or panel of arbitrators to review an award under an appellate or some other standard of review, but arbitration awards are subject to very limited and deferential review by courts and then only on a few narrow grounds.
- “the award was procured by corruption, fraud, or undue means” (9 U.S.C. § 10(a)(1));
- “there was evident partiality or corruption in” any of the arbitrators (9 U.S.C. § 10(a)(2));
- “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” (9 U.S.C. § 10(a)(3)); or
- “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.” (9 U.S.C. § 10(a)(4)).
9 U.S.C. § 10(a)(1)-(4).
The U.S. Supreme Court has held that these four, statutory grounds are exclusive in FAA-governed cases, and cannot be expanded by party agreement. See Hall Street Assoc., L.L.C. v. Mattel, Inc., 552 U.S. 576, 578 (2008). They are limited in scope and generally difficult to establish. (See, e.g., Loree Reins. & Arb. Law Forum posts here, here, here, here, here, here, here, here, here, here & here.)
Their limited scope, however, is not the only obstacle a putative award challenger must overcome. Courts tend to be skeptical of challenges, even ones having a solid basis, and generally the challenger must establish that the only legitimate inference that can be drawn from the law and undisputed facts is that vacatur is warranted. Even where there are factual disputes, courts usually will not order discovery or evidentiary hearings absent “clear evidence of impropriety.” See, generally, Andros Compania Maritima, S.A. v. Marc Rich & Co., 579 F.2d 691, 701, 702 (2d Cir. 1978).
The limited judicial review authorized by Section 10 is designed principally to ensure that the award upon which the court is asked to enter judgment is a legitimate product of the parties’ agreement to arbitrate, and that the challenging party has not been deprived of the modest requirements of fundamental fairness Sections lO(a)(1) through 10(a)(3) imply into every arbitration agreement.
It is tempting to think that courts are engaged in judicial review of arbitration awards under the Federal Arbitration Act, but they are not. When parties agree to arbitrate their disputes they opt out of the court system, and when one of them challenges the resulting arbitration award he perforce does so not on the ground that the arbitrators made a mistake but that they violated the agreement to arbitrate, as by corruption, evident partiality, exceeding their powers, etc.—conduct to which the parties did not consent when they included an arbitration clause in their contract.
Wise v. Wachovia Securities, LLC, 450 F.3d 265, 269 (7th Cir. 2006) (citation omitted) (Posner, J.).
Section 10 thus implements the enforcement purpose of the FAA. Parties who agree to arbitrate must sacrifice much in the way of procedural protection, and assume the risk that the arbitrators may make even egregious errors of law, fact and contract interpretation. That is part of the arbitration bargain, which Section 10 enforces by strictly limiting the nature and scope of arbitration award challenges.
But Section 10 also enforces arbitration agreements by authorizing vacatur where enforcing the award would violate the arbitration agreement-including the baseline requirements of fundamental fairness Sections lO(a)( 1 )-(a )(3) imply into every arbitration agreement- or otherwise sanction an exercise of arbitral power to which the parties did not consent. It provides the parties with at least some assurance that the end product of an arbitration agreement will be a matter of consent, not coercion.
Without at least that modest degree of protection, arbitration would be a far less attractive an alternative to litigation than it was intended to be. Just as few would likely agree to arbitrate if its legitimate result could not be readily-and, if necessary, coercively—enforced, so too would few agree to arbitrate if there were in place no check against material violations of arbitration agreements or the risk that an award was otherwise not grounded in party consent.
Click on the link above or on the image below to read about Section 10(a)(1), which authorizes courts to vacate awards that are “procured by fraud, corruption or undue means.”
Click on the link above or on the image below to read about Section 10(a)(2), which authorizes courts to vacate awards where the arbitrators “are guilty of evident partiality or corruption. . . .”
Click on the link above or on the image below to read about Section 10(a)(3), which authorizes courts to vacate awards where the arbitrators are guilty of prejudicial, procedural misconduct.
Click on the link above or on the image below to read about Section 10(a)(4), which authorizes courts to vacate awards where the arbitrators exceed or imperfectly execute their powers.
An arbitrator may exceed his or her powers in at least three ways:
- Deciding issues not submitted to arbitration;
- Exceeding his or her remedial powers or some other clear provision of the arbitration agreement;
- Making an award that is in manifest disregard of the parties’ agreement;
In some jurisdictions courts hold that arbitrators can exceed their powers and/or otherwise violate Section 10(a) by making an award that is in manifest disregard of the law.
Arbitrators may “imperfectly execute” their powers by purporting to make a final award that does not decide all issues the parties asked them to decide.
These subtopics have their own pages, which you can access below by clicking on the blue highlighted text or the adjacent images. You can also access these pages from the main Section 10(a)(4) page referred to above.
Arbitrators may exceed their powers by granting relief that the arbitration agreement does not empower them to grant or which otherwise violates the clear terms of the arbitration agreement. sometimes grant relief that the parties’ arbitration agreement withholds from them.
Although none of the four grounds explicitly authorizes review of an award’s outcome, the Supreme Court has held that arbitrators “exceed their powers” under Section 10(a)(4) if they “stray from interpretation and application of the agreement” rand substitute for the parties’ agreement their “own brand of . . . justice.” See Stolt-Nielsen, S.A. v. AnimalFeeds, Int’l Corp., 559 U.S. 662, 668 (2010) (quotation and citations omitted). Under this standard—sometimes referred to as the “essence of the agreement” or manifest disregard of the agreement standard—the court may review an arbitrator’s decision on issues that the parties agreed to arbitrate to determine whether there is some arguable basis on which to conclude that the arbitrator construed or applied the parties’ agreement. See, e.g., Stolt-Nielsen, 559 U.S. at 668-72; Oxford Health Plans LLC, v. Sutter, 133 S. Ct. 2064, 2068-71 (2013). If not, the award may be vacated.
The standard is narrow and meeting it presents a “high hurdle” that a challenger cannot overcome simply by showing that the arbitrators “committed an error —or even a serious error.” Id. The sole question for the court “is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract.” See Hill v. Norfolk and Western Ry. Co., 814 F. 2d 1192, 1194-95 (7th Cir. 1987) (Posner, J). If the arbitrator is even “arguably” interpreting the contract, then the arbitrator’s award cannot be vacated. See Oxford, 133 S. Ct. at 2068 (citation and quotation omitted).
Some (but not all) circuits also hold that courts may—under Section 10(a)(4), or “as a judicial gloss” on all the Section10(a) grounds—vacate awards for “manifest disregard of the law,” a standard that overlaps to some extent with the “essence of the agreement” or “manifest disregard of the agreement” standard. See Stolt-Nielsen, 559 U.S. at 668 n.3; Oxford, 133 S. Ct. at 2068-71 (2013); see, e.g., Schwartz v. Merrill Lynch & Co., Inc., 665 F. 3d 444, 451-52 (2d Cir. 2011) (manifest disregard of the law is a judicial gloss on Section 10(a)); Comedy Club, Inc. v. Improv West Assoc., 553 F.3d 1277, 1290 (9th Cir. 2009) (manifest disregard of the law falls under Section 10(a)(4)). Vacatur under that standard may be appropriate if arbitrators disregard or ignore a well-defined, explicit, clearly applicable and outcome determinative rule of law that the challenger argued to the arbitrators. See, e.g., Schwartz, 665 F.3d at 451-52. Manifest disregard of the law does not authorize courts to vacate awards for errors of law—even serious ones—or “a failure on the part of the arbitrators to understand or apply the law.” See, e.g., Lagstein v. Certain Underwriters at Lloyd’s, 607 F.3d 634, 641 (9th Cir. 2010) (quotation and citation omitted).
Sometimes awards need to be vacated because the arbitrators “so imperfectly execute” their powers “that a mutual, final, and definite award upon the subject matter submitted [is] not made.” For example, sometimes arbitrators do not decide all of the issues or claims submitted to them or issue an award that is ambiguous.
What, if anything, can a Party at the Wrong End of an Arbitration Award do to Help Protect its Rights?
If a party believes that an arbitrator’s award: (a) exceeds the authority the parties agreed to delegate to the arbitrators or the authority they actually delegated to them; (b) is fundamentally at odds with the parties’ agreement or clearly applicable law argued to the arbitrators; (c) is tainted by serious impropriety; (d) is the product of fundamental, prejudicial procedural unfairness; or (e) otherwise seems to suffer from some fundamental defect, then it should consult with an attorney who regularly practices arbitration law. That attorney should be able to determine relatively quickly whether or not there appears to be a basis for a challenge and if so, roughly what the chances of success are. And if there is a basis for proceeding, and the party decides to proceed, then the attorney should be able to handle the matter in the way it is supposed to be handled.
The Federal Arbitration Act and state statutes (where applicable) authorize vacatur as a kind of modest fail-safe mechanism to address relatively rare cases where an arbitration award is the product of a serious breach of an agreement to arbitrate. When vacatur is granted in an appropriate case, that doesn’t mean an award challenger is a disgruntled—but lucky—party who escaped the consequences of its agreement to arbitrate. It means the challenger was denied the benefit of the arbitration bargain envisioned by the Federal Arbitration Act and that the court upheld that bargain by not giving effect to the award.
But remember: Vacatur is a remedy of last resort that is available only in unusual circumstances, and even when available it is generally difficult to obtain. The best way a party can protect its interests is to make fully-informed decisions about whether to agree to arbitrate in the first place, taking into account arbitration’s risks and potential benefits. If a party decides to opt for arbitration, then the arbitration should be on terms designed to meet the party’s dispute resolution interests and goals. Arbitration is indeed a matter of consent, not coercion, but that principle is helpful only when consent is fully and meaningfully informed.
If, after having agreed to arbitrate, a dispute arises that is submitted to arbitration, the party needs to go forward fully informed and represented by at least one counsel who knows the ins and outs of arbitration law, arbitration procedure and arbitration in general and has the requisite experience to protect that party’s legitimate interests.
Arbitration and litigation are two very different animals. All too frequently parties fail to consult with an experienced arbitration-law counsel until they receive a highly questionable arbitration award. Those parties often learn, for the first time, and after its too late to do much about it, that things should have been handled differently in the arbitration if the party wanted to leave open the possibility of challenging an award. They sometimes also find that the party probably should not have agreed to arbitrate in the circumstances, or at least not on the terms to which they agreed.
As is so with many other things in life, an ounce of prevention is worth a pound of cure. It is tempting to think that, because arbitration is a private, alternative form of dispute resolution, courts will step in if necessary to ensure that “justice” is done. But that is so only in unusual cases, and even in cases that appear to be good candidates for such intervention, courts tend to bend over backwards to avoid vacating an arbitration award.
When you think about it, that should come as no surprise: arbitration is a matter of contract, and courts are at least as loathe to save parties from the consequences of their arbitration agreements as they are to save them from the consequences of any of their other agreements. The “I didn’t know” or “my counsel didn’t know” excuse almost always falls on deaf ears.
So if you decide to consider agreeing to arbitrate disputes, do yourself a favor and consult with a lawyer experienced with and knowledgeable about arbitration and arbitration law. If a dispute arises that requires arbitration, consult with that lawyer again. That kind of modest investment made early on, before any problems arise, may decrease the likelihood that any actually will, and if they do, may increase the likelihood that you’ll have a meaningful basis on which to seek redress.
Click on the link above or the image below to learn more about confirming arbitration awards under the Federal Arbitration Act:
Click on the link above or the image below to visit this site’s Arbitration Law Gateway Page, where you can learn more about arbitration law and the Federal Arbitration Act:
Click on the link above or the image below to go back to the Gateway Page for Confirming, Vacating, Modifying and Correcting Awards: