Vacating, or setting aside, an arbitration award has been extensively discussed in this column. As we have discussed, vacating an arbitration award is very difficult. Courts have very limited ability to review either the arbitration proceeding or the basis for the award.
Under the Federal Arbitration Act (FAA), 9 USC §10, there are only four grounds for vacating an arbitration award: (1) 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; or (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.
While it is likely that any construction arbitration, even if all of the parties were from Ohio, would be subject to the FAA (why that is the case will be the subject of a future column), Ohio’s arbitration act restricts the court’s ability to review the arbitration proceeding and award in much the same manner as the FAA.
This lack of the court’s ability to review has been one of the most frequently criticized parts of the arbitration process. The arbitrator does not necessarily have to follow the substantive law that might apply to the dispute. In fact, the arbitrator may make awards based on any rational reason.
In order to take advantage of the benefits of arbitration, while still preserving the substantive law, some parties will add an additional requirement to the contractual arbitration provision or to an arbitration agreement requiring the arbitrator to follow the substantive law that applies to the particular dispute. Does this addition force the arbitrator to follow substantive law or is it an impermissible imposition of additional duties onto the federal courts by private parties? Today the answer to this question depends upon where you live.
Cases from the First (Maine, Massachusetts, New Hampshire, Rhode Island, Puerto Rico), Third (Delaware, New Jersey, Pennsylvania, Virgin Islands), Fourth (Maryland, North Carolina, South Carolina, West Virginia, Virginia), Fifth (Texas, Mississippi, Louisiana), and the Sixth (Ohio, Kentucky, Michigan, Tennessee) Districts appear to give parties the power to make this modification to increase judicial review. Cases from the Tenth (Colorado, Kansas, New Mexico, Oklahoma, Utah, Wyoming) appear to prohibit the parties from adding increased review.
Until 2003, the Ninth District (California, Alaska, Arizona, Nevada, Idaho, Oregon, Washington, Montana, Hawaii) allowed the parties to proceed with a de novo review (a new review generally made by the court) of legal issues in an arbitration award following a decision made by the 9th Circuit Court of Appeals in the case of LaPine Tech. Corp. v. Kyocera Corp (1997), 130 F.3d 884. The Ninth Circuit reversed this decision seven years later in the case of Kyocera v. Prudential-Bache Trade Services, Inc. (2003), 341 F.3d 987. This reversal gave rise to Hall Street Associates, LLC v. Mattel, Inc., case number 06-989, a case that is now pending before the United States Supreme Court. This case will resolve this split between the circuits and answer the question for everyone in the United States.
Mattel leased real property from Hall Street for use as a facility to manufacture toys. The well water on the property was contaminated. The parties agreed that Mattel had failed to test the well as required under the Oregon Drinking Water Quality Act. The lease between the parties did not include an agreement to arbitrate.
After Hall Street filed an action seeking indemnification from Mattel for the cost of clean up, the parties attempted to resolve the dispute through mediation. When the mediation failed to produce a settlement, the parties entered into an agreement to arbitrate the dispute. The agreement contained the following provision: “The Court shall vacate, modify, or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence or (ii) where the arbitrator’s conclusions of law are erroneous.” This agreement was made after the decision in LaPine, but before the decision in Kyocera.
The indemnification agreement in the lease was a very broad indemnification. Mattel was required to indemnify Hall Street for environmental hazards unless Mattel complied with all applicable environmental laws and did not contribute to the presence or use of hazardous materials. The parties did not appear to discuss who actually introduced the hazardous materials onto the property.
The arbitrator found that Mattel’s failure to test the well water was not a violation of an applicable environmental law. Reasoning that the Oregon Drinking Water Quality Act was designed to protect human health, not “to protect landowners from having their property contaminated from environmental contamination,” the arbitrator found that the Oregon Drinking Water Quality Act was not an applicable environmental law. Therefore, Mattel did not have to indemnify Hall Street for the cost of clean up.
Hall Street turned to the District Court to review the arbitration in accordance with the agreement to arbitrate. The District Court vacated the award and returned the parties to arbitration. This time the arbitrator rendered a decision in favor of Hall Street. Both parties sought review of the award by the court. Both parties appealed after the District Court entered a judgment incorporating the arbitrator’s award.
The case went back to the Ninth Circuit Court of Appeals twice. The Court ultimately found that, based on its decision in Kyocera, the parties could not expand the scope of review by the federal court. The parties could not contractually impose their own standards by which federal courts review arbitral awards. According to the court in Kyocera, the FAA enumerates the limited grounds on which a federal court may vacate, modify, or correct an award. Hall Street sought and was granted review by the United States Supreme Court in Hall Street Associates, LLC v. Mattel, Inc., 127 S. Ct. 2875.
Proponents of the provision argue that it is a matter of freedom to contract. Again and again the courts have found that arbitration provisions are creatures of contract. Even under the FAA, the validity of the arbitration provision is determined under state contract law.
Further, the purpose of the FAA was to eliminate the judicial hostility that existed prior to the passage of the Act in 1925. Adding a more expansive judicial review of the award would not prevent fulfillment of that objective. In fact, failing to enforce the parties’ private agreement would run counter to the FAA’s purpose of “ensuring that private agreements to arbitrate are enforced according to their terms.” (Volt Information Services, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468).
Opponents of the provision argue that allowing the provision would endanger the independence of the arbitral process sought by the FAA. The intent of arbitration is to provide a final resolution to the dispute. Allowing expanded judicial review would open the door further in transforming arbitration into traditional litigation.
The freedom to contract does not include the right to impose a review standard upon the court, beyond that provided by the FAA, because by the time parties reach the federal court, the arbitration is complete.
Oral arguments were just held before the Supreme Court. When the Court hands down its decision, we will know whether adding the provision is part of the freedom to contract or an impermissible imposition onto the courts. We will discuss the holding of the case and its implications in this column when the decision is available.