The Supreme Judicial Court in Massachusetts recently held that the parties to a commercial arbitration agreement could not contractually alter the grounds for judicial review of an award that are set forth in the Massachusetts Uniform Arbitration Act for Commercial Disputes (MAA), G. L. c. 251. Katz, Nannis & Solomon, P.C. v. Bruce Levine, 473 Mass 784 (2016). In so deciding, Massachusetts joins the ranks of Georgia, Maine, North Dakota, and Tennessee.

The plaintiffs, Katz, Nannis and Solomon and defendant Levine were shareholders in an accounting firm. The stockholder agreement set forth provisions for involuntary withdrawal and withdrawal for cause with various associated financial repercussions. The agreement contained an arbitration clause which provided for a single arbitrator appointed by the AAA and stated that, “[T]he decision of the arbitrator shall be final; provided, however, solely in the event of a material, gross and flagrant error by the arbitrator, such decision shall be subject to review in court.”

A dispute arose regarding Levine’s cousin, a client of the firm, who sustained tax losses when the IRS refused to grant capital gains treatment for the client’s investment because the IRS did not have the necessary documentation. Levine was aware of the problem and that the client had threatened to sue the firm, but did not mention the threatened lawsuit when renewing the firm’s professional liability insurance and did not inform his partners when the lawsuit and a motion to attach the firm’s assets were filed.

Subsequently, the plaintiffs voted to terminate Levine’s employment. Shortly thereafter, he opened his own accounting firm in competition with his former partners. The nature and terms of Levin’s departure from the firm and his subsequent competition with it form the basis of the current dispute.

After a lengthy hearing, the arbitrator issued an award in favor of the plaintiffs. Plaintiffs’ motion to confirm the award was allowed; Levine’s cross motion to vacate was denied. The SJC granted Levine’s application for direct appellate review.

The Supreme Judicial Court first addressed the scope of judicial review of the arbitrator’s decision. Levine argued that the arbitrator committed an error of law and that, pursuant to his arbitration agreement, he is entitled to have a court consider the merits of his claim. The Court rejected Levine’s argument on the basis of the language of the MAA and on policy grounds. Under G. L.c. 251, “the court shall confirm” an arbitration award unless “grounds are urged for vacating or modifying or correcting the award” as provided in §§12 and 13. Section 12 sets forth two grounds relevant to the dispute: whether the award was procured by corruption or fraud or whether the arbitrators exceeded their powers. Otherwise, the court “is strictly bound by an arbitrator’s findings and legal conclusions, even if they appear erroneous, inconsistent, or unsupported by the record at the arbitration hearing.”

Although arbitration is a matter of contract, the court disagreed that the parties could, by contract, alter the scope of judicial review set out in the G. L. c. 251 as the statutory language ‘carries no hint of flexibility’. In so finding, the Court relied on United States Supreme Court’s holding in Hall St. Assocs., LLC v Matell, Inc. 552 U. S. 576 (2008). In Hall Street, the Supreme Court held that the statutory grounds for judicial review under the FAA are the exclusive grounds and that the parties are not able to alter the scope of judicial review by contract. As the statutory language of G. L. c. 251 is substantively identical to the analogous provisions of the FAA, the Court found no reason to interpret the corresponding provisions differently.

Moreover, the Court’s interpretation of G. L.c. 251, limiting a court’s review of an award to one of the statutory grounds set forth therein, comports with the court’s interpretation of the statute since its enactment, “[a]n arbitration award is subject to a narrow scope of review . . . . We do not review an arbitration award for errors of law or errors of fact.”

In addition to the statutory language, the Court relied upon ‘strong policy considerations’ that support limiting the scope of judicial review to those statutorily defined. First, an expansion of the statutory grounds for review would “undermine the predictability, certainty, and effectiveness of the arbitral forum that has been voluntarily chosen by the parties.” Second, allowing the parties to define by contract what a court was to review would potentially create “complex and lengthy case-within-a-case litigation devoted to determining what the parties intended by the contractual language they chose.”

Regarding Levine’s alternative argument that the arbitrator exceeded his power or that the award was procured by fraud, the Court determined that Levine’s ‘repackaging effort failed.’ The Court declined Levine’s request that the court interpret the contract instead of the arbitrator as it’s the arbitrator’s role to interpret the contract. The Court also dismissed Levine’s fraud claim as nothing more than a dispute over a question of fact; the arbitrator was under no obligation to credit Levine’s testimony.