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Disallowing Broader Review of Arbitration Awards by Contractual Agreement
The Supreme Court of the United States in a recent decision held that the scope of review of an award under the Federal Arbitration Act, 9 U.S.C. 9-11 ("FAA") cannot be modified by contractual agreement. The parties, Hall Street and Mattel agreed to arbitrate an indemnification dispute that arose from a lawsuit related to a commercial lease. The arbitrator entered an award for Mattel; Hall Street thereafter sought review in federal court of this award based on a provision in the arbitration agreement allowing review if the award was "legally erroneous or not based upon substantial evidence." The reviewing court vacated the award and remanded back to the arbitrator. The arbitrator entered an award for Hall Street and the district court affirmed. Both parties appealed and the 9th Circuit reversed, holding that the FAA's grounds for review are exclusive.
The Supreme Court granted certiorari to resolve a split of opinion on this matter between Circuits. The Supreme Court found that an arbitration award under the FAA will only be vacated or modified by the grounds contained in the statute and that parties cannot modify these grounds through contractual agreement. The Court made this finding based on the language of the FAA that states that a court "must" confirm an award "unless" one of the grounds in 10-11 is met. The Court concluded that Congress mandated that review by courts be limited when an arbitration is regulated by the FAA.
Parties subject to arbitration under the FAA should be aware of the limitations on review of an award by the affirming court. Now, an award will be vacated or modified only in limited circumstances - demonstrable bias, arbitrator misconduct, fraud, exceeding the authority granted to the arbitrator, or evident material miscalculation - and additional grounds contained in an arbitration agreement will be held unenforceable.
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