The National Arbitration Forum Blog

On Wednesday, the Supreme Court heard oral arguments in Hall Street Associates, L.L.C. v. Mattel, Inc. (No. 06-989), a case of tremendous interest to arbitration practitioners and participants. The issue is whether the Federal Arbitration Act (FAA) permits parties to an arbitration agreement to contract for additional grounds for vacatur.

Under the FAA, there are only four grounds for vacating an arbitration award (e.g., the arbitrator exceeded their powers), but in this case, the parties attempted to create a basis for vacatur by including the following provision in their arbitration agreement: “The Court shall vacate . . . any award . . . where the arbitrator’s conclusions of law are erroneous.”

If the line of questioning at oral argument is any indication, the Court appears likely to hold that the FAA does not permit parties to contract for additional grounds for vacatur. Justices Ginsburg and Souter seemed most likely to reach this holding, with Chief Justice Roberts and Justice Breyer also seeming to lean this way. At the other end of the spectrum, Justices Scalia and Stevens seemed most likely to reach a contrary holding.

Three aspects of the case bear some discussion:

1. Freedom of Contract

Everyone has been citing freedom of contract as the principle for allowing expanded review, but this argument neglects a crucial limitation on freedom of contract – namely, that freedom of contract does not give parties to a contract the right to impose duties and obligations on people or entities who are not party to the contract. In other words, freedom to contract does not necessarily entail the right to impose a duty on the court by prescribing the applicable standard of review.

2. Additional Grounds for Vacatur

Narrowly construed, the question in this case is not whether parties can contract for heightened review under the FAA, but whether they can create additional grounds for vacatur. The distinction is subtle but significant.

The case of KeyClick Outsourcing, Inc. v. Ochsner Health Plan, Inc., 946 So.2d 174 (La. Ct. App. Oct. 31, 2006) illuminates this distinction. In that case, the parties agreed that the arbitrator “shall have no authority to make material errors of law.” Accordingly, when the arbitrator issued an award premised on a material error of law, the court vacated the award on the statutory basis that the arbitrator exceeded his powers. As such, the parties contracted heightened review but did so within the auspices of the FAA by invoking a statutory basis for vacatur.

Conversely, in the Mattel case, the parties’ arbitration agreement did not contemplate heightened review under a statutory basis for vacatur. Instead, the parties attempted to contract for heightened review by creating a basis for vacatur.

3. Are There Non-Statutory Grounds for Vacatur?

The Court’s decision in this case may definitively resolve an issue separate from the one presented – namely, are there any non-statutory grounds for vacatur (e.g., manifest disregard of the law)? This issue came up during oral argument, and there was some suggestion that manifest disregard of the law may be an instance of an arbitrator exceeding their powers and thus within a statutory basis for vacatur. The Seventh Circuit views manifest disregard in this way, but most courts treat it as a common law basis for vacatur. Compare Wise v. Wachovia Securities, LLC, 450 F.3d 265 (7th Cir. 2006) (“[W]e have defined ‘manifest disregard of the law’ so narrowly that it fits comfortably under the first clause of the fourth statutory ground – ‘where the arbitrators exceeded their powers.’”) with Kurke v. Oscar Gruss and Son, Inc., 454 F.3d 350, 354 (D.C. Cir. 2006) (“In addition to the statutory grounds, ‘arbitration awards can be vacated ... if they are in manifest disregard of the law.’”).