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U.S. Supreme Court Bars Enforcement Of Portion Of Arbitration Agreement

Volume 7, Issue 3
March 29, 2008

One of the oft-cited drawbacks of arbitration is the lack of meaningful judicial review of an arbitrator's decision, a standard that makes it far more difficult to overturn an arbitrator's award than if the same decision had been reached by a court. This standard is fixed by statute, requiring the award be upheld unless there are truly unusual circumstances -- the award was secured by corruption, fraud, or undue means; evident partiality or corruption of the arbitrators; misconduct by the arbitrators, including a refusal to postpone a hearing or to hear pertinent and material evidence; and where arbitrators exceeded their powers. This is a reflection of the public policy in favor of the finality of arbitration awards. Many parties have tried to include in their arbitration agreements language modifying the standard for judicial review to make it similar to the relief available by an appellate court, one example being allowing reversal for errors of law.

On March 25, 2008, a divided Supreme Court held that such a practice is contrary to the Federal Arbitration Act ("FAA"), a statute allowing enforcement of awards in federal court, and, at the same time, limiting the grounds for review of those awards. The Court refused to apply that part of an arbitration agreement that modified the standard of court review, and held that the difficult-to-meet statutory grounds were the exclusive grounds to overturn the award. As such, the underlying arbitration award was enforced, although the arbitrator had misapplied a statute because such an error was not sufficient grounds to reverse the arbitrator's ruling.

Thus, at a time when arbitration is more frequently used and is becoming more "court-like" -- particularly with its use in employment situations -- the Supreme Court has made clear that the standard of review is one area where arbitration is not going to resemble litigation.

Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989 (U.S. Supreme Court, March 25, 2008). To read this decision, go to: http://www.supremecourtus.gov/opinions/07pdf/06-989.pdf

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