Introduction
This two-part Arbitration Law FAQ guide is designed to provide individuals and businesses with a basic overview of what the Federal Arbitration Act has to say about challenging arbitration awards in court. This is Part I and Part II is here.
It assumes that the award is governed by the Federal Arbitration Act; the challenge is made in a federal district court having subject matter and personal jurisdiction; and venue is proper.
This guide is not legal advice or a substitute for legal advice. If you are an individual or business which wants or has to challenge or defend an arbitration award, or make an application to confirm the award, then you should consult with an attorney or firm that has experience and expertise in arbitration law matters.
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I just received an arbitration award against me, which I believe is governed by the Federal Arbitration Act (the “FAA”). Does the FAA allow me to appeal the award to a court?
Challenging Arbitration Awards 1
You cannot—at least in any meaningful sense of the word—“appeal” an FAA-governed arbitration award to a court. An appeal involves judicial review by an appellate court under which a panel of judges reviews trial-court rulings on questions of law independently—that is, as if the appellate court were deciding the question for itself in the first instance. The appellate court generally reviews the trial court’s findings of fact on a “clearly erroneous” or “clear error” standard of review, that is, paying a certain degree of deference to the finder of fact (the jury or, in a bench trial, the judge). Appellate review of a court decision is thus fairly broad and searching, particularly where outcomes turn solely on questions of law.
When a person agrees to arbitrate it gives up the right to appellate review, which focuses on issues relating to the merits of the case the court decided or on important litigation-procedure rulings.
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Does the FAA permit a party to challenge an arbitration award?
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The Federal Arbitration Act provides some limited remedies for challenging arbitration awards where a party can show certain kinds of unusual and material violations of an arbitration agreement by an arbitrator or an opposing party, or an obvious mathematical, typographical, or technical error that appears on the face of the award. The remedies are orders: (a) modifying or correcting the award; or (b) vacating the award in whole or in part.
To vacate an award means to annul it, that is, to declare it null and void. When an award is vacated, then the parties generally must (absent a settlement) go back and re-arbitrate the matters that were the subject of the award. When an award is modified or corrected, the correction or modification may be made by the court, or the court may remand the matter back to the arbitrators for that purpose.
These remedies are available only in very limited circumstances, which, for the most part, are set out in the FAA itself. Strict and very short time limits apply, and the chances of success are generally not very high (except in unusual circumstances).
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When can a court modify or correct an arbitration award under the FAA and how can it modify it or correct it?
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For the most part a motion to modify an award is limited to correcting mathematical, typographical or other technical errors appearing on the face of the award or severing from the award rulings on issues not submitted to the arbitrators (i.e., issues the parties did not ask the arbitrators to decide). See 9 U.S.C. § 11(a) (“evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award”); 9 U.S.C. § 11(c) (“award is imperfect in matter of form not affecting the merits of the controversy”); 9 U.S.C. § 11(b) (“arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted”). The court’s “order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.” 9 U.S.C. § 11. If a party seeks only modification or correction of an award, then, even if the challenging party prevails, the end result of the proceeding will be the court’s entry of a judgment on the modified or corrected award.
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On what grounds may a court vacate an award under the FAA?
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A motion to vacate an award under Section 10 of the FAA may be granted only where:
- “the award was procured by corruption, fraud, or undue means” (9 U.S.C. § 10(a)(1));
- “there was evident partiality or corruption in” any of the arbitrators (9 U.S.C. § 10(a)(2));
- “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” (9 U.S.C. § 10(a)(3)); or
- “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” (9 U.S.C. § 10(a)(4)).
9 U.S.C. § 10(a)(1)-(4).
The U.S. Supreme Court has held that these four, statutory grounds are exclusive in FAA-governed cases, and parties cannot expand their narrow scope by agreement or agree that courts may vacate awards on any other grounds. See Hall Street Assoc., L.L.C. v. Mattel, Inc., 552 U.S. 576, 578 (2008). The same is true for the grounds for modifying or correcting an award.
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Do any of these grounds authorize challenging arbitration awards based on the outcome of the award?
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Although none of the four grounds explicitly authorizes review of an award’s outcome, the U.S. Supreme Court has held that arbitrators “exceed[] their powers” under Section 10(a)(4) if they “stray[] from interpretation and application of the agreement” and substitute for the parties’ agreement their “own brand of . . . justice.” See Stolt-Nielsen, S.A. v. AnimalFeeds, Int’l Corp., 559 U.S. 662, 668 (2010) (quotation and citations omitted). Under this standard—sometimes referred to as the “essence of the agreement” or manifest disregard of the agreement standard—the court may review an arbitrator’s decision on issues that the parties agreed to arbitrate to determine whether there is some arguable basis on which to conclude that the arbitrator construed or applied the parties’ agreement. See, e.g., Stolt-Nielsen, 559 U.S. at 668-72; Oxford Health Plans LLC, v. Sutter, 133 S. Ct. 2064, 2068-71 (2013). If there is not, the award may be vacated.
The standard is narrow and meeting it presents a “high hurdle” that a challenger cannot overcome simply by showing that the arbitrators “committed an error —or even a serious error.” Id. The sole question for the court “is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract.” See Hill v. Norfolk and Western Ry. Co., 814 F. 2d 1192, 1194-95 (7th Cir. 1987) (Posner, J). If the arbitrator is even “arguably” interpreting the contract, then the arbitrator’s award cannot be vacated. See Oxford, 133 S. Ct. at 2068 (citation and quotation omitted).
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What if, instead of manifestly disregarding the agreement, the arbitrator manifestly disregards the law?
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Some (but not all) U.S. Circuit Courts of Appeals also hold that courts may—under Section 10(a)(4), or “as a judicial gloss” on all the Section10(a) vacatur grounds—vacate awards for “manifest disregard of the law,” a standard that overlaps to some extent with the “essence of the agreement” or “manifest disregard of the agreement” standard. See Stolt-Nielsen, 559 U.S. at 668 n.3; Oxford, 133 S. Ct. at 2068-71 (2013); see, e.g., Schwartz v. Merrill Lynch & Co., Inc., 665 F. 3d 444, 451-52 (2d Cir. 2011) (manifest disregard of the law is a judicial gloss on Section 10(a)); Comedy Club, Inc. v. Improv West Assoc., 553 F.3d 1277, 1290 (9th Cir. 2009) (manifest disregard of the law falls under Section 10(a)(4)). Vacatur under that standard may be appropriate if arbitrators disregard or ignore a well-defined, explicit, clearly applicable and outcome determinative rule of law that the challenger argued to the arbitrators. See, e.g., Schwartz, 665 F.3d at 451-52. Manifest disregard of the law does not authorize courts to vacate awards for errors of law—even serious ones—or “a failure on the part of the arbitrators to understand or apply the law.” See, e.g., Lagstein v. Certain Underwriters at Lloyd’s, 607 F.3d 634, 641 (9th Cir. 2010) (quotation and citation omitted).
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Is there or might there be any other basis on which a court may vacate an award based on the award’s outcome?
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The only other possible avenue of something resembling outcome review is if the award interprets the contract in a way that causes it to violate a well-defined and explicit public policy, or if the remedy the arbitrator awards violates the criminal law or requires one of the parties to do so. For example, one would not expect a court to enter judgment on an award that purported to authorize the prevailing party to inflict bodily harm on the losing party or vice-versa. That principle is simply an application of the contract-law rule that courts will not enforce contracts that violate public policy. See, generally, W. R. Grace & Co. v. Rubber Workers, 461 U.S. 757, 766 (1983); United Food & Commercial Workers Int’l Union v. King Soopers, 743 F.3d 1310, 1315 (10th Cir. 2014).
This “public policy” exception to enforcement is principally a creature of labor arbitration, which is not technically governed by the FAA, but by Section 301 of the Labor Management Relations Act, pursuant to which federal courts have created a body of common-law applicable to the enforcement of collective bargaining agreements, and the arbitration agreements that are commonly part of them. While some courts may apply the very narrow public policy exception to enforcement to commercial arbitration awards governed by the FAA (or at least pay lip service to it), it is unclear to what extent it would be available under the FAA (except perhaps in extreme and highly unusual circumstances where, for example, the award might purport to force a person to commit a crime).
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Aren’t these “outcome review” standards analogous to appellate review of an award?
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The “outcome review” standards discussed above authorize vacatur only when there is not even a barely colorable basis in the contract or controlling law for the award. They do not even vaguely resemble the appellate review standards that are ordinarily applied to trial court decisions on the merits.
Stay Tuned for More FAQs about Challenging Arbitration Awards….
Challenging Arbitration Awards 9
Part II of this Post will address the following FAQs about challenging arbitration awards:
- What does a person have to prove to convince a Court to grant it vacatur, modification, or correction of an award?
- What proceedings does a Court usually hold to determine applications to vacate, modify, or correct awards?
- What time limits apply to making an application or motion to vacate, modify, or correct awards under the FAA?
- Do I or my lawyer have to object to the arbitrators concerning matters on which we may later rely upon as grounds for vacating, modifying or correcting an award?
- Should a transcript of the arbitration proceeding be made?
- Are there other significant hurdles to overcome to successfully challenge an award?
Photo Acknowledgements:
The photos featured in this post (captioned Challenging Arbitration Awards 1 – Challenging Arbitration Awards 9) were licensed from Yay Images and are subject to copyright protection under applicable law. L&L added graphics or text to Challenging Arbitration Awards 1, 6, and 8.
Tags: arb, Arbitration Award Challenges, Arbitration Law FAQs, Challenging Arbitration Awards, Federal Arbitration Act, Grounds for Modification, Grounds for not Enforcing Award, Grounds for Overturning Award, Grounds for Vacating Awards, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard, Manifest Disregard of Agreement, Manifest Disregard of the Contract, Manifest Disregard of the Law, Modifying or Correcting Awards, Post-Award Challenge, Public Policy Defense
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