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Arbitration Nuts & Bolts: Vacating Arbitration Awards — It’s All in the Agreement

December 8th, 2009 Awards, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure, Reinsurance Arbitration 2 Comments » By Philip J. Loree Jr.

Part I:  Introduction

An arbitration award is effectively a contract resulting from a contract.  Two parties agree to appoint arbitrators, submit their dispute to arbitration and abide by the award.  The parties ordinarily consent to entry of judgment on the award, and it can be confirmed under Section 9 of the Federal Arbitration Act (or a state law equivalent when the Federal Arbitration Act doesn’t apply).  Alternatively it may be enforced through the plenary and summary  procedures applicable to ordinary contracts (subject to any special rules governing arbitration awards).  

So what happens when things go awry — or at least seem to have gone awry — and the arbitration award is or appears to be fundamentally unfair, divorced from the contract or the result of fraud, bias, or some form of prejudicial misconduct on the part of the arbitrators?  Section 10 of the Federal Arbitration Act provides a safety net in the form of a motion or petition  to vacate the award.  (State arbitration statutes and law applicable in actions to enforce arbitration awards generally provide similar recourse, but our focus here is on the Federal Arbitration Act.)

The United States Supreme Court recently declared that Section 10(a) of the Federal Arbitration Act sets forth the exclusive grounds for vacating a commercial  arbitration award (we are not concerned here with awards under 5 U.S.C. § 590, which are governed by 9 U.S.C. § 10(b)).  See Hall Street Assoc. v. Mattel, Inc., 128 S. Ct. 1396, 1404 (2008).  And make no mistake, these grounds are exceedingly narrow; section 10 of the Federal Arbitration Act authorizes vacatur only where: 

1.  The award was procured by corruption, fraud, or undue means;

2.  [T]here was evident partiality or corruption in the arbitrators, or either of them;

3.  [T]he 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; or

4.  [T]he 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). 

While the principal purpose of the Federal Arbitration Act is to enforce the parties agreement as written, see, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947 (1995), we see the flip side of that purpose expressed in Section 10(a).  Section 10(a) addresses situations where  putting a court’s  imprimatur on an award would deprive one of the parties of the benefits of its freely-bargained-for arbitration agreement.  Judge Posner put it well when he said:

It is tempting to think that courts are engaged in judicial review of arbitration awards under the Federal Arbitration Act, but they are not. When parties agree to arbitrate their disputes they opt out of the court system, and when one of them challenges the resulting arbitration award he perforce does so not on the ground that the arbitrators made a mistake but that they violated the agreement to arbitrate, as by corruption, evident partiality, exceeding their powers, etc. – conduct to which the parties did not consent when they included an arbitration clause in their contract. That is why in the typical arbitration . . . the issue for the court is not whether the contract interpretation is incorrect or even wacky but whether the arbitrators had failed to interpret the contract at all, for only then were they exceeding the authority granted to them by the contract’s arbitration clause.

Wise v. Wachovia Sec., LLC, 450 F.3d 265, 269 (7th Cir.) (citations omitted), cert. denied, 549 U.S. 1047 (2006).

As we shall discuss in detail in subsequent posts, each of the grounds specified in Section 10(a) implicates whether the arbitration award deprived the party of the benefit of its arbitration agreement.   Indeed, the first question a party should consider before investing time and expense in a motion or petition to vacate is whether it has reasonable grounds for asserting that the award effectively violated the agreement to arbitrate.  If the answer is “yes,” and the alleged violation falls within the scope of Section 10(a), then the party may have a good faith basis for vacating the award. 

In subsequent parts of this post we shall take a closer look at each of the grounds for vacating an award….

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2 Responses to “Arbitration Nuts & Bolts: Vacating Arbitration Awards — It’s All in the Agreement”

  1. […] this Part II of our Nuts & Bolt feature on vacating arbitration awards (Part I is here) we briefly look at the first statutory ground for vacating an award under the Federal Arbitration […]

  2. […] this Part III of our Nuts & Bolts feature on vacating arbitration awards (Parts I and II  here and here) we consider the second statutory ground for vacating an award under the Federal […]