U.S. Supreme Court Sends Mixed Message on Arbitration: What It May Mean to Your Business
On March 25, 2008, the United States Supreme Court decided an issue that, on first blush, reinforces the strong policy in favor of arbitration in the business and commercial context. In Hall Street Associates, L.L.C. v. Mattel, Inc., Justice David Souter, writing on behalf of the majority, held that courts should defer to arbitrators and generally uphold arbitration awards unless there are grounds for vacating the award expressly set forth in the Federal Arbitration Act. Such grounds are limited and include, for example, instances where an arbitrator exhibits bias or exceeds his or her powers. This important case bucks the recent trend among courts (whether conscious or not) to broaden the review of arbitration awards.
A Double-Edged Sword
While Hall Street Associates, L.L.C. v. Mattel, Inc. seems to be a victory for those supporting arbitration, the decision in fact may be a double-edged sword. Why? Because the Supreme Court also held that parties to an arbitration agreement cannot expand the grounds for judicial review of an arbitration award even if their contract expressly allows it. In other words, the Supreme Court's decision makes it unlikely that you can fashion an arbitration provision that would allow you to maintain the right to appeal an arbitration award for reasons other than those set forth in the Federal Arbitration Act.
Moreover, if your contracts currently include arbitration provisions that contain language allowing an appeal—as business agreements often do these days—those provisions may now be unenforceable. (The Supreme Court's decision did leave some wiggle room whereby provisions allowing an appeal might be enforceable outside of the Federal Arbitration Act, but that road is bumpy at best.)
A Trend Away from Arbitration?
Even before the decision in Hall Street Associates, L.L.C. v. Mattel, Inc., there has been a growing recognition in legal circles that arbitrations do not guarantee a less expensive or more expeditious resolution of disputes. Arbitration, in fact, can be both costly and time consuming. Now, the free hand arbitrators often take has one less control than before—expanded review by a court. From a business perspective, this more limited review calls for a re-examination of the benefits (either perceived or actual) to be obtained in arbitration.
Although the ramifications on arbitration are yet to be fully felt, it is clear that Hall Street Associates, L.L.C. v. Mattel, Inc. is an extremely important decision for most businesses. At a minimum, it calls into question the language of any arbitration provision that does more than merely grant the right to arbitrate—and that includes a majority of such provisions. Thus, one thing is certain: You should work with your legal counsel to review your contracts in light of the Supreme Court's recent decision and make any necessary modifications to protect your business in future disputes.