The Supreme Court's recent decision in Hall Street Assocs. L.L.C. v. Mattel, Inc., 2008 U.S. LEXIS 2911 (March 25, 2008) addresses whether contractual arbitration clauses or agreements calling for expanded judicial review of arbitration awards are enforceable. Paul E. Mason, discusses the decision, its background, and the implications for both domestic and international arbitration practice.
Mr. Mason writes: The underlying dispute, Hall St. Assocs., L.L.C. v. Mattel, Inc., 196 Fed. Appx. 476 (9th Cir. 2006), arose out of property damage litigation between property owner (Hall Street ) and its lessee (Mattel) based on allegations that Mattel failed to guard against the contamination of well water on the property. With approval of the U.S. District Court for the District of Oregon, the parties had entered into a post-dispute agreement to arbitrate the issues. The arbitration agreement provided for judicial review by the District Court of an arbitral award based on a lack of “substantial evidence” for the award, or findings of legal error in making the award.
After the case bounced between the U.S. District Court for the District of Oregon and the United States Court of Appeals for the Ninth Circuit, the United States Supreme Court resolved the issue of expanded judicial review of arbitration awards. Mr. Mason explains that the Supreme Court’s 5-4 decision “held on both statutory construction and policy grounds that §§ 10 and 11 of the [Federal Arbitration Act] present the exclusive grounds on which to vacate arbitral awards considered thereunder.”
According to Mr. Mason, the practical upshot is that:
The Supreme Court has now made it clear that at least as regards arbitrations falling under the FAA, a contractual arbitration clause cannot be enforced which provides for expanded judicial review based on “manifest disregard of the law” by an arbitrator. If on the other hand, the arbitration in question falls under a state arbitration law rather than the FAA, then this question would remain open, depending on the state law involved.
Thus, if an expanded judicial review scenario for an arbitration clause or agreement is presently being considered by a U.S. party, it may be helpful to include specific severability language for the clause, in case a state court rules that these expanded judicial review agreements are unenforceable in that state. That way, the rest of the arbitration clause or agreement may still be preserved.