By James M. Gaitis
[See Part I here. ]
Because the only valid grounds for vacatur now recognized by the Supreme Court are those grounds found in Section 10 of the FAA, the above statements by the Supreme Court in AT&T Mobility show that the Court in effect was stating that an arbitral failure to at least attempt to apply the Federal Rules of Civil Procedure in the Court’s hypothetical example would constitute either “misbehavior” that prejudiced the rights of a party or an “act in excess of arbitral authority,” both of which would give rise to vacatur under Section 10(a)(4). That the Court implicitly was relying on one or both of these statutory grounds must be the case because judicial vacatur of such an award is the only means by which courts can, as the Court in AT&T Mobility phrased it, “honor” the parties’ agreement requiring the application of specific procedural rules. And the only grounds that would fit the situation described in the Court’s hypothetical are those found in Section 10(a)(4). Under the Court’s line of reasoning, an arbitral failure to at least attempt to apply the parties’ chosen substantive law (as defined in a choice of law provision), logically would also constitute either “misbehavior” prejudicing a party’s right or an “act in excess of arbitral authority,” also thereby giving rise to potential vacatur under Section 10(a)(4). The only argument against that conclusion presupposes that while the FAA permits the judicial enforcement of a contractual agreement to employ specific procedural rules, it prohibits the judicial enforcement of an agreement to employ a particular choice of law. Such a distinction not only is without foundation but also contradicts the emphasis found in many Supreme Court decisions, now including AT&T Mobility, on the parties’ right to craft their own arbitration process. Such a purported distinction also contradicts two hundred years of American case law recognizing that the scope of an arbitrator’s authority is restricted by a choice of law provision. It also contradicts the Court’s emphatic point in AT&T Mobility that while states may not impose upon arbitrating parties guidelines that make the arbitration process more cumbersome than that “envisioned by the FAA,” contracting parties are free to agree to do so and court’s must “honor” that agreement. And it also contradicts the Supreme Court’s prior statement that when interpreting a contract that has an arbitration provision and a choice of law provision, courts must adhere to “another cardinal principle of contract construction: that a document should be read to give effect to all of its provisions and to render them consistent with each other.” See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 63 (1995).
Detractors no doubt will argue that Hall Street stands for the proposition that courts may not review an arbitral award for errors in the application of law because such a review is not contemplated by the limited vacatur grounds set forth in Section 10 of the FAA. But that argument begs the question (the legitimacy of which question was acknowledged, and then left unresolved, by the Court in Hall Street) regarding whether an egregious failure to apply the law could, at least under some circumstances, constitute either “misbehavior” prejudicing a party’s rights or an act in excess of authority under Section 10(a)(4) of the FAA. The logical conclusion, and one that is consistent with the Court’s “Federal Rules of Civil Procedure” hypothetical in AT&T Mobility, is that when the arbitrator fails to even attempt to apply the parties’ chosen law, a vacatur of the resulting award is justified, but not because the arbitrator erroneously applied the governing law. Instead, vacatur is warranted because the arbitrator’s failure to even attempt to apply the governing law constitutes a clear failure to comply with the parties’ arbitration agreement and thus violates the parties’ rights. The same no doubt is true with respect to an arbitration agreement requiring the application of the Federal Rules of Civil Procedure. Courts presumably are empowered to vacate the resulting award if the arbitrators do not even attempt to apply those procedural rules. Whether a court can properly vacate an award based on the conclusion that the arbitrators grossly failed to correctly apply clearly established aspects of those rules, of course, is an entirely different question.
The alternative proffered approach, whereby arbitrators are deemed to have unfettered authority to resolve the parties’ dispute without being obligated to comply with the parties’ choice of law provision, would permit arbitrators to “dispense [their] own brand of industrial justice” in violation of the Court’s express prohibition in Stolt-Nielsen. Stolt-Nielsen thus clearly holds that when the arbitrator “strays from interpretation and application of the [arbitration] agreement,” the underlying award is subject to vacatur. That principle in no way conflicts with the Court’s decision in Hall Street, which merely prohibited the enforcement under the FAA of contractual provisions purporting to “enhance” judicial review of arbitral awards. Hall Street did not serve to expand the authority of arbitrators such that arbitrators are no longer required to attempt to comply with the parties’ directives concerning the manner in which their disputes are to be resolved. As Judge Posner observed when he affirmed the vacatur of an award under Section 10(a)(4) on the very eve of Hall Street: “[P]recisely because arbitration is a creature of contract, the arbitrator cannot disregard the lawful directions the parties have given [him]. If they tell him to apply Wisconsin law, he cannot apply New York law.” Edstrom Industries, Inc. v. Champion Life Insurance Company, 516 F.3d 546, 552 (7th Cir. 2008). AT&T Mobility reinforces that principle.
While it thus seems clear to this writer that Hall Street, Stolt-Nielsen, and now AT&T Mobility all support the ongoing enforceability of choice of law provisions in contracts subject to arbitration, one broader ambiguity remains. That ambiguity arises in part due to the Court’s determination in Stolt-Nielsen that arbitrators have no discretion and are entitled to no deference in the resolution of questions regarding the scope of their authority “[when] there can be only one possible outcome on the facts.” That conclusion, in and of itself, is eminently reasonable since it simply declares the obvious—i.e., that one can only exercise “discretion” when the matter at issue entails subjective issues that can only be resolved by resort to an exercise of discretion. That perfectly rational approach leads to the following corollary question in the context of arbitration vacatur law: Can the same principle be said to control with respect to the arbitrators’ application of the parties’ chosen law when that law is so clear and definitive that it, too, can lead to “only one possible outcome on the facts?” In this respect it is worth reminding that in discussing this general issue in Stolt-Nielsen, the court was not addressing a purely factual issue. Instead, the issue before the Court concerned the interpretation of the parties’ arbitration provision—i.e., a mixed question of law and fact—and the Court’s opinion thus thoroughly addressed the arbitrators’ failure to apply controlling contract interpretation law. There is a limit to the deference to be accorded to arbitrators and, so it would seem, there are times when arbitrators are to be accorded no deference when the law admits to only one possible outcome.
Ironically, if one were to apply the historically-founded “manifest disregard” concept alluded to by the Supreme Court in Wilko v. Swan, 346 U.S. 427 (1953), overruled on other grounds, Rodriguez de Quijas v. Shearson/Am. Exp., Inc., 490 U.S. 477 (1989), the answer to the question whether courts must defer to an arbitrator’s plainly erroneous “interpretation” of governing law when that law is so clearly established as to not be subject to interpretation would be an emphatic “No.” While it seems less than likely that the Supreme Court will adopt or confirm that principle, the Court’s recent arbitration decisions do suggest that the Court will find that parties’ agreed choice of law provisions are, as a matter of law, enforceable, and that when arbitrators plainly ignore the parties’ chosen law the ensuing award will be at risk of vacatur by reviewing courts. To the extent AT&T Mobility supports that conclusion, it helps to protect the fundamental purpose of the FAA to enforce the right of contracting parties to craft their own arbitration process and, further, to ensure that a fundamental aspect of commercial contracts—i.e., choice of law provisions that explain contractual intent and define contract performance expectations—will remain viable into the future.
James M. Gaitis is the former Director of the International Dispute Management Programme at the Centre for Energy, Petroleum & Mineral Law & Policy, University of Dundee, Scotland, where he remains a member of the Global Faculty. He is the Editor-in-Chief of the second edition of The College of Commercial Arbitrators Guide to Best Practices in Commercial Arbitration (J. Gaitis, C. von Kann, R. Wachsmuth forthcoming Fall 2010) and the author of numerous law review articles on the topic of arbitration, several of which have been repeatedly cited to the United States Supreme Court and lower state and federal appellate courts. Over the past twenty years he has served on a diverse array of arbitration rosters, including as a Fellow of the College of Commercial Arbitrators, a Fellow of the Chartered Institute of Arbitrators, and as a panelist on the AAA Complex Case Panel and the Energy/Oil & Gas Panels of the AAA and CPR. He received his BA from the University of Notre Dame and his JD from the College of Law at the University of Iowa where he was an editor of the Iowa Law Review. He is also the author of two published novels. He may be reached via email at: firstname.lastname@example.org.