Hall Street and its Impact on International Arbitration
Amidst all the focus on last week’s decision in Medellin, most readers missed another important decision rendered by the Supreme Court that will have a significant impact on international law. The case of Hall Street v. Mattel concerns the ability of contractual parties to fashion judicial review of domestic and international arbitration awards.
As a general rule, the Federal Arbitration Act authorizes federal courts to confirm, vacate, or modify awards. Confirmation transforms an arbitral award into a court judgment that is fully enforcable like any other court judgment. Vacating an award renders it unenforceable in the United States, but that option is only available on very narrow grounds of significant procedural irregularity outlined in Section 10 of the FAA. Modification of an arbitral award is only appropriate for simple and inadvertent problems like clerical or computational errors.
The question raised in Hall Street is whether contractual parties could draft into the contract a fourth path, namely judicial review of an award for legal or factual error. Such review is not among the expressly enumerated powers of the courts under the FAA, and before Hall Street there had been a circuit-split as to the propriety of such review. The Court rejected Hall Street’s argument and held that the only options available to courts are those outlined in the FAA: confirmation, vacatur, and modification.
The case is important for two reasons. First, the Court quite explicitly rejected the notion that parties could craft a mechanism for judicial review of factual or legal error. One of the major concerns about arbitration is that there is no appeal mechanism where arbitrators get it wrong and many speculated that without the possibility of judicial review parties will forego arbitration.
The second reason Hall Street is important is that the Court rejected a judicially-crafted exception that circuit courts had developed known as “manifest disregard of the law.” Essentially, courts had added a non-statutory ground for vacatur if it could be established that the arbitrator knew the law and deliberately ignored it. It’s not exactly review for legal error, but it is close. But again, the Court interpreted Section 10 as exhausting the available grounds for vacating an arbitral award. Here is an excerpt:
Instead of fighting the text, it makes more sense to see [the relevant provisions of the FAA] as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can “rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process,” and bring arbitration theory to grief in post-arbitration process….
When all these arguments based on prior legal authority are done with, Hall Street and Mattel remain at odds over what happens next. Hall Street and its amici say parties will flee from arbitration if expanded review is not open to them. One of Mattel’s amici foresees flight from the courts if it is. We do not know who, if anyone, is right, and so cannot say whether the exclusivity reading of the statute is more of a threat to the popularity of arbitrators or to that of courts. But whatever the consequences of our holding, the statutory text gives us no business to expand the statutory grounds.
How will the decision impact international arbitration? At the international level I doubt it will discourage parties to avoid arbitration, because distrust of national courts is a principal reason for opting to use a neutral arbitral forum in the first place. It also will stregthen the power of arbitral panels by limiting the grounds for vacating awards. “Manifest disregard of the law” had become a kitchen-sink argument thrown in to many vacatur proceedings as a back-door attempt to secure a merits review. It may also create incentives for the development of internal appeals processes within arbitral institutions, a subject about which Erin Gleason Alvarez, a former student of mine, has written an awarding-winning article.