Resolving Conflict
through Contractual Arbitration
and Compulsory ADR
J O S E P H L I PA R I
T H E S U LT Z E R L A W G R O U P, P. C .
SEPTEMBER 2011
“Arbitration”
Generally defined as a process of private dispute
resolution in which a neutral third party arbitrator
renders a decision after a hearing in which both
parties have had an opportunity to be heard.
Arbitration is a creature of contract and is presided
over by a non-judicial arbitrator.
Contractual arbitration is binding as parties are
allowed to waive their rights to a jury trial.
The Advantages of
Arbitration
1) affords the parties a greater degree of privacy than litigation
2) expeditious exchange of discovery between the parties;
3) discovery rules are more flexible and can be tailored in a way that is
suitable for the particular dispute;
4) arbitrators can decide not to rigidly adhere to the rules of evidence;
5) parties can oftentimes informally communicate with the arbitration panel
rather than filing costly and complex motions;
6) the types of hearings can vary to accommodate the parties and the
witnesses;
7) establishing rules and protocols may be a collaborative process between
the arbitrators and the parties
8) the entire arbitration process may last a few months instead of a few
years
Federal Arbitration Act (“FAA”)
Promulgated in 1925 in order to abrogate the
general common law rule against specific
enforcement of arbitration agreements.
Prior to the FAA, courts either did not enforce
arbitration provisions or would only award nominal
damages for the breach of an agreement to
arbitrate.
Congress intended to place arbitration agreements
“upon the same footing as other contracts.”
Arbitration Clauses
Arbitration clauses typically specify the applicable law and procedural rules
that will govern.
In construing an arbitration agreement, every doubt is to be resolved in
favor of arbitration.
The FAA provides that courts shall decide the issue of arbitrability based
upon their interpretation of the contractual intent of the parties; courts
should, however, defer to arbitration between commercial entities unless
there is clear intent that the arbitration clause does not apply; doubts as to
parties' intent are to be resolved in favor of arbitration
Any interpretation of the scope of an arbitration clause is governed by two
guiding legal principles: (1) as there is strong federal policy favoring
arbitration, any doubt concerning the scope of arbitrable issues should be
resolved in favor of arbitration; and (2) that an order to arbitrate a
particular grievance should not be denied unless it may be said with
positive assurance that the arbitration clause is not susceptible of
interpretation that covers asserted dispute.
Separability
Even if the underlying contract is deemed void ab initio as a result of
fraud, a court will sever or separate the arbitration clause in order to
allow the arbitrator to decide all issues in dispute, including arbitrability
Mitsubishi Motors Corp v Soler Chrysler Plymouth, Inc., 473 US
614 (1985)
The Court held that determining whether a dispute is subject to
arbitration involves a two step inquiry: 1) whether the arbitration
agreement covers an issue in dispute; and 2) whether an external
legal constraint forecloses the arbitration of those claims.
As to the first prong, the Court explained that the parties
intention controls, but those intentions are generously construed
as to issues of arbitrability.
As to the second prong, the Court held that almost any type of
claim is arbitrable and the party opposing arbitration must show
a clear congressional intent to exclude a claim from arbitration
before the courts will deny a motion to compel.
FAA §16
In 1988, Congress amended the FAA to add § 16.
This section allows for the appeal of district court orders refusing
to compel arbitration and denies the appeal of orders compelling
arbitration.
The circuits are split as to whether a party may appeal an order
compelling arbitration when the issue arises within a broader
action that includes other claims and the court has dismissed the
remaining claims.
The majority of courts have held that orders compelling
arbitration in an “embedded proceeding” are always
interlocutory and thus not “final decisions” subject to appeal
under to § 16.
The majority of courts have held that orders denying arbitration
are “final decisions” subject to appeal.
The Significance of Situs
Courts in the arbitral situs can vacate the award and
declare it a nullity.
Accordingly, where the arbitration provision is silent as
to situs, the situs should not be selected simply for
convenience of counsel.
Consideration should be given to the arbitral caselaw of
the “vacating courts.”
Consideration should be given to the “circuit splits”
with respect to arbitration clause and arbitration
procedure issues.
Interim Rulings that have been deemed “Final
Awards” Subject to Judicial Review
An order requiring the posting of security to protect a possible final
award is itself a "final award” subject to judicial review.
An order requiring defendant to post an interim letter of credit was
reviewable award under the FAA.
Temporary equitable orders calculated to preserve assets or
performance needed to make a potential final award meaningful.
Vacating an Arbitration Award
◦ STATUTORY
1) where the award was procured by
corruption, fraud or undue means;
2) where there was evident partiality or
corruption;
3) where the 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) where the arbitrators exceeded their
powers, or so imperfectly executed them that
a mutual, final and definite award upon the
subject matter submitted was not made.
◦ JUDICIAL
1) manifest disregard of the law; or
2) violation of public policy.
What is Manifest Disregard of the Law?
Judicially created standard not found in section 10 of the FAA.
All Circuits agree that it is something more than mere legal error or misinterpretation.
The standard is derived from the 1953 Supreme Court ruling Wilko v Swan 346 U.S 427
(1953), rev’d on other grounds, Rodriguez de Quijas v Shearson/American Express, Inc.
490 U.S 477 (1989).
In Wilko v Swan, the Court explained, in dicta, that “in unrestricted submissions, such
as the present margin agreements envisage, the interpretations of the law by the
arbitrators in contrast to manifest disregard are not subject, in the federal courts, to
judicial review for error in interpretation.”
As an example of one Circuit’s interpretation of the judicially created standard, in
Merrill Lynch v Bobker, 808 F.2d 930 (2d, Cir. 1986), the Second Circuit stated that
“although the bounds of this ground have never been defined, it clearly means more
than error or misunderstanding with respect to the law. The error must have been
obvious and capable of being readily and instantly perceived by the average person
qualified to serve as an arbitrator. Moreover, the term ‘disregard’ implies that the
arbitrator appreciates the existence of a clearly governing legal principle but decides to
ignore or pay no attention to it…the governing law alleged to have been ignored by the
arbitrators must be well defined, explicit and clearly applicable.
Judicial Review
The FAA maintains only four limited grounds for vacatur that a party
may pursue, in a federal district court, if dissatisfied with the arbitrator's
decision. A party can use the FAA to ask a federal district court to vacate
the arbitration award, but that party will succeed only if one of the
statutory or judicially created grounds were violated by the arbitrator or
the arbitration panel.
The FAA was intended to encourage parties to exercise their freedom to
contract for arbitration rather than litigation.
The argument has been made that the parties should be free to agree
on everything affecting their arbitration, including a standard of judicial
review.
Whether parties can contractually demand that a federal district court
review the arbitration award for grounds not mentioned in the FAA split
the federal Circuit Courts of Appeals.
Can Parties Contract to Expand their Right to Judicial Review of an Arbitral
Award?
Prior to Hall Street Associates, LLC v Mattel, Inc., the circuit split was:
◦ YES
◦ NO
Third Circuit
Eighth Circuit
Fourth Circuit
Ninth Circuit
Fifth Circuit
Tenth Circuit
Hall Street Associates, L.L.C. v.
Mattel, Inc.
The Court Held:
“The Federal Arbitration Act…provides for expedited judicial review to
confirm, vacate, or modify arbitration awards. The question here is whether
statutory grounds for prompt vacatur and modification may be
supplemented by contract. We hold that the statutory grounds are
exclusive.”
However the Court Limited its holding:
“We do not purport to say that they exclude more searching review based
on authority outside the statute as well. The FAA is not the only way into
court for parties wanting review of arbitration awards: they may
contemplate enforcement under state statutory or common law, for
example….But here we speak only to the scope of the expeditious judicial
review under §§ 9, 10, and 11.”
The Hall Circuit Split:
Manifest Disregard
Does manifest disregard still exist as a judicial, non-statutory ground for
vacatur of arbitration awards?
The Court Stated:
“Maybe the term ‘manifest disregard’ was meant to name a new ground for
review, but maybe it merely referred to the § 10 grounds collectively, rather
than adding to them. Or, as some courts have thought, ‘manifest disregard’
may have been shorthand for § 10(a)(3) or § 10(a)(4), the subsections
authorizing vacatur when the arbitrators were ‘guilty of misconduct’ or
‘exceeded their powers.’”
The Court left the question open. As of August, 2011, the 1st, 2nd, 3rd, 5th,
6th, and 9th Circuit Courts have commented on Hall.
Does Manifest Disregard
Still Exist?
◦ YES
Second Circuit
Sixth Circuit
Ninth Circuit
◦ Unclear
Third Circuit
NO
First Circuit
Fifth Circuit
Compulsory ADR Strategies
Most states have enacted legislation that encourages or compels litigants to
participate in some form of ADR.
Mediation
Non-Binding Arbitration