In Hall Street Associates, LLC v. Mattel, Inc.,[1] the U.S. Supreme Court ruled that parties may not contractually expand upon the grounds set forth in the Federal Arbitration Act (“FAA”) for vacating or modifying an arbitration award. In reaching its ruling, the Supreme Court unequivocally held that the FAA’s grounds for vacating and modifying arbitral awards are exclusive for parties seeking expeditious review under the FAA. The ruling is significant for parties considering arbitration, and should be considered before entering into an arbitration agreement.

As recognized in Hall Street Associates, the FAA was enacted to replace judicial indisposition to arbitration with a national policy that both favors arbitration and places it on equal footing with all other contractual agreements. In cases that fall within a court’s jurisdiction, the FAA makes contracts to arbitrate “valid, irrevocable, and enforceable” so long as the contract’s subject involves commerce. The FAA provides for expedited review of arbitration awards, and sets forth mechanisms to enforce the awards, including by judicial decree to confirm an award, vacate an award, or modify or correct the award.

The facts of the Hall Street Associates case reveal the parties’ attempt to agree to an arbitrated resolution of their dispute, while maintaining the right of judicial review of the arbitrator’s findings. The case involved a lease dispute, between Hall Street Associates, as landlord, and Mattel, Inc., as lessee. Mattel had used the subject property as a manufacturing site, and the leases provided that the tenant would indemnify the landlord for costs resulting from the tenant’s or its predecessors’ failure to follow environmental laws. After Mattel gave notice of its intent to terminate the lease, Hall Street sued claiming, among other things, that the lease obligated Mattel to clean up the site.[2] Following a trial at which Mattel won on the termination issue, the parties entered into an arbitration agreement to submit Hall Street’s indemnification claim to arbitration.

The parties’ arbitration agreement included a provision that “[t]he Court shall vacate, modify or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.” The case was arbitrated and the arbitrator decided in favor of Mattel; but, on the basis of this provision, the court in which the underlying lawsuit was pending vacated the award, determining that the arbitrator had committed legal error. The case eventually made its way to the Supreme Court.

The Supreme Court determined that the FAA’s express provisions leave no room for contractual expansion of the statutory grounds for modifying or vacating arbitration awards. The Court recognized that Section 9 of the FAA expressly provides that a court “must” confirm an award “unless” it is vacated, modified or corrected “as prescribed” in Sections 10 and 11 of the Act. The Supreme Court further determined that the specific grounds set forth in Sections 10 and 11 – including, for example, “corruption,” “fraud,” “evident partiality,” “misconduct,” “misbehavior,” and similar grounds, address “egregious departures from the parties’ agreed-upon arbitration,” and that a court may correct those only if they go to “[a] matter of form not affecting the merits.” Accordingly, the Court determined that the Act contained no hint of flexibility, and that the exclusive regimes for the expeditious review of arbitral awards under the FAA established in Sections 10 and 11 of the Act are not subject to contractual tinkering.

Therefore, when considering an arbitration agreement for its ability to achieve a cost effective and quick result, it is imperative that the parties consider the extent to which their rights to set the terms of the agreement are limited by the FAA. The Hall Street Associates decision, however, is itself limited to the scope of the expeditious judicial review under the FAA; it does not address other potential avenues for judicial enforcement of arbitration awards such as under the common law or state statutory law.

Parties considering arbitration also should recognize that arbitration is a trade off. An arbitrator may decide a case based upon what the arbitrator believes is just and right; even if incorrect as a matter of law, the arbitrator’s decision is, subject to limited exceptions, final. Arbitration generally provides for an expeditious and less expensive forum for dispute resolution, whereas litigation allows for full discovery of the relevant facts, and a judicial determination that is subject to review including for mistakes of law.

Hirsch & Westheimer provides litigation and arbitration services to its clients, and welcomes any request for additional information.

[1] Hall Street Associates, LLC v. Mattel, Inc., — S.Ct. —, 2008 WL 762537 (Mar. 25, 2008)
[2] High levels of Trichloreothylene (TCE) had been detected in tests of the property’s well water, and the Oregon Department of Environmental Quality discovered other pollutants prior to Mattel’s notice to terminate the lease.