The Ability to Contract for Expanded Judicial Review of Arbitration Awards Is Limited in Several Jurisdictions



Our clients frequently ask which is better for their contracts - resolving disputes in arbitration or court? Because appeal rights are limited in arbitration, the question arises whether we can arbitrate in the first instance, but preserve a later right of appeal. Some contracts now provide for an appellate panel of arbitrators, who review the decision of the arbitration hearing panel. Contracting for judicial review of arbitration awards is more problematic. The federal circuits are split on whether parties can contract to impose a legal standard of review by courts following their private arbitrations.

The Federal Arbitration Act ("FAA") sets out very narrow grounds upon which an arbitration ruling may be vacated or modified by a court. See 9 U.S.C. ßß 10 - 11. Several of these grounds relate primarily to fraud or corruption on the part of the arbitrator(s). The broadest basis available to a reviewing court under the FAA (and most state statutes) for modifying or overturning an arbitration award is that a court may vacate an arbitration award "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." 9 U.S.C. ß 10(a)(4). Most state arbitration statutes similarly limit the scope of judicial review of arbitration awards.

By contrast to the constraints imposed by the FAA and similar state law legislation, there is near universal agreement that arbitration is a creature of contract, and that a party is bound to arbitrate only to the extent that it has agreed to do so, and then only with regard to the specific issues that are contemplated by the party's arbitration agreement. See eg. Volt Information Services, Inc. v. Board of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989) ("Congress's principal purpose [in enacting the FAA was to ensure] that private arbitration agreements are enforced according to their terms.ÖArbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit.")

Thus, it appears that parties are entitled to establish by contract the scope of an arbitrator's authority, and that a court should review an arbitration award in such a way as to ensure that such contractual authority, whatever its scope may be, has not been exceeded. In particular, parties to an arbitration clause could limit the arbitrator(s)'s powers in deciding any dispute in accordance with applicable law, and that an award that violates this mandatory restriction would be subject to challenge in the courts as an award which "exceeds the arbitrator(s)'s powers." See 9 U.S.C. ß 10(a)(4).

This view has been accepted in many jurisdictions, including the United States Court of Appeals for the Fourth Circuit. Other courts, however, have expressed hostility to attempts to limit the arbitrator's "authority" in a way that would require a court to review the arbitrator's legal conclusions under a de novo standard. These courts have resisted or even refused to review arbitration awards under anything other than a "fraud or corruption" standard. In fact, most courts considering the issue tend to view the question presented not as one involving a question of arbitrators "exceeding their authority;" rather, most courts frame the issue as whether parties by contract may expand the narrow standards of judicial review expressly established under the FAA. This memo provides a very brief overview of the federal jurisprudence1 addressing this issue.

Circuit Split

Courts Embracing "Expanded" Review

The Fourth Circuit addressed the issue of contractual expansion of judicial review of arbitrator decisions in Syncor International Corporation v. David L. McLeland, 120 F.3d 262 (4th Cir. 1997), and has not revisited the issue since the decision. The Syncor court upheld an employment arbitration agreement, which called for expanded judicial review of an arbitration award. The arbitration agreement required that "the arbitrator shall not...

To continue reading