Check Your Contract Arbitration Provisions
For Validity under Recent Court Decision
By Carroll Dubuc
The writer was formerly North American Counsel for Air France and its Meridien Hotels; Current Chairman of the Fairfax Bar Alternate Dispute Resolution Section, Member of the Council of the Joint ADR Committee of the Virginia Bars, Certified Mediator for Civil and Family cases, mediator, conciliator and neutral case evaluator for Virginia courts, arbitrator for National Arbitration Forum, New York Stock Exchange and Attorneys Arbitration Service, and a 9-11 Victims Fund Hearing Officer (a mediator or arbitrator in hundreds of cases) previously a trial lawyer for 35 years; Past Chairman of the Alternate Dispute Section of the Federation of Defense and Corporate Counsel, past Chairman of the Alternate Dispute Resolution Committee of the Defense Research Institute, Past Chairman of the Alternate Dispute Resolution Section of the International Association of Defense Attorneys, a trainer of attorneys in mediation skills, and a prior member of the board of the Virginia Mediation Network.
Do you currently have contracts and operating agreements which contain provisions for the arbitration of disputes in the event of problems? Are the terms of the arbitration clauses customized to permit extra grounds for challenging the arbitration award if it is not acceptable? The use of provisions in the contract arbitration clauses which permit an unsatisfied participant to challenge the arbitrator’s award upon grounds that the (1) the arbitrator’s finding of facts were not supported by evidence, or (2) that the arbitrator made erroneous conclusions of law, have been popular incentives to convince a reluctant signer to accept an arbitration clause in a contract or agreement. These provisions indeed incorporated an extra-legal perception that the arbitrator’s award could be overturned making other legal options available to resolve contractual and other issues. However a recent decision of the United States Supreme Court in Hall Street 1, found that the limited statutory grounds for challenging an arbitration award set forth in the Federal Arbitration Act 2 is exclusive so that the provisions for challenge based on unsupported factual findings and erroneous conclusions of law were not valid reasons to overturn an arbitrator’s award.
Many commercial agreements in the hotel and hospitality industry involve parties in different states and services which cross state borders so that the issues involve interstate commerce thereby activating the commerce provisions of the United States Constitution, and thus making the Federal Arbitration Act applicable to the arbitration clauses in those agreements. In the Hall Street case, a lease of a manufacturing site included provisions in the lease for arbitration of any disputes adding to the statutory grounds for judicial review of additional grounds, i.e., (1) where the arbitrator’s finding of facts are not supported by the substantial evidence, and (2) where the arbitrator’s conclusions of law are erroneous. A dispute arose because of an environmental contamination of the site, the lessee terminated the lease, the landlord filed suit and the lessee claimed the right to arbitration. After the arbitration, the arbitrator’s award was challenged on grounds that his finding of facts and conclusions of law were erroneous as provided in the arbitration clause in the lease. The Trial Court permitted the challenge but the Supreme Court reversed that decision holding that the added grounds for judicial review were invalid because they went beyond the language and intent of the statute; the Supreme Court reversed and sent the case back for entry of the arbitration award.
The effect of the Hall Street decision is that the statutory grounds set forth in the Federal Arbitration Act for challenging arbitration awards could not be modified by additional language in the drafting of the arbitration provisions, and therefore the only grounds available to challenge an arbitration award would be those in the Federal Arbitration Act, i.e., if it was procured by (1) Corruption, fraud or undue means; (2) there was evidence of partiality or corruption in an arbitrator; (3) the arbitrator was guilty of misconduct in refusing to postpone a hearing or refusing to hear material evidence, or other misbehavior which prejudices a party’s rights; and (4) the arbitrators exceeded their powers or imperfectly executed them.
In rejecting the other grounds for judicial review that were included in the arbitration clause of the parties’ lease the Supreme Court stated:
“The decision recognizes that the sine qua non of arbitration is speed, efficiency, and cost savings… The business decision whether to litigate or arbitrate is an either-or proposition; arbitration should not be an opportunity to combine the two.”
Therefore it would be prudent for you or your legal counsel to review any existing arbitration provisions in contracts and agreements, and to be used in future agreements so as to avoid the prohibitions set forth by the Supreme Court, since it is probable that the Federal Arbitration Act will be the controlling law.
However, if the contract or agreement does not involve that kind of interstate commerce described in this article, some State arbitration statutes might permit the parties to stipulate in their arbitration agreement that a state arbitration act governs the arbitration and some heightened grounds for judicial review such as errors of law or facts might be included in the arbitration provisions.
Indeed the California Arbitration Act apparently contains some leeway for the parties to include heightened judicial review in their arbitration agreement. In a recent decision after the Hall Street decision, the California Supreme Court permitted a challenge to the arbitrator’s award on grounds of errors of fact and conclusions of law, in a dispute involving commissions and improper charges by a television company.
In reaching that conclusion, the California Court noted that the California Arbitration Act allows parties to contract for such heightened judicial review and that the arbitration agreement in the Cable Connection3 case contained a provision that:
“The arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.”
However, even parties to contracts and agreements in California should note that the approach taken by the California Court is questionable under the Federal Pre-emption Doctrine which makes the Federal Arbitration Act exclusive unless all arbitration issues are solely intra-state issues. The California decision presents a confusing and perhaps erroneous decision considering that DIRECTV services cross many State lines. If that case is appealed it may be reversed as in the Hall Street case. The California decision referenced the Hall Street case decision, found that Pre-Emption would be inimical to the Federal Arbitration Act’s primary purpose of enforcing private agreements to arbitrate. Although California has adopted the Revised Uniform Arbitration Act enacted by several states that acknowledges the use of heightened grounds for judicial review of arbitration awards, it is now clear that if the issues being arbitrated are within the interstate Commerce definition, the Federal Arbitration Act “Trumps the State law.” Therefore, in order to avoid problems in trying to challenge an arbitration award, it is important to note that although many states have adopted the Revised Uniform Arbitration Act, in doing so they have modified its provisions to conform to the Federal Arbitration Act.
As a result, it is important for parties to commercial contracts in the hospitality field to be aware of these differences in order to be able to rely on the arbitration provisions they have bargained for.4
Since, as we have noted that if the arbitration provisions to be placed in an agreement do not provide sufficient comfort because a challenge to an arbitrator’s award may not be based on erroneous conclusions of law or facts unsupported by evidence, a possible alternative would be to include a provision in the agreement for mediation of any dispute. Such provisions typically state that any dispute shall be submitted to non-binding mediation within a stated period of time before any other proceedings such as litigation or arbitration are attempted. Statistics show that approximately eighty percent of such mediations are successful.
1 .Hall Street Associates, L.L.C. v. Mattel, Inc, No. 06-989, 2008 WL. 762537
2 9 U.S.C.Sec. 1 et seq., 9 and 10
3 Cable Connection, Inc. v. DIRECTV, Inc. No. S147767, 2008 WL, 3891556
4 Va.Code, 8.01-581.01
