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Overview

In Hall Street Associates v Mattel Inc, 552 U.S. 1 (2008) the US Supreme Court held that parties to an arbitration agreement cannot agree to expand the grounds for judicial review to permit review of the award for an error of law.

Background

The petitioner, Hall Street Associates LLC (Hall Street), leased commercial manufacturing premises to the respondent, Mattel Inc (Mattel). Mattel agreed to indemnify Hall Street for any costs arising from Mattel’s failure, or that of its predecessors, to obey environmental laws. Tests of the property’s water revealed high levels of contamination caused by Mattel’s predecessors. Mattel terminated the lease. Hall Street brought an action against Mattel, disputing the validity of the termination, and claiming that Mattel was obliged to indemnify it for clean-up costs. Mattel’s termination was upheld by the District Court. After an abortive attempt at mediation, the parties agreed to arbitrate the indemnity issue. The arbitration agreement provided that a Court could vacate, modify or correct any award where:

• the arbitrator’s findings of facts are not supported by substantial evidence, or
• the arbitrator’s conclusions of law are erroneous.

The decision

The grounds of review under the Federal Arbitration Act 9 USC §1 et seq (the FAA), permit review where there has been an “egregious departure from the parties’ agreed upon arbitration”. The majority of the Court concluded, based on a textual analysis of the provisions of the FAA, that the statutory grounds of review at sections 9 to 11 of the FAA were exclusive.

The statute provided “no textual hook” for expansion, and did not authorise the parties to the arbitration agreement to “supplement review for specific instances of outrageous conduct with review for just any legal error”. Hall Street argued first that, beyond the provisions of the FAA, the award could be set aside for “manifest disregard” of the law. The submission relied on the Court’s decision in Wilko v Swan 346 US 427 (1953), where it stated that “interpretations of the law by the arbitrators in contrast to manifest disregard are not subject…to judicial review for error in interpretation.” The non-statutory test of “manifest disregard” had been recognised in several decisions of lower courts. Nonetheless, the Supreme Court rejected Hall Street’s submissions as arguable at best, finding that Wilko v Swan did not give rise to a non-statutory ground of review.

Hall Street then argued that to uphold the parties’ agreement would be consistent with the underlying policy of the FAA — it argued the FAA was “motivated, first and foremost, by a congressional desire to enforce agreements into which the parties ha[ve] entered.” Although the Court acknowledged the flexibility afforded to parties to tailor many features of their arbitration, the words of sections 9 to 11 FAA carried “no hint of flexibility”, and were not at all “malleable”. Accordingly, the provisions reflected “a national policy favouring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway”. The dissenting opinions accepted Hall Street’s policy-oriented arguments, and considered that a refusal to enforce the arbitration agreement defeated the primary purpose of the FAA.

Conclusion

What impact the decision of the US Supreme Court might have in due course on the willingness of commercial parties to submit to arbitration remains to be seen. Amicus curiae for Hall Street submitted that the Court’s refusal to uphold expanded grounds of review may lead parties to shy from arbitration; whereas, predictably, Mattel’s amici advanced the opposite view. The Court did not give its opinion on the matter. Regardless, the decision certainly bolstered the certainty and finality of arbitration under the FAA. Clearly, added certainty and finality makes arbitration more attractive to some parties. Indeed, Switzerland’s Supreme Court has recently confirmed a party’s right to completely waive judicial review of an award. For others however, an appeal process is important. Whatever the parties’ preference, this decision suggests that the FAA might usefully be modified to allow more scope for party autonomy and allow sophisticated parties to agree to expand the grounds of review of their awards if they wish. This case also overruled previous Federal Court authority in La Pine Technology that expansion of the grounds for review was permissible.