Prior to 1925, judges frequently exhibited their hostility toward arbitration by only reluctantly—if at all—enforcing arbitration clauses in contracts. It was in 1925 that Congress passed the Federal Arbitration Act (FAA) which is now our principal federal statute dealing with arbitration. The FAA was the genesis of a new national policy favoring arbitration as a method of dispute resolution. It accomplishes this by mandating enforcement of arbitration agreements in transactions “involving commerce” as follows:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
The FAA contains sanctions to ensure that covered arbitration agreements are enforced according to their terms:
First, courts are authorized to stay litigation instituted with respect to a matter covered by a valid arbitration clause;
Second, if one bound by an arbitration agreement refuses to arbitrate, the FAA authorizes the court to grant the aggrieved counter-party an order compelling arbitration; and
Third, if the parties have so agreed, judgment may be entered on an arbitral award, giving the prevailing party access to the collection remedies available to judgment creditors.
The FAA espouses an appellate policy founded on the concept that efficiency is a primary aim of the FAA. Accordingly, judicial vacatur of arbitral awards is quite limited. In fact, the FAA provides only four grounds for vacatur:
1. Procurement of the award by corruption, fraud, or undue means;
2. Evident partiality or corruption on the part of the arbitrators;
3. Misconduct on the part of the arbitrator in refusing to postpone the hearing or in refusing to hear pertinent evidence or misbehavior prejudicing rights of a party;
4. The arbitrators exceeded or imperfectly executed their powers.
Grounds for vacatur are interpreted narrowly. Few challenges are successful. It is axiomatic that mistakes of law or fact by the arbitrator are insufficient to support the setting aside of an arbitral award. Some courts recognize a limited number of common law bases on which awards may be set aside. These include circumstances in which the arbitral award is “in manifest disregard of the law,” “contrary to public policy,” “irrational” or “arbitrary and capricious.”
Litigation seeking to set aside arbitration awards has increased. These efforts have been founded on one of the few enumerated bases under the FAA or one of the judicially created bases. This increase has not gone unnoticed. A number of courts have expressed concern. In 2007 the Eleventh Circuit Court of Appeals, in B.L. Harbert International, LLC v. Hercules Steel Co., threatened to issue sanctions against parties and their lawyers who challenge arbitration awards without a “substantial basis.”
Many states have adopted Uniform Arbitration Acts. Next time we will look at how these state statutes interact with the sometimes conflicting provisions of the FAA.
Note: The articles in this series dealing with arbitration were adapted from an article written by Stanley A. Leasure and Wayne L. Anderson entitled Arbitration in Arkansas: A Legal Primer, which appeared in The Arkansas Lawyer, 43 Ark. Law. 14 (2008).