Expanding the Grounds for Vacating an Arbitration Award

Almost exactly 15 years ago, in Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), the U.S. Supreme Court held that, in cases governed by the Federal Arbitration Act (FAA), section 10(a) provides the “exclusive” grounds on which to vacate an arbitration award. As section 9 states, a court must grant a motion to confirm the award unless the award is vacated or modified “as prescribed in sections 10 and 11.” Although arbitration is a matter of contract, in which parties may agree on the contours of their arbitration, the Court dismissed arguments that parties could vary the terms of section 10 by agreement: “There is nothing malleable about ‘must grant,’ [in section 9] which unequivocally tells courts to grant confirmation in all cases, except when one of the ‘prescribed’ exceptions applies.” That said, the Court recognized that parties may find themselves in arbitration by “avenues” other than the FAA and, thus, it remanded and made no comment on the effect of such other avenues if applicable. Notably, the parties’ contract in Hall provided that a reviewing court must deny confirmation if the award was based on an error of law.

Two years later, the Third Circuit stated in dictum that in an international arbitration governed by the New York Convention, parties, through “clear intent,” might be able to agree that awards could be judicially reviewed for legal error, but it held that the FAA standards applied to that particular case. Ario v. Underwriting Members of Syndicate 53 at Lloyds, 618 F.3d 277 (3d Cir. 2010). Federal district courts in the Third Circuit have followed Hall by holding that one cannot avoid the FAA standards by generally selecting Delaware law to govern the parties’ contract, see Markdutchco 1 B.V. v. Zeta Interactive Corp., 411 F. Supp. 3d 316 (D. Del. 2019) (N.Y. Convention and FAA applied by operation of law), aff’d., Nos. 19-3845, 20-2824, 2021 U.S. App. LEXIS 23673 (3d Cir. Aug. 10, 2021) (not precedential), or by arguing that New Jersey law applied when the parties’ AIA contract said that the FAA “shall govern.” See M&M Dev., LLC v. Watts Restoration Co., Civil Action No. 21-cv-09274, 2022 U.S. Dist. LEXIS 199434 (D.N.J. Nov. 2, 2022). Whatever it might mean to supplant or supplement the FAA vacature standards by “clear intent” per Ario, the facts in those latter cases did not suffice.

And, indeed, in the precedential opinion in Strickland v. Foulke Mgmt. Corp., __ N.J. Super. __, No. A-0455-21, 2023 N.J. Super. LEXIS 21 (Super. Ct. App. Div. Mar. 3, 2023), the appellate division held that Hall foreclosed the possibility of expanding judicial review by so stating in an arbitration agreement when that agreement explicitly adopted the FAA.

The plaintiff in Strickland bought a used car from a dealership owned by defendant Foulke Management and claimed that she was a victim of a bait and switch and various other statutory and common law violations. The free-standing arbitration agreement that governed the credit and other aspects of the transaction stated that the FAA would apply to any arbitration and that

The arbitrator shall render his/her decision only in conformance with New Jersey law. If the arbitrator fails to render a decision in conformance with New Jersey law, then the award may be reversed by a court of competent jurisdiction for mere errors of New Jersey law. A mere error is the failure to follow New Jersey law.

An “error of law” is not one of the reasons given in the FAA for vacating an award, but it was particularly important here, because the selling documents provided for shortened “limitations” periods supplanting the limitations otherwise applicable under New Jersey law. Foulke evidently believed that these shortened periods, though harmful to buyers, would be upheld in the New Jersey courts.

The arbitrator found that the shortened periods were not unconscionable and, in any case, the facts did not support the plaintiffs’ claims. When plaintiff petitioned the trial court to vacate the award in defendant’s favor, she argued that the above-quoted language applied and, because the limitations periods were contrary to New Jersey law, the award must be vacated. Foulke found itself in the awkward position of arguing that the “error of law” language it had inserted in the contract was not enforceable because it was inconsistent with the FAA and violated the law as set out in Hall. The trial court agreed, as did the appellate division. Oddly, the plaintiff did not argue that Foulke should be estopped from arguing that its own “error of law” contract term was unenforceable, and the appellate division pointedly noted that it could not comment on an argument not raised by the parties.

The clear rule provided to New Jersey litigants by Strickland is welcome. Together with the trial and appellate cases in the Third Circuit noted above, parties and courts have specific guidance applying Hall and the FAA to particular fact patterns. However, Strickland leaves one uncertain about its limits. Yes, contract language alone will not override the dictates of section 10(a) of the FAA, per Hall, but it remains unclear whether parties may still, by “clear intent,” agree to expand the judicial review of awards when the parties have not contractually adopted the FAA. For example, may they show “clear intent” in an interstate contract by adopting the New Jersey Revised Uniform Arbitration Act and its safe harbor in N.J.S.A. 23B-4(c)? Or is the exception in Hall and Ario only applicable to court-ordered arbitration (as suggested by Hall) or international arbitration governed by the standards of the New York Convention?