- defining the scope of permissible judicial review expressly within the parties’ agreement,
- creating an “appellate” review of the arbitration award within the arbitration itself, and
- further innovations in challenging awards in court based on current statutes or on principles of common law.
The first of these three innovations has not always been successful, as courts have held that the parties’ freedom of contract does not extend to modifying the statutes (such as the Federal Arbitration Act) that codify the extent of judicial review of awards. See, e.g., Kyocera Corp. v. Prudential-Bache Trade Serv., 341 F.3d 987 (9th Cir. 2003); Bowen v. Amoco Pipeline Co., 254 F.3d 925 (10th Cir. 2001). The second innovation is available to participants in arbitration, as seen, for example, in the American Arbitration Association’s Optional Appellate Arbitration Rules or in JAMS’s Optional Arbitration Appeal Procedure. However, the creation of an internal level of appellate review within the arbitration system serves to duplicate the features of litigation, reducing the incentives to select arbitration as a process that may allow for a quicker, less expensive resolution of disputes. The third innovation—the development of merits-based challenges to arbitration awards within the process of judicial review—illustrates the problem facing participants in the arbitration process: At present, the judicial review of arbitration awards involves a tension between competing legal principles at work in sorting out the proper scope of merits-based review of arbitration awards: (1) the principle of freedom of contract (allowing the parties to choose a dispute resolution process that accepts an increased risk for “mistaken” outcomes for the sake of a faster or cheaper resolution) and (2) the principle of enforcing at least the minimal rule of law (including principles of equity and justice) necessary for a rational method of dispute resolution.
This tension is at the heart of every case in which courts find it necessary to reject the enforcement of arbitration awards that have resulted in a misapplication of the substantive law at issue in the dispute. Many cases express this tension. See, e.g., U.S. Soccer Federation, Inc. v. U.S. National Soccer Team Players Ass’n, 838 F.3d 826 (7th Cir. 2016); First Merit Realty Servs., Inc. v. Amberly Square Apartments, L.P., 373 Ill. App. 3d 457 (1st Dist. 2007). As the courts often state, “[j]udicial review of arbitration awards is extremely limited.” Johnson Controls, Inc., Sys. & Servs. Div. v. United Ass’n of Journeymen, 39 F.3d 821, 824 (7th Cir. 1994).
[A] goal of arbitration is to provide the parties with “swift, inexpensive and final decisions,” but “this does not vitiate judicial review of an arbitrator’s decision.” Here, just as the parties agreed to arbitration, they also agreed “to limit the arbitrator’s authority and preserve their right to challenge decisions when the arbitrator had reached out and rendered a decision that stray[ed] beyond his delegated authority and is barred by the negotiated contract.”
U.S. Soccer Federation, Inc., 838 F.3d at 837.
Although it is often recognized that judicial review will not remedy all errors of fact or law inherent in an arbitration award, a certain type of error is reviewable and provides a basis to vacate or modify an award. One acknowledged basis for overturning an arbitration award, found in both the Federal Arbitration Act and the Uniform Arbitration Act, is described under the rubric that the arbitrator “exceeded his or her powers”—and the courts sometimes enforce this principle where the arbitrator fails to adhere to the plain language of the parties’ contract. Indeed, the concept of an arbitrator exceeding his or her powers is itself a broad and undefined concept, which requires judicial construction and invites challenges to the arbitration award’s fact-finding and accuracy of legal analysis—both with respect to procedural and substantive legal principles. In such circumstances, the courts typically root their rejection of the arbitration award in the idea that the error in question (a failure to follow the plain language of the parties’ contract) is special—and calls for judicial review—because the contractual agreement is itself the source of the arbitrator’s power to adjudicate the issue submitted for decision. Id.
Of course, this principle can be hard to apply to specific factual scenarios in a rational and consistent manner, especially when any substantive legal error involving the interpretation of a contract is difficult to distinguish from a failure to apply the plain language of the parties’ agreement. To put it lightly, it is hard to distinguish on principle cases in which an arbitrator has simply misinterpreted the plain language of a contract from cases in which the arbitrator has ignored the plain language of the contract and substituted his or her own view of equity or justice in its place.
It appears that this tension in the law of the judicial review of arbitration awards will remain so long as the courts and legislatures attempt to make room for a truly alternative dispute resolution procedure. Yet, the law regarding the judicial review of arbitration awards is itself evolving into a common-law tradition—as the courts are faced with the task of working out the basic principles of equity and justice that should apply where parties have attempted to opt for a dispute resolution procedure that, although it does not fully participate in the court system, will nevertheless retain basic protections of the rule of law that are necessary to a rational method of dispute resolution.
Keywords: litigation, construction, binding arbitration, freedom of contract, rule of law
Eric Sparks is a partner in the Construction Practice Group and Litigation Practice Group at Gould & Ratner, LLP, in Chicago.