So Wrong and Still Right (Enough) – The Challenges of Setting Aside an Arbitral Award

The grounds to challenge an arbitral award are intentionally limited by the Federal Arbitration Act (“FAA”), which is mirrored by the Revised Uniform Arbitration Act followed by many states. Under the FAA, arbitral awards can be challenged by asserting that the arbitrators either exceeded their authority or so imperfectly executed their authority that a mutual, final, and definite award was not made. 9 U.S.C. § 10(a). Additional bases are arguably more straightforward, and include the following:

1. award procured by corruption, fraud or undue means,
2. evident partiality or corruption by the arbitrators, and
3. arbitrator misconduct which prejudices any party’s rights. Id.

The majority of contracts include arbitration terms granting the arbitrator wide contract interpretation discretion. Arbitrators are limited by the contract terms defining the issues subject to arbitration while often simultaneously granted wide contract interpretation power. Courts have consistently found the parties to an arbitration are bound by the deal they bargained for — the arbitrator’s interpretation of the contract and terms at issue — and courts may not usurp that power. Hidroeléctrica Santa Rita S.A. v. Corporación AIC, SA, 119 F.4^th 920, 2024 WL 4500962 (11th Cir. Oct. 16, 2024).

As a word of caution in arbitration practice, recent opinions among various circuits confirm the ironclad nature of granted arbitral awards, even in the face of conclusive arbitrator error.

1. Arbitrators can incorrectly interpret a contract term and still be within their contractual authority. A recent Eleventh Circuit examined whether the FAA statutory ground for vacatur that the arbitrators exceeded their authority provided a basis to vacate the arbitral award at issue. The court concluded that it did not. The Court noted: “[e]ven if the Tribunal erred in its analysis of the contractual language, it makes no difference . . . as long as the Tribunal construed and applied the underlying contract.” Hidroeléctrica, 119 F.4th 920, 2024 WL 4500962, at *3 (citations and quotations omitted). The court explained that when a party challenges an arbitral award on this basis, the court’s role is limited to evaluating whether the tribunal “even arguably constru[ed] or appl[ied] the contract,” which is sufficient. Id. (citing United Paperworkers v. Misco, 484 U.S. 29, 38 (1987)). Put differently, the simple fact of explaining the contract interpretation is deemed sufficient, even if the interpretation is provably wrong.

This concept extends to the definition of the claims presented to the arbitrator, even if the claims are not contained in the pleadings and are contrary to the parties’ contentions. Arbitral authority to make such findings lies in evidence presented in the arbitration and presumed to be submitted to the arbitrator by consent. In one such instance, an arbitral award making a finding of joint and several liability — which was not a claim presented in the pleadings — was still upheld. CL Costa, Inc. v. Adcock Development, LLC, No: 04-23-00475-CV (Ct. App of Texas, 4th Dist., San Antonio, July 31, 2024, https://casetext.com/case/cl-costa-inc-v-adcock-dev-1) (“In this case we cannot say any alleged failure to expressly plead joint and several liability . . . somehow diminished the arbitrator’s authority to assess full [joint and several] liability[]”).

Courts across circuits have affirmed this position, stating “[a] dispute ‘need only touch matters covered by the contract . . . for the court to resolve all doubts in favor of arbitration.’” E.g., CMB Infrastructure Group IX, LP v. Cobra Energy Investment Finance, Inc., No. 2:21-CV-00214-CDS-DJA (D. Nev. Oct. 15, 2024) (quoting Operation: £Heroes, Ltd. V. Procter & Gamble Prods., Inc., 903 F. Supp. 2d 1106, 1119 (D. Nev. 2012)).

The takeaway here is that the bar is low. If the arbitrator reaches even a colorable interpretation of the contrac,even if that interpretation is wrong,the award will very likely stand.

2. The FAA also does not permit judicial review of arbitrators’ erroneous application of law. Similarly, the Tribunal’s evidentiary findings of fact will not be disturbed, even if wrong. See, e.g., Sanchez v. Elizondo, 878 F.3d 1216, 1221 (9th Cir. 2018) (quoting Kyocera Corp. v. Prudential-Bache Trade Servs., 341 F.3d 987, 997 (9th Cir. 2003) (“For a tribunal to exceed its power, it must not have ‘merely interpret[ed] or appl[ied] the governing law incorrectly.’”)). The erroneous legal application bar is high (and therefore rarely successful) - the award must be “completely irrational,” or exhibit a “manifest disregard of law.” Kyocera Corp., 878 F.3d at 1221-22 (emphasis added). "

“When a party seeks to vacate an arbitration award by reason of an arbitrator exceeding their power, ‘the inquiry looks only to whether the arbitrator had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue, and does not consider whether the arbitrator decided the issue correctly.’” MSV Synergy, LLC v. Shapiro, No. 1:21-CV-07578-ER (S.D.N.Y. Dec. 2, 2024) (citing Seed Holdings, Inc. v. Jiffy Int’l AS, 5 F. Supp. 3d 565, 586 (S.D.N.Y. 2014)). It is only when “‘the arbitrator acts outside the scope of his contractually delegated authority . . . may a court overturn his determination,’” even if the arbitrator makes a legally incorrect finding. MSV Synergy (citing Seed Holdings, 5 F. Supp. 3d at 586).

In examining the arbitrators’ interpretation of the federal Foreign Corrupt Practices Act, the Eleventh Circuit underscored judicial review limitations, stating, “[t]he Tribunal’s interpretation of the FCPA may be legally erroneous . . . but our review under §10(a)(4) does not allow us to ‘sit to hear claims of . . . legal error by an arbitrator.’” Hidroelectrica at *12; see id. (quoting Paperworkers, 484 U.S. at 38 (“a court may not reject those findings simply because it disagrees with them.”)).

A challenging party must show “something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand and apply the law” to successfully challenge an award. HayDay Farms, Inc. v. FeedX Holdings, Inc., 55 F.4th 1232, 1240 (9th Cir. 2022). Specifically, “[t]here must be some evidence in the record, other than the result, that the arbitrators were aware of the law and intentionally disregarded it.” Id. at 1241 (emphasis added). “’Arbitrators need not provide reasons for their findings, but are presumed to have applied the law appropriately.” CMB Infrastructure Group IX, LP v. Cobra Energy Investment Finance, Inc., No. 2:21-CV-00214-CDS-DJA (D. Nev. Oct. 15, 2024) (quoting LaTour v. Citigroup Glob. Mkts., Inc., 544 F. App’x 748, 749 (9th Cir. 2013)). “Review of an arbitration award is so limited that even a mistake of law or fact by the arbitrator in the application of substantive law is not a proper ground for vacating an award.” CL Costa, Inc. v. Adcock Dev., No: 04-23-00475-CV (Ct. App of Texas, 4th District, San Antonio, July 31, 2024).

Understanding this extreme deference is critical for a parties’ presentation at the hearing, because judicial review presumes the arbitrator has applied the law correctly, even when the award reflects a legally erroneous result. The only avenue to challenge such an award is when it is “‘clear from the record that the arbitrators recognized the applicable law and then ignored it .’” CMB Infrastructure Grp. IX v. Cobra Energy Inv. Fin., 2:21-cv-00214-CDS-DJA, *9 (D. Nev. Oct. 15, 2024) (quoting LaTour v. Citigroup Glob. Mkts., Inc., 544 Fed. Appx. 748, 749 (9th Cir. 2013)(emphasis added)).

3. Perhaps most surprisingly, a Tribunal’s contract interpretation will not be disturbed even if an interpretation error is the result of the arbitrator affirmatively misreading the contract or applicable law.

“While the arbitrator ‘may not ignore the plain language of the contract,’ a reviewing court ‘should not reject [the] award on the ground that the arbitrator misread the contract.’” Caremark, L.L.C. v. New York Cancer & Blood Specialists, 740 F. Supp. 3d 340, 363 (S.D.N.Y. 2024) (quoting Paperworkers, 484 U.S. at 37-38). It is difficult to square how an award which reflects that the arbitrators misread the contract somehow does not ignore the plain language of the contract . However, this principle underscores the nearly immutable nature of arbitral awards. As the Supreme Court has explained, “[b]ecause the parties have contracted to have disputes settled by an arbitrator chosen by them rather than by a judge, it is the arbitrator's view of the facts and of the meaning of the contract that they have agreed to accept.” Misco, 484 U.S. at 37-38 (emphasis added).

As for misreading the law, recent decisions affirm strong deference to the arbitrators’ decision, with no avenue for judicial review even if the applicable law is misread or even overlooked, meaning entirely not considered. See Caremark, L.L.C. v. New York Cancer & Blood Specialists, 740 F. Supp. 3d 340, 359 (S.D.N.Y. 2024) (citing Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d Cir. 2003)).

Practice Points

The key takeaway is that the beginning of arbitration planning should recognize where it may end. Development of the arbitral record with the backdrop of very limited judicial review is critical. Given that a reviewing court may only consider the arbitral record submitted — not the arbitral record as it exists — the parties define the limited record and therefore the lens for review.

Parties have power at two stages.

1. The first is at the contract drafting stage where the parties define the scope of the arbitrators’ authority. The contract is the arbitration roadmap, guiding evidence development and outlining the arbitral hearing presentation. While it is impossible to account for every iteration and path to potential findings, the importance of clearly defining the arbitral scope, and the governing and applicable law at the contract drafting and initial arbitration stage cannot be overstated. This is especially so because the burden is on the party seeking to vacate the award to demonstrate the FAA basis for vacatur (e.g., show that arbitrator exceeded his authority). Eletson Holdings, Inc. v. Levona Holdings Ltd., 731 F. Supp. 3d 531, 581 (S.D.N.Y. 2024) (citing Smarter Tools Inc. v. Chongqing SENCI Import & Export Trade Co., Ltd., 57 F.4th 372, 378 (2d Cir. 2023)).

2. The second is through carefully developing the hearing record with an eye towards challenging an award. Parties must remain vigilant, keeping track of what makes its way into the recor (planned or no)and clearly state objections or clarifications to define the issues presented for determination. An example of successful implementation of this practice is in McEachern v. E.R.J. Insurance Group, Inc., 23-13298 (11th Cir. Jan. 31, 2025). ThT dispute arose out of a contract the parties entered into about commission payments Allstate allegedly owed to Blue Dealer Inc. The district court vacated the arbitral award, in part because the arbitration was not carried out in accordance with the contract’s arbitration procedural requirements. Id. On review, the Eleventh Circuit affirmed vacatur of an award due to deviation from the contractual parameters of the arbitration because “[the defendants] clearly and repeatedly objected at virtually every critical point to the composition of the arbitration panel.” Id. The Eleventh Circuit recognized “[t]his simply was not a situation where [the plaintiff] sat idle throughout the arbitration process, thereby waiving its objections.” Id. The Eleventh Circuit affirmed based on this violation of the contractual language defining the scope of arbitration alone. It was defendants’ vigilance and strict adherence to the arbitration contract that equipped the Court to confirm vacatur of the award.

Given arbitral awards will only very rarely be disturbed, propping up the bases for challenging an award is essential.