International Commercial Arbitration
The dual benefits of affordability and efficiency of arbitration has well been recognized by the courts and legal experts. The benefits of arbitration may accrue to the parties to the arbitration only based on the finality of the decision of the arbitrator. There are grounds for judicial review of the arbitration awards which are limited in nature as set out in the Federal Arbitration Act and (FAA) several other statutes. The judicial review of the arbitration awards may be of real advantage to some parties while some other parties would try to expand the preset scope of review as provided for in the FAA or other statutes.
Since the process of arbitration between parties is resorted in pursuance of a contractual arrangement, the parties who would like to have more judicial review of the arbitration awards and also an oversight of the awards should take care to include a broad scope of review within the terms of the arbitration agreement itself. It may be noted that the FAA provides for only narrow and limited grounds upon which an arbitration award can be set aside or modified by a court.
Most of the grounds relate to the committing of fraud or corruption by the arbitrator. The broadest basis available for any court reviewing the arbitration award under FAA and most of the state laws, for setting aside or modifying an award is “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made”. In fact most of the state laws governing the arbitration proceedings have put forth similar limitations.
In contrast to the constraints as set out in the FAA and other applicable laws, it is universally agreed that the arbitration is a creature of contract and hence a party is entitled to arbitrate only to the extent provided for in the agreement to arbitrate. Further the arbitration can cover only those issues which have been specifically included in the agreement. Where the parties to the arbitration agreement consent to limit the arbitrator’s power by requiring that the arbitrator to follow and apply the law, the reviewing court would be empowered to set aside the arbitration award only when the arbitrator has failed to follow the law.
This is considered important since the parties can receive rational decisions and awards only when the arbitrators follow law as specified in the agreement. There is an argument that when the arbitrators base their decisions on varying and unidentified standards of fairness rather than following the law, the result would be the passing of irrational awards. Thus it becomes imperative that the parties should freely contract with each other to insist that the arbitrator properly apply the correct and proper legal standards to decide the issue under arbitration.
It was observed by 7th Circuit Court in the case of Watts and Sons, Inc. v. Tiffany & Co that the arbitrator as the mutual agent of the parties may do only what the parties may do. Thus when the parties want the arbitrator to have only few powers then they should specify this in the arbitration agreement. Hence it can reasonably be concluded that the judicial review of the arbitration award by the courts can be undertaken only when it is specifically intended by including the desire to do so in the arbitration agreement.
Arguments in favor of expanding judicial review of arbitration award may be seen in the judgments of several federal courts reviewing and upholding the arbitration awards, where the parties have expanded the judicial review in the arbitration clause. One of the important judgments in this direction is the one delivered by the 4th Circuit Court in the case of Syncor International Corporation v. David L. McLeland . In this case the court upheld an employment arbitration agreement which called for an expanded review of an arbitration award.
The condition contained in the arbitration agreement stated, “The arbitrator shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected by judicial review for any such error”. Even though the clause in the agreement imposes a condition of review on the court much in excess of the authority granted by the FAA, (FAA does not authorize the courts to undertake a full de novo review) the court determined in favor of upholding the judicial review following the decision of the 5th circuit court in the case of GatewayTechs. , Inc. v. MCI Telecoms Corporate.
In the Gateway case the 5th court of appeal held that contractual modification with respect to expanding the judicial review can be enforced to give effect to the intent of the parties. This rationale was followed by the 9th circuit court also in the case of Lapine Tech. Corp. v. Kyocera in which the court decided that the arbitrator’s conclusions of law were erroneous and hence upheld the judicial review. Thus based on the above discussion, while the provisions of the FAA limits the powers of the court to expand the judicial review, the standards set for review can be considered just as the guiding principles.
However from the majority of the decisions of the Circuit courts it appears that the power granted to the arbitrator by virtue of the arbitration agreement shall be the benchmark for enabling the courts in extending their powers to make a review of the arbitration awards. Till date according to a majority of jurisdictions, the parties to the arbitration agreement either through the incorporation of appropriate clauses or through administered arbitration expand the scope of the judicial review otherwise finding a place in the FAA. Applying the above principles as was decided in the case of Syncor International Corporation v.
David L. McLeland and in the Gateway case ABC is in a persuasive position as the arbitration agreement between the parties provide for the expanded review of the arbitration award with special emphasis on the power to the US District Court to vacate or modify the award of the arbitrator in case if the conclusion on laws has been erroneously arrived at. Since the District court found that the arbitration award was incorrect with respect to the question of law it can be inferred that the court had the power to modify the award in favor of ABC. The Court of Appeal has erred in reversing the order of the District Court.
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