My last post explained the increased risks of arbitration due to the U.S. Supreme Court’s recent holding in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008) (“Hall Street”), which greatly limits a court’s ability to protect you from an erroneous arbitration decision. The Supreme Court did this by ending the long-standing practice that allowed courts to vacate (reject) arbitration decisions that show a “manifest disregard” of the law. Hall Street only applies to arbitrations involving interstate commerce, which are governed by the Federal Arbitration Act (“FAA”).
Hall Street does not mean that you should avoid arbitration. It does mean that you must control the arbitration process as much as possible, to increase your chances of ending up with a good and reasoned arbitration decision–since you will likely be stuck with it, even if it is wrong. Here are some pointers:
(1) CLARIFY THAT AN ARBITRATION DOES NOT INVOLVE INTERSTATE COMMERCE (IF YOU CAN): Hall Street only affects arbitrations governed by the FAA, which means arbitrations that involve intERstate commerce. Local, intRAstate arbitrations are governed by state arbitration codes, such as the Georgia Arbitration Code. Many of these state codes, including Georgia’s, permit courts to do what Hall Street prohibits–vacate arbitration decisions that show manifest disregard of the law. While the inter- / intra- state nature of a dispute will ultimately be dictated by a court’s view of the facts, parties can increase the chance that a court will not apply the FAA (and, therefore, the holding in Hall Street) by stressing the local nature of an arbitration in their arbitration clause or agreement. For example, parties can recognize in a “whereas” clause that a potential dispute involves only intrastate issues and does not involve interstate commerce.
(2) PROVIDE FOR THE SELECTION OF AN EXPERIENCED, COMPETENT, AND IMPARTIAL ARBITRATOR OR PANEL OF ARBITRATORS: Because Hall Street means you will likely be stuck with whatever decision results from an arbitration, it’s crucial that you have a good arbitrator. Do this by avoiding arbitration clauses or agreements that leave arbitrator-selection entirely to chance or to some other body, such as an arbitration association. Instead, use a process that, for instance, allows each party to select an arbitrator, and, if the parties cannot agree, have their choices make the decision. Also consider requiring a panel of three arbitrators to preside over important, high-stakes disputes, so that at least two have to agree on any ruling. Although three arbitrators are more costly than one, the added expense can be much cheaper than having to deal with a fickle, incorrect decision issued by a single arbitrator.
(3) USE A DEFINITE, KNOWN SET OF ARBITRATION RULES: Many lawyers draft arbitration clauses and agreements that simply adopt a particular set of rules–such as the American Arbitration Association’s Commercial Arbitration Rules (the “Rules”). Don’t do this. A set of rules can change, sometimes unfavorably, and by adopting a set of rules, you necessarily adopt future changes to them. For example, some have been unpleasantly surprised to learn that unanticipated changes to the Rules caused them to forfeit their right to have a court, rather than an arbitrator, decide whether a dispute comes within the scope of an arbitration clause. Although judges typically make this decision, parties can instead agree to have an arbitrator make that call by giving the arbitrator the power to determine his or her own jurisdiction. Because the Rules have been changed to let an arbitrator determine his or her jurisdiction, courts have held that adopting the Rules constitutes a waiver of the right to have a court make that threshold determination. See, e.g., Terminix Int'l Co. LP v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1332-1333 (11th Cir. 2005). Instead, the better practice when drafting an arbitration clause or agreement is either to reference a known set of rules as they exist on a certain date, or to defer the choice of rules until the time of an arbitration, to be selected by the parties, or by the arbitrator if the parties cannot agree.
(4) REQUIRE A DETAILED WRITTEN ARBITRATION DECISION: As common sense would suggest, it’s easier to prove to a court that an arbitrator made a serious error in a decision if the arbitrator explains in detail how and why he reached his decision. Likewise, it’s much more difficult to prove an error in an incorrect decision that says nothing more than “party X must pay $Y to party Z.” Don’t let this happen. Make sure your arbitration clause or agreement requires the arbitrator to write a detailed, reasoned decision that states the legal and factual basis for the decision.