The California Arbitration Act provides for extremely limited grounds for challenging an award made in an arbitration proceeding – corruption and misconduct of an arbitrator, for example, or the arbitrator’s exceeding his or her power or prejudicially excluding evidence. Not following the law is not one of those grounds, as the California Supreme Court held in its 1992 decision in Moncharsh v. Heiley & Blase, 3 Cal.4th 1.
Since the Moncharsh decision, parties to an arbitration agreement have on occasion tried to achieve greater predictability by including in the provision a requirement that the arbitrator “follow and apply the law of the State of California.” The logic appears to be that if a court determines that the arbitrator failed to follow the law, the court would be able to find that the arbitrator exceeded the power granted by the arbitration contract. This logic has not been tested in any court decision.
Now the United States Supreme Court has weighed in on the issue. In an opinion issued on March 25, 2008, the Court held that in arbitrations governed by the Federal Arbitration Act, the limited statutory grounds for vacating or modifying an arbitrator’s award (almost identical to those in California) are exclusive. It rejected the argument that parties can contract to expand the grounds for judicial review by allowing a court to vacate or modify an award “where the arbitrator’s conclusions of law are erroneous.” Hall Street Associates, L.L.C. v. Mattel, Inc. (No. 06-989) 76 U.S.L.W. 4168. In reaching this decision, the Court resolved a split in the federal circuits – four circuits had held that parties may contract for expanded judicial review, two (including the Ninth Circuit in the decision under review) that they may not.
The scope of the Federal Arbitration Act is broad – it applies to any contract “evidencing a transaction involving commerce.” Thus most negotiated arbitration provisions are likely to be governed by the Hall decision. Whether the decision will deter parties from agreeing to arbitration – a fear argued in the Hall case — remains to be seen.