Mayhew-Hite Report        Curbing the Runaway Arbitrator in Commercial Arbitration: Making Exceeding the Powers Count

Christian George

Arbitration is a useful and efficient dispute resolution process available to parties who engage in commercial transactions. But business reliance on arbitration has recently been on the decline. The increasing perceived risk of “arbitrator compromise and the inability to appeal adverse arbitration awards to court” are factors driving the decline in reliance on arbitration.[1] The fear of an arbitrator making an unexpected decision has caused many businesses to forgo the benefits of arbitration and use less effective dispute resolution methods. Professor Sarah Rudolph Cole proposes a solution to ease the uncertainty many business leaders in her article Curbing the Runaway Arbitrator in Commercial Arbitration: Making Exceeding the Powers Count. Cole proposes changing the standard of review for arbitrator decisions to a clear and unmistakable standard requiring arbitration on issues that the parties clearly and unmistakably indicate they wish to arbitrate[2] and then using the judicial review process to ensure that the parties’ wishes are respected.  Limiting deference to the arbitrator in these situation should allay the fear of the “runaway arbitrator.”[3]

Professor Cole begins her article by discussing the origins of arbitration. Placing arbitration in its historical context, she is able to focus on arbitration’s purpose. Cole claims that arbitration arose out of the need for businesspeople to find quick solutions to minor disputes in accordance with customary norms.[4] The end goal was to allow merchants to have the “swift results the parties desired” through a mechanism that was self-enforcing because of the merchants’ desire to maintain their reputations and preserve business relationships.[5] The “informal marketplace sanctions” that are enforced through the need to have business relationships became less effective as economic markets began to expand and commerce grew, bringing with it increased impersonal business deals. The increase in impersonal business relationships led to a business marketplace that required legislative action to protect business dispute resolution choices.[6]

It was through this legislative action that the courts became involved in reviewing arbitrator decisions, but this legislative action also brought with it the principles of deferring to the arbitrator’s decision. The practice of deferring to the arbitrator’s decision was established to protect party autonomy in their ability to create the arbitral system that best fits the needs of the parties’ relationship.[7] Yet, prioritizing party autonomy was made secondary to the Supreme Court’s desire to promote arbitration’s ability to promote finality in the controversy.[8] The Court’s holding in Hall Street Associates v. Mattel, Inc. led many in business to fear that they would not be able to properly obtain judicial review of a decision by a “runaway arbitrator.”[9] Cole proposes her heightened review standard as a means to push against the uncertainty that prompted many commercial parties to flee arbitration.

The first problem prompting commercial parties to lose trust in arbitration is the Hall Street holding that weakened an arbitration party’s ability to control the arbitrator’s ability to ward a remedy. Empirically, it is quite rare for a court to step in and vacate a decision even when the arbitrator was explicitly limited in her authority via the parties’ arbitration clause.[10] Cole argues that when arbitrators fail to comply with the parties’ explicit directives, courts should not merely “rubber stamp the arbitrator’s decisions,” but should step in to ensure that the parties’ explicit terms and limitations are enforced.[11]

Professor Cole argues that the runaway arbitrator problem can be fixed if  courts can step in when the arbitrator does not follow what the parties clearly and unmistakably agreed to in structuring their arbitration. If the parties agree to clearly and unmistakably limit the arbitrator’s authority, then, as long as the limitations are neither unconscionable nor vague, a court, on review, should vacate the award if the arbitrator ignored the limitations.[12] This standard of review, allows a party objecting to an arbitrator’s decision to have recourse that was otherwise foreclosed upon in Hall Street.

The second problem that has led to uncertainty in arbitration is the difficulty parties have in choosing which state law should govern the arbitration. Similar to arbitrator remedial authority, courts inconsistently enforce choice of law provisions in arbitration agreements.[13] The Supreme Court in Mastrobuono v. Shearson Lehman Hutton, Inc. reviewed an arbitration decision that contained a choice of law provision establishing New York law as the governing law to be applied in the arbitration.[14] Despite this clear and unmistakable provision the parties agreed to, the Court deferred to the arbitrator’s decision to apply only New York substantive law and apply the procedural law of a different state.[15]

The Court’s deference to an arbitrator acting in direct conflict with the established agreement of the parties is contrary to the fundamental aspect of arbitration as a dispute resolution tool that the parties created.[16] Courts should only refuse to enforce the parties’ choice of law if that choice of law conflicts with the prime directive of the Federal Arbitration Act.[17] The current precedent as articulated in Mastrobuono requires parties to explicitly state that they wish both the procedural and substantive law of a particular state to apply when choosing to make a choice of law provision.[18] Cole states this requirement is redundant and overly burdensome.[19]

The solution is the same option Cole proposes to prevent overreach of an arbitrator’s remedial power: apply a clear and unmistakable standard.[20] This standard, similar to remedial power abuse, would allow a court to vacate an arbitration decision that the court determined violated the parties’ directives.[21] This eliminates the redundancy requiring parties to state whether the choice of law provision applied to substantive or procedural issues, but would simply take the parties at their word, unless there is a question about whether or not the parties agreed to a particular choice of law.[22] If an arbitrator applied New York procedural law to a directive agreeing to apply Ohio law, the reviewing court should vacate the decision as a violation of the arbitration directive.

Professor Cole proposes a real solution that can bring about greater certainty and will protect against current risks of runaway arbitrators. Asking courts to use a clear and unmistakable standard to review arbitrator decisions in the face of explicit remedial limitations or choice of law provisions, will ensure that parties are protected from rogue arbitrators. The increased certainty in arbitration will allow businesses to once again trust arbitration and continue to use it as an effective dispute resolution method.

[1] Sarah Rudolph Cole, Curbing the Runaway Arbitrator in Commercial Arbitration: Making Exceeding the Powers Count, 68 Ala. L. Rev. 179, 180 (2016).
[2] Id. at 215.
[3] Id. at 223–24.
[4] Id. at 186–87.
[5] Id. at 187–88.
[6] Id. at 188.
[7] Id. at 189–90.
[8] Id. at 195.
[9] Id. at 194–95 (citing Hall Street Associates v. Mattel, Inc., 552 U.S. 576, 586 (2008)).
[10] Id. at 198.
[11] Id. at 203.
[12] Id. at 214.
[13] Id. at 205.
[14] Id. at 205–06.
[15] Id. at 206–07.
[16] Id. at 207–08.
[17] Id. at 208.
[18] Id. at 209.
[19] Id. at 208.
[20] Id. at 215.
[21] Id. at 221–22.
[22] Id. at 220, 223.