The Crumbled Difference Between Legal and Illegal Arbitration Awards: Hall Street Associates and the Waning Public Policy Exception

I. INTRODUCTION Imagine that A, the governor, and B, an individual, entered into an agreement whereby B paid A $2,000,000 in exchange for A exercising his governmental power to appoint B to a top government position.1 Imagine further that A and B then reduced the agreement to a writing that contains an arbitration provision. Subsequently, A breaches the agreement by failing to appoint B. Thereafter, an arbitrator awards B damages for the breach. Consider, perhaps, a more likely scenario. Imagine that two individuals A and B get a divorce and a family court orders A to pay B $2,000 per month in alimony. Subsequently, A and B agree that A will pay B $100 in alimony per month, in contravention of the court order, in exchange for A's not informing the court of 5's criminal activity. Imagine further that the agreement contains an arbitration clause, B seeks arbitration of the agreement, and an arbitrator finds that the agreement is binding, thus reducing the amount of alimony ordered by the court. As a matter of ordinary contract law, neither of these contracts is enforceable in any court, as both are illegal and thus violate what is commonly known as the public policy exception, a judicial construct prohibiting courts from enforcing illegal contracts or contracts that, while not illegal per se, are against public interests.2 Furthermore, at least until recently, neither arbitration award would be enforceable either, as courts would apply the same principle to invalidate the awards.3 Last year, the United States Supreme Court decided Hall Street Associates.* In this case, the parties entered into a commercial lease that included an arbitration provision. The arbitration provision permitted a reviewing court5 to vacate the decision of the arbitrator on grounds not included within the Federal Arbitration Act ("FAA"6).7 Applying a strict plain meaning analysis, the Court held the review provisions of the FAA were "exclusive," and the phrase "must grant" within section 9 "unequivocally tells courts to grant confirmation in all cases, except when" the FAA explicitly provides a method for vacatur in section 10.8 Thus, the Court held that vacatur is permitted only on the basis of procedural irregularities such as fraud, corruption, bias, and exceeding contractual powers.9 While the Hall Street Associates holding did not specifically mention the public policy exception, the Court's reasoning invariably questions its continued existence in the context of arbitration awards, as the FAA does not include a "void against public policy" standard.10 Furthermore, because the public policy exception is a creature of the common law,11 the FAA's provisions are in derogation of it. This Article argues that the Hall Street Associates opinion has displaced the public policy exception in the context of enforcing arbitration awards, and that displacement offends traditional notions of Lockean social contract theory. 12 This Article further argues that the courts - as a corollary of their duties under the social contract - should adopt the public policy exception as an additional ground for vacatur under the FAA deriving from their inherent social contract powers. Part II of this Article discusses the historical roots of arbitration and the courts' traditional aversion to enforcement of arbitration awards. It further discusses the advent of the FAA as a means to counter the former judicial aversion to arbitration and provides a brief discussion of the FAA's component parts, specifically discussing the statutory bases for vacatur under the FAA. Part III then discusses the creation of the public policy exception, first examining its roots in Lockean social contract theory and then discussing its subsequent development in the arbitration context by the Supreme Court's decisions in Hurdn and Grace.14 Part IV discusses Hall Street Associates, providing a brief historical background of the case and outlining the Court's strict plain-meaning reasoning. …