Source: https://www.asil.org/insights/volume/12/issue/11/hall-street-assocs-v-mattel-inc-supreme-court-denies-enforcement
Timestamp: 2020-02-28 22:01:51
Document Index: 94182920

Matched Legal Cases: ['§ 10', '§ 10', '§10', '§10', '§10', '§ 9', '§ 9', '§ 10', '§ 10', '§ 9', '§ 10', '§ 5', 'art. 5', 'art. 34', '§ 69', 'art. 192', '§ 22', 'art. 34', 'art. 5', '§ 109', '§ 69']

Hall Street Assocs. v. Mattel, Inc.: Supreme Court Denies Enforcement of Agreement to Expand the Grounds for Vacatur Under the Federal Arbitration Act | ASIL
On March 25, 2008, the United States Supreme Court announced its judgment in Hall Street Assocs. v. Mattel, Inc.,[1] a case involving the exclusivity of the grounds for vacating arbitral awards under the Federal Arbitration Act (FAA). As explained below, the decision holds that the disputing parties may not agree to expand the grounds for vacatur beyond those listed in 9 U.S.C. Â§ 10. However, in rendering its judgment, the Supreme Court left open a number of questions, including the capacity of judges to formulate non-statutory grounds for vacatur, the application of the Courtâs reasoning to judicial review governed by other sources of law, and the application of the Courtâs holding to international commercial arbitrations. More broadly, the decision may signal a departure from one trend and the consolidation of another. For example, if applied to international commercial arbitrations, the decision would be hard to reconcile with recent judicial practice that favors party autonomy over doctrine and statutes designed to restrict the exercise of party autonomy. By contrast, the decision reinforces the Supreme Courtâs tendency to avoid broad pronouncements on commercial matters that would require legislative fine-tuning.
Hall Street Associates (Hall Street) agreed to lease a manufacturing site in Oregon to Mattel, Inc. (Mattel). As part of the agreement, Mattel undertook to indemnify Hall Street for costs resulting from violations of environmental laws by Mattel or its predecessors, who had used the site since 1951. During 1998, tests disclosed that the propertyâs well water contained elevated levels of pollutants caused by the manufacturing discharges of Mattelâs predecessors. After entering into a consent decree with the Oregon Department of Environmental Quality, which provided for a cleanup of the site, Mattel notified Hall Street of its intent to terminate the lease in 2001. Contesting its right to terminate the lease and seeking a declaration that Mattel had to provide indemnification for the costs of environmental remediation, Hall Street commenced a lawsuit against Mattel.[2]
After Mattel prevailed on the termination issue in a bench trial, the parties decided to submit the indemnification issue to arbitration. Approved by the court and entered as an order, the arbitration agreement provided that:
[t]he United States District Court for the District of Oregon may enter judgment upon any award, either by confirming the award or by vacating, modifying or correcting the award. The Court shall vacate, modify or correct any award: (i) where the arbitratorâs findings of facts are not supported by substantial evidence, or (ii) where the arbitratorâs conclusions of law are erroneous.[3]
In due course, the arbitrator rendered an award for Mattel. While recognizing that Mattel had undertaken to indemnify Hall Street for violations of âenvironmentalâ laws, the arbitrator described Oregonâs Drinking Water Quality Act (DWQA) as a statute that protects âhuman health.â Relying on the distinction between environmental and health laws, the arbitrator concluded that violations of the DWQA entailed no obligation to provide indemnification.[4]
As contemplated by the arbitration agreement, Hall Street petitioned the district court to vacate the award because the arbitrator had committed legal error by failing to regard the DWQA as an environmental law. Agreeing with this proposition, the district court vacated the award and remitted the case to the arbitrator, who then ruled for Hall Street. Thereafter, Mattel unsuccessfully sought modification of the second award by the district court. On appeal to the United States Court of Appeals for the Ninth Circuit, however, Mattel prevailed on the theory that 9 U.S.C. Â§ 10 provides the exclusive grounds for vacatur under the FAA, thus rendering unenforceable the agreement to permit vacatur for errors of law. Following remand and a second appeal to the Ninth Circuit, the Supreme Court granted certiorari to address a split of authority regarding the validity of contracts to permit vacatur for reasons not enumerated in the FAA. [5]
In its submissions to the Supreme Court, Hall Street advanced two main arguments to justify a non-exclusive approach to the grounds for vacatur under the FAA: (1) courts had accepted the existence of non-statutory grounds for vacatur since Wilko v. Swan,[6] in which the Supreme Court mentioned the possibility of vacatur for awards rendered in âmanifest disregard of the lawâ; and (2) the FAA reflects a federal policy that favors party autonomy and, thus, enforcement of arbitration agreements according to their terms.[7]
Writing for a six-member majority, Justice Souter first recognized that Wilko v. Swan âincludes some language arguably favoring Hall Streetâs position,â and that âsome Circuitsâ have treated âmanifest disregardâ as a judicially recognized âground for vacatur on top of those listed in Â§10â of the FAA.[8] However, assuming that judges could establish narrow, non-statutory grounds for vacatur, that did not support Hall Streetâs submission that disputing parties may agree to plenary review for legal error under the FAA. To the contrary, the relevant passages of Wilko expressly rejected the possibility of âgeneral reviewâ for legal error. Furthermore, while not reaching a definitive conclusion, Justice Souter suggested that the Supreme Court never intended âmanifest disregardâ to enlarge the statutory grounds for vacating awards. Thus, the Court might have used âmanifest disregardâ to describe the collective sense of all grounds listed in Â§10. Alternatively, it might have used the concept as shorthand for a single provision, such as Â§10(a)(4), which authorizes vacatur when arbitrators have exceeded their powers. In any event, Justice Souter saw no reason to treat Wilko as a precedent supporting enforcement of agreements to expand the grounds for vacatur under the FAA.[9]
Turning to the question of party autonomy, Justice Souter recognized that the FAA generally favors enforcement of arbitration agreements according to the terms selected by the parties.[10] Thus, the statute allows them to determine the qualifications of the arbitrators and the method of their selection, the scope of arbitrable issues, the procedural rules, and the substantive law. Despite the general policy favoring party autonomy, however, Justice Souter identified certain âtextual featuresâ that rendered the FAA incompatible with enforcement of contracts to permit vacatur on non-statutory grounds.[11] According to Justice Souter, such agreements cut âagainst the grainâ of 9 U.S.C. Â§ 9, which provides that district courts âmustâ confirm awards âunless . . . vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.â[12] Comparing this to the FAAâs permissive language on appointment of arbitrators,[13] Justice Souter concluded that Â§Â§ 9 and 10 do not sound âremotelyâ like default provisions subject to alteration by the parties.[14] Furthermore, assuming that Â§ 10 left room for supplementation by agreement, Justice Souter implied that the additional grounds should conform to the overall tenor of Â§ 10. Because that provision contemplates vacatur only for various forms of âoutrageous conduct,â interpretive principles would not condone expansion to encompass review for errors of law.[15]
Instead of âfighting the textâ of Â§Â§ 9 and 10, Justice Souter deemed it more sensible to read those provisions as establishing a national policy that favors the limited review needed to ensure speed and finality in arbitration.[16] Any other interpretation would transform arbitration into the prelude for a long and expensive judicial process.
In a dissenting opinion joined by Justice Kennedy, Justice Stevens observed that parties could agree to judicial review of awards for legal error before adoption of the FAA in 1925.[17] Because Congress adopted the FAA to promote enforcement of arbitration agreements according to their terms, Justice Stevens believed that the statute enhanced the presumption favoring enforcement of fairly negotiated agreements regarding judicial review for legal error.[18] To the extent that Â§ 10 had a mandatory character, it simply established a minimum list of the grounds that always support vacatur, but did not restrict parties from consenting to additional grounds.[19] Finally, even if the case raised debatable issues, Justice Stevens would have resolved them by applying the principle of âfreedom,â or party autonomy, which he described as a âpresumption of overriding importance.â[20] In a brief dissenting opinion, Justice Breyer asserted that the Court should enforce the partiesâ agreement on judicial review because it did not violate the FAA, any other statute, or any relevant public policy.[21]
Although Hall Street involves a domestic transaction and the application of domestic law, the Supreme Courtâs judgment may have ramifications for international commercial arbitrations venued in the United States. As a general principle, national courts at the place of arbitration have the power to vacate awards according to the standards for vacatur in that jurisdiction.[22] When they exercise that power, vacatur then becomes a ground for refusing enforcement of awards in third states under the New York and Panama Conventions.[23] Under these circumstances, limited and well defined standards for vacatur tend to enhance a stateâs desirability as an arbitral forum, and to promote the international portability of awards. By contrast, broad and poorly defined standards for vacatur tend to have the opposite effect. As a result, most modern arbitration laws either set forth the exclusive grounds for vacatur,[24] or permit deviations only within well defined limits.[25] To the extent that they permit deviations, they allow parties to restrict (but not to enlarge) the statutory grounds for vacatur.[26] By treating the FAAâs grounds for vacatur as exclusive and by foreclosing the possibility of open-ended expansion of those standards, the Supreme Courtâs decision arguably keeps the FAA within the mainstream and, thus, preserves the United Statesâ attraction as a major center for arbitration.
Despite the clear holding that parties may not contract to enlarge the FAAâs grounds for vacatur, Hall Street leaves at least four open questions. First, while strongly indicating that the Supreme Court did not intend its endorsement of vacatur for âmanifest disregard of the lawâ to enlarge the grounds for judicial review under the FAA,[27] Hall Street does not take a clear position on the power of courts to articulate limited, non-statutory grounds for vacatur if they intend to do so.
Second, as stated in dicta and noted by observers, Hall Street takes no position on the validity of contracts to expand the grounds for vacatur under state arbitration statutes.[28] However, because many of those statutes contain the same âtextual featuresâ as the FAA,[29] the question arises why the application of state arbitration statutes should lead to any result other than the one adopted in Hall Street.
Third, as noted by a federal judge while speaking at a recent conference, Hall Street does not address the validity of agreements to expand the grounds for refusal to enforce awards under treaties such as the New York and Panama Conventions. Although technically correct, those treaties also contain the same âtextual featuresâ as the FAA.[30] Therefore, the question also arises why their application would lead to any result other than the one adopted in Hall Street. Furthermore, while it is understandable why disputing parties might agree to vacatur for legal error by the courts at the place of arbitration, it is questionable why parties might agree to plenary judicial review of the merits in every country where the prevailing party seeks enforcement of the award.
Fourth, more tantalizing and less often discussed, Hall Street does not indicate whether the same result would occur under the FAA for disputes involving international commercial arbitration. Despite the categorical tone of the majority opinion and the absence of any dicta reserving the question for international commercial disputes, the Supreme Courtâs jurisprudence often displays a willingness to enforce forum selection agreements and arbitration agreements relating to international transactions, even assuming that the Court would not enforce identical clauses in domestic transactions.[31] Thus, the application of Hall Street to international commercial arbitration may depend on the Courtâs inclination to maintain the traditional distinction between domestic and international transactions. This may represent the most promising theory on which to seek a different result for disputes involving international commercial arbitration.
As stated above, it may be too early to predict with confidence whether the Supreme Court and lower courts will apply Hall Street to disputes involving international commercial arbitration. If they do, however, that would represent a significant departure from recent cases in which courts have elevated party autonomy over judicially created restrictions on arbitrability[32] and even statutory anti-waiver provisions enacted by the United States Congress.[33] While future developments are uncertain, Hall Street could signal a retreat from the high water mark of party autonomy with respect to the design of procedures for international commercial disputes.
In the end, however, one aspect of Hall Street seems perfectly clear: the Supreme Court has affirmed its reluctance to embrace simplistic decisions that could become blunt instruments for the regulation of commerce, which often requires fine-tuning. Previously, the Court declined to apply Title VII of the Civil Rights Act to employment relationships outside the United States, in part because the Court foresaw that the extraterritorial application of U.S. law would require fine-tuning better left to Congress.[34] Likewise, in Hall Street, the Court expressed concern that enforcement of contracts to expand the grounds for vacatur would transform arbitration into the mere prelude for a long and expensive judicial process with multiple levels of appeal. Of course, judicial review of awards for legal error need not entail such horrible consequences. For example, the English Arbitration Act of 1996 avoids far-reaching and protracted litigation by permitting appeals of the merits, but only by agreement of the parties or by leave of court, only on questions of law (not fact), only on questions of English (not foreign) law, and with further appeal granted only by leave of court (and only if the case involves a question of general importance).[35] In other words, one may construct a workable system of appeals for arbitral awards, but it requires comprehensive fine-tuning better achieved by statute than by ad hoc judicial pronouncements.
Charles H. Brower, II , a former member of ASILâs Executive Council, is currently a Tillar House Sabbatical Fellow, American Society of International Law; Visiting Fellow, Lauterpacht Research Centre for International Law, Cambridge University; Scholar-in-Residence, American University, Washington College of Law; Croft Associate Professor of International Law and Jessie D. Puckett, Jr. Lecturer-in-Law, University of Mississippi School of Law.
[1] 552 U.S. ___ (2008) (Slip Opinion).
[5] Id. at 3-4. Compare Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 1000 (9th Cir. 2003), and Bowen v. Amoco Pipeline Co., 254 F.3d 925, 935 (10th Cir. 2001) (prohibiting agreements to expand the grounds for vacatur under the FAA), with Puerto Rico Tel. Co. v. U.S. Phone Mfg. Corp., 427 F.3d 21, 31 (1st Cir. 2005), and Jacada (Europe), Ltd. v. International Mktg. Strategies, Inc., 401 F.3d 701, 710 (6th Cir. 2005), and Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287, 288 (3d Cir. 2001), and Gateway Tech., Inc. v. MCI Telecom. Corp., 64 F.3d 993, 997 (5th Cir. 1995) (permitting agreements to expand the grounds for vacatur under the FAA).
[6] 346 U.S. 427 (1953).
[7] Hall Street, Slip Opinion at 7, 9.
[13] 9 U.S.C. Â§ 5.
[14] Hall Street, Slip Opinion at 10-11.
[17] Id., Stevens, J., dissenting, at 1.
[20] Id. at 4 (quoting FCC v. Beach Communications, Inc., 508 U.S. 307, 320 (1993) (Stevens, J., concurring)).
[21] Id., Breyer, J., dissenting, at 1.
[22] See JULIAN D.M. LEW ET AL., COMPARATIVE INTERNATIONAL COMMERCIAL ARBITRATION 664-68 (2003); ALAN REDFERN & MARTIN HUNTER, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION 409-21 (4th ed. 2003); ANDREW TWEEDDALE & KEREN TWEEDDALE, ARBITRATION OF COMMERCIAL DISPUTES 372 (2005).
[23] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, art. V(1)(e), 330 U.N.T.S. 38, 21 U.S.T. 2517 [hereinafter New York Convention]; Inter-American Convention on International Commercial Arbitration, Jan. 30, 1975, art. 5(1)(e), 14 I.L.M. 336 (1975) [hereinafter Panama Convention].
[24] See Model Law on International Commercial Arbitration of the U.N. Commission on International Trade Law, art. 34(2), G.A. Res. 40/72, U.N. GAOR 40th Sess., Supp. No. 53 at 308, U.N. Doc. A/40/53, adopted Dec. 11, 1985 [hereinafter Model Law]; REDFERN & HUNTER, supra note 22, at 411-12; TWEEDDALE & TWEEDDALE, supra note 22, at 379.
[25] See English Arbitration Act of 1996, Â§ 69(1), 36 I.L.M. 155 (1997) (providing for appeals of awards on questions of law, but permitting exclusion of the courtâs jurisdiction by agreement); Swiss Private International Law Act of 1987, art. 192(1), 27 I.L.M. 37 (1988) (allowing the disputing parties to exclude some or all grounds for annulment of awards, provided that none of the parties have their domicile, habitual place of residence, or business establishment in Switzerland).
[27] Hall Street, Slip Opinion at 8.
[28] Id. at 13; Henry Weisburg & Christopher Ryan, Hall Street v. Mattel, NATâL L.J., May 12, 2008, at 12.
[29] See Revised Uniform Arbitration Act of 2000, Â§ 22 (providing that âthe court shall issue a confirming order unless the award is . . . vacated pursuant to Section 23â). See also Model Law, supra note 24, art. 34(2) (providing that an arbitral award may be set aside âonlyâ in seven enumerated situations). California, Connecticut, Illinois, Louisiana, Oregon and Texas have enacted international arbitration statutes based on the Model Law. See Status â UNCITRAL Model Law on International Commercial Arbitration, available at http://www.uncitral.org/uncitral/en/uncitral_texts/ arbitration/1985Model_arbitration_status.html.
[30] See New York Convention, supra note 23, art. V(1) (authorizing the refusal to recognize and enforce awards âonlyâ if the complaining party furnishes proof regarding one of five enumerated defects); Panama Convention, supra note 23, art. 5(1)(e) (same).
[31] See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 629 (1985); Scherk v. Alberto-Culver Co., 417 U.S. 506, 515-16 (1974); M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15-16 (1972).
[32] See Mitsubishi Motors Corp., 473 U.S. at 628-39.
[33] See, e.g., Bonny v. Society of Lloydâs, 3 F.3d 156, 159-62 (7th Cir. 1993); Roby v. Corporation of Lloydâs, 996 F.2d 1353, 1361-66 (2d Cir. 1993); Riley v. Kingsley Underwriting Agencies, 969 F.3d 953, 958-60 (10th Cir. 1992). See also Lipcon v. Underwriters at Lloydâs, London, 148 F.3d 1285, 1291-95 (11th Cir. 1998); Richards v. Lloydâs of London, 135 F.3d 1289, 1293-96 (9th Cir. 1998); Haynsworth v. The Corporation, 121 F. 3d 956, 965-70 (5th Cir. 1997).
[34] See E.E.O.C. v. Arabian Am. Oil Co., 499 U.S. 244, 256 (1991). Shortly after the Supreme Courtâs decision, Congress did in fact enact legislation expressly providing for, and fine-tuning, the extraterritorial application of Title VII. See Civil Rights Act of 1991, Pub. L. No. 101-166, Â§ 109(a), (b)(1), 105 Stat. 1071 (1991).
[35] See English Arbitration Act of 1996, supra note 25, Â§Â§ 69(1)-(2), (8), 82(1); DAVID ST. JOHN SUTTON & JUDITH GILL, RUSSELL ON ARBITRATION 392-93, 394, 401-02 (22d ed. 2003); TWEEDDALE & TWEEDDALE, supra note 22, at 390, 799-801, 806, 820-22.