Bar News - October 19, 2016
Alternative Dispute Resolution: Judicial Review Standard: Priorities Matter in Crafting Arbitration Clauses
By: Robert D. Cohan and Jamie N. Hage
Although arbitration is generally regarded as an efficient and economical system of alternative dispute resolution, the standard of judicial review of arbitration awards varies from state to state. Further, the Federal Arbitration Act (FAA) provides its own, very narrow, standard of review, which some states follow.
When contemplating an arbitration clause in an agreement, a necessary concern is the standard of judicial review to which an arbitration award will be subjected. It is important to consider: Does your client want efficient and economical resolution of disputes? Or would he prefer to preserve a right to appeal an award based on a plain mistake of law? If he wants a quick and less expensive resolution, he may have to surrender appellate rights.
A second important consideration, if preservation of appellate rights is paramount, is to choose an arbitrator who understands the law. Two recent cases from Massachusetts and New Hampshire present a study in contrast.
In Finn v. Ballentine (June 14, 2016), the New Hampshire Supreme Court affirmed a NH Superior Court decision that had vacated an arbitration award on the grounds that the arbitrator had made a “plain mistake of law.” Under New Hampshire law, the Superior Court may modify or vacate an award, “for plain mistake, or… fraud, corruption, or misconduct by the arbitrators, or on the grounds that the arbitrators exceeded their powers,” according to the decision, and which quoted RSA 542:8. This “plain mistake” standard permits a New Hampshire court to vacate an award if the court determines that “an arbitrator misapplied the law to the facts,” the court ruled, quoting from Sherman v. Graciano (NH, 2005).
The plaintiff in Finn v. Ballentine, who was represented by the authors of this article, argued that the much narrower FAA standard of review should have applied in this case because it preempted the state law. That FAA standard provides that courts can only disturb an arbitrator’s award in the event that: 1) an award is procured by corruption, fraud, or undue means; 2) there is evident partiality or corruption of the arbitrator(s); 3) there is misconduct by the arbitrators in conducting the hearing, such that a party was prejudiced; or 4) the arbitrators exceeded their power or failed to make a mutual, final, and definite award.
The New Hampshire Supreme Court disagreed, ruling that the US Supreme Court has yet to explicitly state that the FAA standard of review preempts the state standard, and the New Hampshire standard applied. The decision of the Superior Court vacating the award for plain mistake of law was affirmed. It is unlikely that the award would have been overturned had the FAA standard of review been applied.
Note that the arbitration award in Finn entered on Nov. 25, 2014. The Superior Court vacated the award on May 14, 2015, and the New Hampshire Supreme Court affirmed that reversal on Jan. 27, 2016 – more than a year after the award entered.
Because the standard of review under the New Hampshire statute is much less deferential to arbitrators’ decisions, it can provide a client with more favorable grounds to appeal an unfavorable award. This comes with the sacrifice of the speed and costs savings that are normally the motivating factors for choosing arbitration in the first place.
If a client wants efficiency and economy over an ability to appeal, consider choosing Massachusetts law where, “[a]n arbitrator’s findings of fact and conclusions of law are binding even if erroneous,” as the Massachusetts Appellate Court found in Conway v. CLC Bio LLC (2015) (emphasis added). Although an award may be vacated where the arbitrator exceeds his authority, “[t]he fact that an arbitrator [may have] committed an error of law does not alone mean that [s]he has exceeded [her] authority,” that court ruled (quoting City of Boston v. Professional Staff Association. (2004)). Of course, as in New Hampshire, the usual rule against, “corruption, fraud, or other undue means” also applies in Massachusetts law.
The narrow standard of judicial review applied in Massachusetts applies to all commercial disputes, but may not extend to every arbitration, the Massachusetts appeals court ruled in Conway.
Although the plaintiff in Conway argued that the arbitrator exceeded her authority, the court found that the plaintiff was really arguing that the arbitrator misapplied the law. The court refused to address whether the arbitrator misapplied the law, stating that whether there was an error of law is “not subject to judicial review.” In choosing the application of Massachusetts law to arbitration clauses, there will be little chance for an appeal of the arbitrator’s award, but this helps to assure that the dispute will be settled quickly and economically.
The FAA, like Massachusetts, imposes a restrictive standard of review, and it has preempted the laws of many states, which are less restrictive. Under federal law, “mere mistake of law by an arbitrator cannot serve as the basis for judicial review,” the US District Court for the District of Massachusetts ruled in Dennis v. Wachovia Securities, LLC (2006). As noted by the New Hampshire Superior Court, “this view of the law is different from that taken by the New Hampshire Supreme Court, which affords no deference to an arbitrator’s determination as to what the controlling law is.” Finn v. Ballentine Partners, LLC, (NH Super. Ct. April 9, 2015).
It is well established in many jurisdictions that, where a state statute provides “lesser protection for arbitration agreements and awards,” it is preempted by the provisions of the FAA. (Thomas Diaz, Inc. v. Columbina S.A. (D.P.R. 2011)). It is common in other states for a conflict between state and federal standards of review to exist, but it is not the norm. As observed by the Florida Supreme Court, “it makes more sense” to have a “national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway.” Visiting Nurses Association of Florida Inc. v. Jupiter Med., Inc. (Fla. 2014).
Given the vagaries and variances in state laws, when considering whether to include an arbitration clause in an agreement, the first question to resolve is to what extent the client is willing to sacrifice his appellate rights in order to preserve arbitration as an efficient and economical resolution of disputes. If the client leans toward a more efficient and economical course, the attorney should be cognizant of the law of the state that will apply to his contract. Alternatively, counsel might simply require that any appeal is subject to the FAA. On the other hand, if the client wants to preserve appellate rights, in order to preserve a safety net from a plainly incorrect award, then selecting state law, such as New Hampshire’s less deferential law, is necessary.
No matter which law is selected to govern the arbitration clause, when it comes time to arbitrate, the selection of the arbitrator becomes the paramount concern. It is imperative to choose an arbitrator who can understand and apply the law correctly. In Finn, the arbitration panel included former New Hampshire Supreme Court Chief Justice John Broderick. One would think that he would craft an award that would not include a “mistake of law;” yet, the New Hampshire Supreme Court said that is exactly what happened. With a nod to Broderick’s stature as a jurist, the court stated that it need not “assume proper application of the law from the panel members’ resumes,” the court wrote in Finn. Even the careful selection of an arbitrator well-versed in the law is no guarantee the award will be affirmed.
Until there is a uniform standard for appellate review of arbitration awards, attorneys should be aware of how the choice of governing law provisions may affect the dispute resolution process. Without a uniform standard that narrows the appellate review, it may not be advantageous for certain clients to have arbitration clauses in contracts.
Robert Cohan is a founding partner of Cohan Rasnick Myerson Plaut in Boston, Mass. His practice emphasizes business litigation on a contingent-fee basis. He can be reached at by email. Jamie Hage is a founding member of the firm of Hage Hodes in Manchester, NH. He can be reached at by email. Cohan and Hage represented the plaintiff in Finn v. Ballentine.