Stites & Harbison, PLLC

A recent decision of the United States Supreme Court has made arbitration awards under the Federal Arbitration Act more vulnerable to court challenges.  In the case Stolt-Nielsen SA v. Animal Feeds International Corp., 130 Sp. Ct. 1758 (2010), the Court has departed from the long-standing principal of limiting judicial review of arbitration awards to very narrow circumstances.

Under the traditional standard based on § 10(a) of the Federal Arbitration Act, courts could vacate arbitration awards only where the integrity of the arbitration was undermined by fraud, corruption, arbitrator bias, misconduct, or where the arbitrators exceeded the scope of their powers as set forth in the arbitration agreement.  In addition, courts have allowed challenges based upon arbitrators’ manifest disregard of the law.  The common theme for each of those challenges is that an arbitration award could be vacated if the process itself was undermined.

The recent Stolt-Nielsen case represents a significant shift because it vacated the arbitration panel’s decision based upon the outcome.  The principal issue in Stolt-Nielsenwas whether or not the arbitration provision prohibited class action arbitration.  The arbitration panel found that the broad arbitration clause did not demonstrate an intent to exclude class arbitration, because it was silent on that issue.  The Supreme Court disagreed and vacated the arbitration decision under 9 USC § 10(a)(4) finding that the arbitrators exceeded their powers.  The Court’s rationale was that the arbitration panel made its decision to permit class arbitration based upon the panel’s analysis of the public policy governing the issue.  In effect, the Court imposed a standard of review based upon the outcome of the arbitrator’s decision; thereby, not limiting the Court’s review to challenges based upon the integrity of the process.

The standard of review the Court used in Stolt-Nielsen could be the foundation for future challenges of arbitration awards based upon the outcome at least in cases where the arbitration agreement is governed by the Federal Arbitration Act.

Gregory P. Parson is a Member in the firm's Lexington office where he is Office Executive Member.  His practice focuses on litigation, with particular emphasis on representing clients in construction and business disputes.  He also drafts and reviews construction contracts and participates in alternative dispute resolution as an advocate and neutral.