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The United States Supreme Court recently held in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. ___ (2008), that the grounds for vacating or modifying an arbitration award under Sections 10 and 11 of the Federal Arbitration Act (FAA) are exclusive and that those grounds cannot be expanded by agreement of the parties.

The Hall Street Associates decision is critical for both domestic and international arbitral awards because it may severely limit parties’ ability to challenge awards on the basis of manifest disregard of the law, which is a judicially created basis not expressly stated in the FAA.

Supreme Court Addresses Issue After Arbitrator’s Awards Were Vacated Twice

The case arose from a dispute over a lease that Mattel, Inc. entered into with Hall Street Associates, LLC for commercial property located in Oregon state. After beginning litigation, the parties agreed to arbitrate their dispute and the court entered the arbitration agreement as an order. The arbitration agreement provided, inter alia, that the district court must modify or correct any award in which the arbitrator’s conclusions of law were erroneous.

The district court twice vacated the arbitrator’s award on the grounds that it was legally incorrect, and the parties twice appealed to the Ninth Circuit. Each time, the Ninth Circuit reversed the district court’s decision on the basis that the FAA does not permit courts to modify or vacate awards for legal error, and on the basis that the FAA’s grounds for modifying and vacating are exclusive and cannot be expanded by contract. The Supreme Court ultimately addressed this issue, deciding that the only bases for vacating or modifying arbitral awards subject to the FAA are those expressly stated in the statute and that parties may not expand on those bases.

The FAA and Manifest Disregard

The FAA governs the enforcement of both domestic and foreign arbitration agreements and arbitral awards. Section 10 of the FAA requires courts to confirm an award unless:

(1) the award “was procured by corruption, fraud, or undue means”;

(2) the arbitrators were impartial or corrupt;

(3) the arbitrators committed some misconduct that prejudiced one of the parties; or

(4) “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”

Courts may also modify awards to correct non-substantive matters that do not affect the merits pursuant to Section 11.

The courts also have crafted an additional ground for vacating arbitral awards which has come to be known as manifest disregard of the law. To vacate an award on the grounds of manifest disregard, a party must demonstrate that the arbitrator was aware of some applicable legal standard but consciously chose to ignore it.

Manifest disregard challenges have provided fertile grounds for losing parties to challenge an award in court and to delay its confirmation. Moreover, by their very nature, manifest disregard challenges require parties to address in court the merits of matters that were decided in the arbitration, and therefore provide an opportunity for parties to litigate issues that have been resolved in the arbitration. Consequently, manifest disregard challenges can significantly increase the burden of confirming an award and can turn what is meant to be a summary court proceeding into a morass of satellite litigation.

The Impact of Hall Street Associates On Manifest Disregard Challenges to Domestic Awards

At first blush, it would appear that Hall Street Associates prevents future manifest disregard challenges. However, a closer reading of the opinion demonstrates that the Supreme Court ultimately left open the question of whether parties may still advance manifest disregard challenges, at least in the domestic award context.

The Supreme Court acknowledged that while some lower courts had concluded that manifest disregard is an additional ground on which to vacate, this conclusion may only be shorthand for the existing FAA grounds or another way of describing arbitrator misconduct or arbitrators overstepping the bounds of their powers – both permissible grounds under the FAA. Consequently, the Court did not ultimately resolve the question of the viability of manifest disregard challenges.

Manifest Disregard Challenges to International Awards After Hall Street Associates

Some federal circuits permit not only domestic but international awards to be vacated for manifest disregard of the law. Vacating international awards on these grounds, however, always has been controversial, because neither the New York Convention nor the Panama Convention (which are incorporated into the FAA as Chapters 2 and 3 respectively) list manifest disregard as a basis for refusing recognition of an award.

Given the Supreme Court’s rationale for its decision in Hall Street Associates, and because none of the grounds for refusing recognition in the New York or Panama Conventions directly correlate to arbitrator misconduct or arbitrators overstepping the bounds of their powers, it is a possible consequence of Hall Street Associates that parties will no longer be able to rely upon manifest disregard to challenge an international arbitral award.

A Turning Point in the Court’s Interpretation of the FAA

Hall Street Associates marks a turning point in the Supreme Court’s interpretation of the FAA. It may also signal a death knell to manifest disregard challenges, particularly in the international award context. Parties must now closely follow its subsequent treatment to determine if courts will continue to entertain manifest disregard challenges as a basis for vacating awards.