Appealability of Arbitration Awards

Posted over 3 years ago. Applies to Minnesota, 1 helpful vote

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Arbitration provisions in contracts have proliferated in recent years, presumably under an assumption that arbitration is a faster and less expensive alternative to a lawsuit. Awards are binding on the parties, and judicial review is very limited, again restricting options and limiting expenses (there is no further expense or delay at risk if there is no option for appeal). As with most such things, the benefits of arbitration carry their own burdens. Arbitration is great when you win, but frustrating when you lose because there is typically no recourse. More problematic, even if the arbitrator fails to follow controlling law, you may not be able to challenge the award. Whither the avenue of challenge to arbitration awards? Down an increasingly narrow path.

Arbitration awards are highly favored in Minnesota, and the standard of review is “extremely narrow." Hunter, Keith Indus. v. Piper Capital Mgmt., 575 N.W.2d 850, 854 (Minn. App. 1998). The court “must exercise every reasonable presumption in favor of the award’s finality and validity." Id. (quotation omitted). Whether the record supports the arbitrator’s findings is not an issue for the court’s review, and the court “may not examine the underlying evidence and record, or otherwise delve into the merits of the award." Liberty Mut. Ins. Co. v. Sankey, 605 N.W.2d 411, 414 (Minn. App. 2000), rev. denied (Minn. Apr. 18, 2000). The arbitrator is the “final judge of both law and fact." Cournoyer v. Am. Television & Radio Co., 83 N.W.2d 409, 411 ( Minn. 1957).

Under both Minnesota law (Minn. Stat. § 572.19) and the Federal Arbitration Act (FAA), a challenge to an arbitration award is limited to specifically enumerated grounds. Under Minnesota law, an arbitration award “will be vacated only upon proof of one or more of the grounds stated in Minn. Stat. § 572.19." AFSCME Council 96 v. Arrowhead Reg’l Corr. Bd., 356 N.W.2d 295, 299 (Minn. 1984). The party seeking to vacate the award has the burden of proving that the award is invalid. Nat’l Indem. Co. v. Farm Bureau Mut. Ins. Co., 348 N.W.2d 748, 750 (Minn. 1984). Under the FAA, the statutory grounds are the exclusive means for vacating an arbitration award under the FAA. Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396, 1403 (2008).

Prior to the Hall Street decision, courts in many jurisdictions recognized the manifest-injustice-of-the-law doctrine, described as an arbitrator understanding the governing legal principle but choosing to ignore it, as a basis for vacating an arbitration award.[1] See, e.g., Hunter, Keith Indus., 575 N.W.2d at 855. The Hunter, Keith Indus. court recognized the existence of the manifest-injustice doctrine but did not reach the issue of whether to apply it as a matter of MN state law. Id. at 855-56 (stating in parenthetical that “Minnesota law favors arbitration awards and by statute severely limits the grounds upon which a reviewing court may vacate an award" and “view[ing] as significant the fact that very few of the federal circuit courts that have recognized the manifest disregard doctrine have vacated an arbitration award on that basis"). Hall Street, while not binding, reinforces a restrictive reading of Minn. Stat. § 572.19.

You Can’t Contract Around the Statute

The parties in Hall Street attempted to enlarge the grounds for judicial review by including a provision in the arbitration agreement requiring the court to “vacate, modify, or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous." Hall Street, 552 U.S. at 588, 128. The Supreme Court rejected these contract terms as unenforceable under the FAA, explaining that “[a]ny other reading opens the door to the full-bore legal and evidentiary appeals that can ‘’rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.’ " Id. (internal citations omitted).

Impact for Contracts

Parties should expressly evaluate whether arbitration is the most appropriate forum for resolving disputes that may arise in the future. The severely restricted ability to challenge an arbitration award, even where the arbitrator disregards the law, cuts against arbitration as an appropriate dispute resolution mechanism. Full judicial review procedures are far more desirable for the protection of substantial rights, valuable property and large sums. As value increases, the “appeal" of arbitration withers. Like any dispute resolution mechanism, arbitration is not the best fit for all situations. The merits (speed, cost efficiency) should be carefully weighed against the burdens (lack of meaningful appeal) before agreeing to an arbitration clause.

Footnote:

[1] Because Hall Street held that Sections 10 and 11 provide the “exclusive" grounds for challenging an arbitration award, manifest-injustice is effectively dead under the FAA. A creative attorney may attempt to recast an arbitrator’s disregard of the law under the express statutory formula of Section 10(a)(4) of the FAA—where arbitrators exceed their powers. The Court’s discussion in Hall Street suggests, however, that the Supreme Court would unfavorably view such a stratagem.

Additional Resources

Minn. Stat. § 572.19 https://www.revisor.mn.gov/statutes/?id=572.19 Federal Arbitration Act http://www.law.cornell.edu/uscode/html/uscode09/usc_sup_01_9.html

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