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Beware: Arbitration

By David K. Nelson

In an arbitration, the parties agree to hire one or more neutral third parties to hear the dispute and issue a ruling.  The parties further agree to abide by that ruling.  If one party fails to do so, the ruling can be enforced by a court of law just as if an actual judgment had been entered.  Some suggest the process is less costly and more efficient than litigation; however, significant rights can be lost under the guise of so called legal efficiency.

For example, what happens when the arbitrator gets it totally wrong, misunderstands the facts, and totally ignores or misapplies the law?  If the matter had been tried in a court of law, the losing party would have had an absolute right to appeal the ruling to an appellate court.  However, in an arbitration, there is no right to appeal.  Both the Federal Arbitration Act and Louisiana's arbitration statutes set forth very narrow and fact specific grounds for vacating or modifying an arbitration award.  These grounds are:

Federal:  Federal Arbitration Act 9 U.S.C. § 10(a) 

To vacate: 1) award procured by fraud or corruption; 2) arbitration partiality; 3) arbitrator misconduct in failing to postpone a hearing or admit evidence pertinent and material; or 4) arbitrator's exceeding authority. 

To modify: 1) evident miscalculation; 2) award rendered on subject matter not referred to them; 3) imperfect as to form not affecting the merits. 

State:  (La. R.S. 9:4210)

To vacate: 1) arbitrator fraud or corruption; 2) arbitrator misconduct; and 3) arbitrator exceeded authority. 

To modify: 1) material miscalculation; 2) award of a matter not submitted; and 3) irregularities as to form.

Some federal and state courts recognize one additional non-statutory ground for vacating an arbitration award, i.e., manifest disregard of the law or misapplication of the facts. However, the U.S. Fifth Circuit Court of Appeal recently ruled, '…manifest disregard of the law is no longer an independent ground for vacating arbitration awards under the FAA.' Citigroup Global Markets, Inc. v. Bacon, 562 F.2d 349, 355 (5th Cir 2009).

Louisiana appellate courts are divided on this issue.  Four of Louisiana's five appellate courts recognize the 'manifest disregard for the law as an additional, non-statutory ground for attacking an arbitration award.'  However, to date, the First Circuit Court of Appeal has not.  Instead, the First  Circuit will not consider a challenge to an arbitration unless one of the specified statutory grounds exists.  The First Circuit Court of Appeal, 'see[s] no reason to deviate from [its] consistent line of jurisprudence of strict adherence to statutory mandates.' JK Developments, LLC v. Amtek of Louisiana, Inc., 958 So.2d 199, 203 (La. 1st Cir. La. 2008) cert. den, 983 So.2d 1276 (2008).  So even in a situation in which the arbitrator misunderstands or misconstrues the facts and/or disregards Louisiana law, the unsuccessful party may be left without an ability to challenge the award.

In this unfortunate circumstance, the alleged benefits of arbitration hardly seem worth the price.

 

Full post as published by Louisiana Law Blog on October 13, 2010 (boomark / email).