Labor & Employment Law

SCOTUS takes another arbitration case

The US Supreme Court has announced that it will decide whether the Federal Arbitration Act (FAA) permits arbitrators to impose class arbitration on parties whose arbitration clauses are silent on that issue.

The case: Stolt-Nielsen S.A. v. AnimalFeeds International (certiorari granted 06/15/2009) [Details, Briefs]

The parties in this case are parties to international maritime contracts that contain arbitration clauses. The contracts are silent as to whether arbitration is permissible on behalf of a class of contracting parties.

A panel of arbitrators, tasked with deciding whether that silence permitted or precluded class arbitration, received evidence and briefing from both sides. The arbitrators issued an award deciding that the contracts permit class arbitration.

Stolt-Nielsen petitioned the United States District Court to vacate the award. That court did vacate the award on the ground that the award was made in manifest disregard of the law.

The 2nd Circuit reversed, and applied the rule that courts vacate arbitration awards in the rare instances in which "the arbitrator knew of the relevant [legal] principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it." Using this principle, the court found that the arbitration panel did not manifestly disregard a rule of federal maritime law, and did not manifestly disregard New York State law.

The US Supreme Court granted certiorari on June 15, 2009 to review the 2nd Circuit judgment. I expect the Court will hear oral arguments some time in October, November, or December.

The question to be decided by the Court in this case was left open in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), and there appears to be split of authority among the federal Circuit Courts.

My view: This case presents a tug-of-war between two fundamental principles of arbitration law.

First, It is for the arbitrator to decide matters of arbitration procedure. Following this principle, the argument is that the arbitrators simply interpreted the contract (that is, the silence of the contract) as permitting class arbitration, and the courts must enforce the arbitrators' interpretation.

Second, Arbitration agreements must be enforced according to their terms. Following this principle, the argument is that neither a court nor an arbitrator has the authority to "re-write" the silent arbitration agreement so as to require class arbitration.

(As an aside, it is noteworthy that many courts, applying state law relating to unconscionability or public policy, have held that many arbitration agreements that forbid class arbitrations are unlawful.)

Full post as published by Arbitration Blog on June 21, 2009 (boomark / email).