Arbitration remains a favored dispute resolution mechanism for parties involved in international commerce. One reason for this wide acceptance is the conventional wisdom that, in the more than 130 countries that are signatory to the New York Convention, the grounds for vacating an award are those limited grounds set forth in the Convention. Do parties have the right to alter the standards by which arbitral awards are enforced? Two recent decisions hold that parties cannot change the standard of review in the Federal Arbitration Act (“FAA”), irrespective of whether they agree to ask the court to apply a stricter standard or a more liberal standard than in the statute.

FAA Sets Minimum Standard

Hoeft v. MVL Group, Inc., 2003 WL 22048228 (2d Cir., Sept. 3, 2003), arose out of a stock purchase agreement that provided for a price adjustment based on the calculation of EBITDA. The agreement further provided that, in the event that there was a dispute concerning the calculation of EBITDA, “such a dispute shall be resolved by Steven Sherril, whose decision in such matters shall be binding and conclusive upon each of the parties hereto and shall not be subject to any type of review or appeal whatsoever.”

When the parties could not agree on the calculation of the EBIDTA, an arbitration took place before Sherrill. He issued an award in which he adopted Hoeft’s contentions and rejected MVL’s argument that the computation should be determined solely according to Generally Accepted Accounting Principles (“GAAP”). The district court vacated the award on the ground that the arbitrator manifestly disregarded the law by ignoring GAAP.

On appeal, Hoeft argued that, because the arbitration clause specifically provided that the award “shall not be subject to any type of review or appeal whatsoever,” the district court erred in even considering whether the arbitrator had manifestly disregarded the law. The district court had avoided deciding whether such a provision was enforceable. Rather, the district court assumed arguendo that parties could agree to eliminate judicial review of an arbitration award, but concluded that the clause here in question was not sufficiently clear to indicate the parties’ intention to do so.

Hoeft argued that arbitration is a contractual matter and that parties are generally free to contract as they please. In addition, Hoeft relied on the deference that courts ordinarily give to agreements to arbitrate. The Second Circuit rejected these arguments and pointed out that one of the reasons that the federal courts voice such strong support for the arbitral process is that awards remain subject to at least a minimum judicial review – described by the court as the “safety net that hangs below” agreements to arbitrate.

The Second Circuit noted that, although various courts had enforced private agreements to alter the standard of judicial review to be applied to arbitral awards, those cases were different because they involved attempts to apply a stricter standard of review than otherwise available under the FAA, whereas Hoeft was attempting to have the court refuse to apply the grounds specifically enumerated in the statute. The court explained that, while arbitration agreements are private contracts, at the end of the process, the successful party may obtain a judgment that then affords resort to the potent legal remedies available to judgment creditors. Therefore, Congress, in enacting the FAA, tried to strike a balance between affording flexible private dispute resolution mechanisms and preventing federal courts from “confirming awards tainted by partiality, a lack of elementary procedural fairness, corruption or similar misconduct.” The Second Circuit concluded that the integrity of the arbitration process would be compromised if, as a result of the parties’ agreement to prevent any review, a federal court were required to bless an arbitral award that was flawed on any of these bases.