Contractual expansion & limitation of judicial review of arbitral awards: Part II

Dispute Resolution Journal, Feb-Apr 2001 by Curtin, Kenneth M

In the conclusion of this two-part series, Kenneth Curtin's examination of various court decisions and their implications lead him to propose that a "strict, unguided adherence to the principle of freedom of contract needs to be tempered with a respect for the arbitration process."

Contractual Expansion and Limitation of Judicial Review

Parties agree to arbitrate disputes for several reasons. For instance, in international agreements, arbitration is considered a neutral forum when parties cannot agree on which nation's courts should have jurisdiction over a dispute. Arbitration is also generally considered less time consuming and expensive than litigation. Further, in arbitral proceedings, parties, to a certain extent, can control the makeup of the arbitral panel, thereby employing arbitrators who possess knowledge and expertise in certain areas of the law or business community.62 The advantages of arbitration are united in a common thread, namely, in order to benefit from these advantages, any corresponding arbitral award needs to be recognized and enforced by national courts. The FAA, on a national scale, and the New York Convention, on an international scale, have gone a long way toward unifying arbitration law and assuring the enforceability of awards. However, in some instances, parties have attempted to contractually alter the effect of the FAA and the New York Convention by either expanding or limiting judicial review of arbitral awards.

A. Contractual Expansion Judicial Review

The standard of judicial review under the FAA and the New York Convention, as discussed above, is extremely limited. The effect of this limited judicial review is that the vast majority of arbitral awards are recognized and enforced as a matter of course not only in American courts, but also around the world. In this regard, parties have attempted to contractually enlarge the judicial role in reviewing arbitral awards beyond that contemplated by the FAA and the New York Convention. These attempts have met with mixed results-some being enforced on the theory of freedom of contract and others being denied on the basis of preserving the integrity of the arbitral process.

1. The Freedom of Contract Viewpoint

In Gateway Technologies Inc. v. MCI Telecommunications Corp.,63 the Sth Circuit held that the FAA does not prohibit parties who voluntarily agree to arbitration from providing contractually for a more expansive judicial review of an award than the default standard provided in the FAA. In Gateway, MCI, after successfully bidding on a government contract to supply telephone service to state inmates, subcontracted with Gateway to furnish, install, and maintain all the equipment necessary to provide automated collect calls.64 The subcontract agreement contained an arbitration clause providing that in the event of any disputes, the parties agree to binding arbitration, "except that errors of law shall be subject to appeal."65

A dispute arose between the parties with MCI contending that the Gateway automated system design was improperly completing many collect calls and Gateway responded by alleging that MCI merely wished to integrate the Gateway system into its own, thereby realizing a significant profit.66 Eventually, MCI integrated the two systems and terminated its contract with Gateway. The dispute was submitted to arbitration and the arbitrator found that MCI had breached its contractual duty to negotiate in good faith and awarded actual as well as punitive damages to Gateway.67 The United States District Court for the Northern District of Texas confirmed the arbitral award, refusing to review the award under a strict "errors of law" analysis in deference to the federal policy favoring arbitration.68 MCI appealed arguing that the court erred in not reviewing the award for "errors of law" in accordance with the parties' agreement to arbitrate disputes.

The 5th Circuit held that such a contractual modification expanding the court's power to review an arbitral award was acceptable, because arbitration is a creature of contract.69 The Appeals Court reasoned that the public policy purpose of the FAA was to ensure that private agreements to arbitrate are enforced according to their terms, and that the FAA's pro-arbitration policy does not operate without regard to the wishes of the contracting parties.70 The Appeals Court rejected the District Court's unwillingness to enforce the contract because "the parties have sacrificed the simplicity, informality, and expedition of arbitration on the altar of appellate review."71 While conceding that the parties' agreement to expand judicial review may not have been "prudent," the Appeals Court reasoned that federal arbitration policy demanded that the court conduct its review according to the terms of the arbitration contract.72

The 5th Circuit in Gateway relied upon several U.S. Supreme Court decisions in which the Court upheld a party's right to select the procedural rules that will govern an arbitration.73 However, Gateway did not concern the selection of procedural rules governing the arbitral process, but rather concerned the judicial enforcement of a corresponding award. Nonetheless, the decision in Gateway is not without precedent. Other federal and state courts have upheld the contractual expansion of judicial review over arbitral awards in substantially the same circumstances.74 On the other hand, the 5th Circuit decision in Gateway was not the end of the debate.