united-states arbitration
Why does an arbiter&#39;s decision need to be based in law?
<p>There's a Youtube series I watch called LegalEagle where an attorney provides legal input on a variety of things from pop culture. In <a href="https://www.youtube.com/watch?v=mr9ZdBwCjwk" rel="nofollow noreferrer">this episode</a>, he reviewed an episode of Always Sunny where the gang employs an arbitrator to settle a dispute for them.</p>
<p>Near the <a href="https://youtu.be/mr9ZdBwCjwk?t=1127" rel="nofollow noreferrer">end of the video</a>, he makes the assertion that an arbitrator can make any decision that they want, but their decision has to be based in law.</p>
<p>This was confusing to me because throughout the course of the video he makes a point to indicate that arbitration is not subject to the <a href="https://youtu.be/mr9ZdBwCjwk?t=167" rel="nofollow noreferrer">same rules of court</a> and thus the participants can agree to whatever rules they want for the purposes of the <a href="https://youtu.be/mr9ZdBwCjwk?t=260" rel="nofollow noreferrer">arbitration as it proceeds based on mutual consent</a>.</p>
<p>Given that the rules of arbitration are somewhat arbitrary (see what I did there), what is meant exactly by the arbitrator's decision must be based in law? Does he mean that the arbitrator's decision have to be based in the laws of the jurisdiction where the incident occurred? Or could the decision be based on the rules that the litigants have agreed to for the arbitration?</p>

<blockquote>
<p>he makes the assertion that an arbitrator can make any decision that
they want, but their decision has to be based in law.</p>
</blockquote>
<p>The question isn't entirely settled.</p>
<p>While an arbitrator may have a moral obligation to make a decision based in law, there is usually no legally enforceable way to enforce that obligation, and even when there is a legal obligation it is so deferential that it is almost impossible to enforce in practice.</p>
<p>For all practical purposes, in the usual case where a contract establishes that certain kinds of disputes are subject to arbitration and someone subject to the contract takes a case to arbitration, the arbitrator can completely disregard the law and is not subject to judicial review for doing so.&lt;1&gt;</p>
<p>Historically, the U.S. Supreme Court noted in dictum that “the
interpretations of the law by the arbitrators in contrast to manifest disregard, are not subject, in federal courts, to judicial review for
error in interpretation,&quot; <em>Wilko v. Swan</em>, 346 U.S. 427, 436-437 (1953). This led all U.S. Circuit Courts of Appeal to recognize a manifest disregard of the law ground for invalidating an arbitration award.</p>
<p>But, some lower courts concluded that the U.S. Supreme Court implicitly eliminated this ground for review of arbitration awards when it decided  <em>Hall Street Assoc., L.L.C. v. Mattel, Inc.</em>, 128 S. Ct. 1396 (2008) (holding that the grounds set forth in the Federal Arbitration Act (“FAA”) at 9 U.S.C. §§ 10(a) (1)-(4) and 11 are the exclusive grounds upon which an arbitral award may be vacated or modified.)</p>
<p>Since then, the U.S. Supreme Court has, at a minimum, strongly disfavored the manifest disregard of the law ground for invalidating an arbitration award, but hasn't stated whether this historically recognized ground for setting aside an arbitration award is available at all or not under the Federal Arbitration Act as a clearly as it might. <em>See, e.g., Oxford Health Plans LLC v. Sutter</em>, 569 U.S. 564, 572-573 (2013) (“The potential for . . . mistakes [by the arbitrator] is the price for agreeing to arbitration.”).</p>
<p>As a result, there is now a circuit split between U.S. Court of Appeals circuits over the ultimate issue of whether even &quot;manifest disregard for the law&quot;, which was once widely accepted as a ground for setting aside an arbitration award, is still a basis for invalidating an arbitration award under the Federal Arbitration Act (the FAA). <em>Compare, e.g., Weiss v. Sallie Mae, Inc.</em>, 939 F.3d 105 (2d Cir. 2019) (reversing a lower federal trial court’s decision to vacate that award on grounds that the arbitrator manifestly disregarded the law), to <em>Wachovia Securities, LLC v. Brand</em>, 671 F.3d 472, 483 (4th Cir. 2012) (recognizing that &quot;manifest disregard&quot; of the law also exists as either an independent ground for overturning arbitral awards or as a judicial gloss on the grounds for vacatur set forth in 9 U.S.C. § 10). <em>See also</em> Liz Kramer and Bri’An Davis, &quot;Manifest Disregard: The Circuit Split Persists&quot;, American Bar Ass’n. (Jul. 6, 2015) (the Fifth, Eighth and Eleventh Circuits have held that manifest disregard did not survive <em>Hall Street Assoc., LLC</em>, while the Second, Fourth, Seventh, Ninth and Tenth Circuits continue to allow manifest disregard challenges) (with the 2nd Circuit subsequently changing sides in the circuit split in <em>Weiss</em> in 2019 leaving four circuits on each side of the split and five circuits with no binding precedents addressing the issue since 2008).</p>
<p>In circuits where manifest disregard for the law is a ground for setting aside an arbitration award the standard to do so is as follows:</p>
<blockquote>
<p>[A] court's belief that an arbitrator misapplied the law will not
justify vacation of an arbitral award. Rather, appellant is required
to show that the arbitrators were aware of the law, understood it
correctly, found it applicable to the case before them, and yet chose
to ignore it in propounding their decision.</p>
</blockquote>
<p><em>Remmey v. PaineWebber, Inc.</em>, 32 F.3d 143, 149 (4th Cir. 1994).</p>
<p>Generally, conservatives on the U.S. Supreme Court have disfavored allowing arbitration awards to be vacated on the ground of manifest disregard for the law, while liberals have favored allowing these challenges, although the issue is not entirely partisan. So, given the current very conservative 6-3 majority on the current U.S. Supreme Court, if it resolved the split, it would probably be most likely to resolve it in favor of not allowing arbitration awards to be challenged on the ground of manifest disregard for the law.</p>
<blockquote>
<p>Does he mean that the arbitrator's decision have to be based in the
laws of the jurisdiction where the incident occurred?</p>
</blockquote>
<p>No. Choice of law is a question that has been solely in the arbiters discretion for a long time (certainly since 1953), at least if there is any colorable reason for applying the law of a jurisdiction other than where the incident occurred even if it is not supported on the merits by applicable law made by courts or is contrary to enacted statutes that should be controlling.</p>
<blockquote>
<p>Or could the decision be based on the rules that the litigants have
agreed to for the arbitration?</p>
</blockquote>
<p>This would be permissible, but failure to do so is only rarely enforceable as discussed above.</p>
<p>&lt;1&gt; One can imagine a very atypically drafted arbitration agreement that somehow changes this predominant rule, but it almost never happens that way. Likewise, in theory, an arbitration agreement could specifically provide that a decision be made on some basis other than the applicable law (e.g. by a coin toss).</p>

<h2>An arbitrator has their power through statute</h2>
<p>In every jurisdiction where arbitration is legally binding, that comes from a law that says arbitration Is legally binding and the way an arbitration must be agreed to and conducted to make it so. Within those boundaries an arbitrator and the parties have more flexibility than a court does but they still must follow the law.</p>
<p>For example, the parties <em>could</em> agree that the dispute will be resolved by a coin flip and if the arbitrator decided it that way that would be in accordance with law: the decision followed the statute that allows the parties to agree on how to resolve the dispute. More likely is that the arbitration will be conducted like a trial but without having to follow the strict rules of evidence that a court has to; it’s quite common for parties to an arbitration to waive the hearsay rule. It’s also common for the parties to agree that the arbitrator is to decide based on principles of justice rather than strict adherence to law.</p>

<p>I have a dispute with you over some contract between us, and there's a clause in the contract that says we have to refer the matter to an arbitrator. What's going on here is that we've decided to create a process for ourselves, under the contract, about how to proceed. We could go to the courts but we have mutually decided not to (I still <em>could</em>, but in the U.S., and elsewhere, courts are likely to decline to interfere with an ongoing arbitration process that I had previously committed to following). Probably, we made that decision because some facet of arbitration is attractive to us, including:</p>
<ul>
<li>procedural flexibility compared to courts</li>
<li>rules of evidence are different - arbitration may allow hearsay which courts would not, and can be restricted as to which of my documents are subject to discovery</li>
<li>arbitration is less public</li>
<li>we get to choose an arbiter, but we don't get to choose a judge</li>
<li>it might be faster or cheaper</li>
<li>it is more likely to come up with a final determination, as opposed to a chain of appeals</li>
</ul>
<p>Because the arbitration tribunal is not a court, there are limits to the remedies it can provide, and its decisions can't bind anyone who aren't parties to the contract. But there are many disputes where this is an acceptable tradeoff.</p>
<p>The arbitration will take place according to some rule-set, which might be the law of some particular place, like New York or France, or a specific set of arbitration rules developed independently. It will also happen somewhere in the world - the <em>seat</em> or <em>forum</em> of the arbitration - which is relevant because the seat will have laws that govern the arbitration process. This is also called the &quot;curial law&quot;. For example, the United States has a federal law which <a href="https://www.law.cornell.edu/uscode/text/9/9" rel="nofollow noreferrer">provides</a> for courts to be able to enforce arbitration decisions, which is relevant when I refuse to abide by the arbitrator's award in your favor. (Side note: We can actually choose a curial law that differs from that of the place where the arbitration is held! But it usually will be the same place.)</p>
<p>The arbitrator has to obey the law of the seat, as far as licensing, procedures, costs, and so on. They are also meant to follow the rule-set agreed to in the contract, for how they conduct the process and ultimately make a decision. Within those rules, they could decide the matter whichever way. The law of the seat may give additional restrictions and remedies about the process, which have the effect of fettering the arbitrator's discretion. For example, if there are serious irregularities in how they conduct the arbitration, such as a failure to be impartial, then courts may be able to intervene. The bar for exercising that supervisory jurisdiction can be high - typically, courts will excuse some matters if they don't bring the overall outcome into doubt.</p>
<p>Confusion may arise if we fail to be clear about the seat and about the rule-set. A recent international example was <em>Enka v Chubb</em> before the UK Supreme Court in 2020, <a href="https://www.supremecourt.uk/cases/docs/uksc-2020-0091-judgment.pdf" rel="nofollow noreferrer">in which</a> the contract between the two Russian companies said</p>
<ul>
<li>&quot;the Dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce&quot;</li>
<li>&quot;the place of arbitration shall be London, England&quot;</li>
</ul>
<p>but had not specified whether that part of the contract itself should be construed according to the law of England or Russia or anywhere else. The curial seat might be England, by implication from the location of the proceedings, and the <em>rest</em> of the contract had no explicit clause about choice of law. The UKSC deduced it was England, by a narrow margin. Thus, a court in England was entitled to issue an anti-suit injunction (preventing concurrent court proceedings in Russia until the arbitration was settled) having interpreted the contract according to English law.</p>
