The Important and Timely Demise of Extra-StatutoryStandards of Review in the United States

The Important and Timely Demise of Extra-Statutory Standards of Review in the United States Quinn Smith1 As Peru embarks on the application and interpretation of its new arbitration law, it is worth looking at courts have interacted with their own arbitration laws over an extended period of time. While the new Peruvian law is modern and widely acclaimed, over the course of the coming years new and different cases will test its contours and edges. As Peruvian judges, lawyers, and scholars contemplate the proper response to these challenges, it can be helpful to look at the history of a country like the United States and its arbitration law. While there are obvious differences in the systems, conceptual approaches to arbitration can be similar or can show better methods of tackling common problems. The jurisprudence of United States courts regarding extra-statutory grounds of review provides a rich field for study and reflection.

For years, courts in the United States have struggled with extra-statutory standards of review of arbitral awards, creating a variety of definitions, names, and standards differing among the circuit courts of appeal2 and even within a state’s federal and state courts3. With the Supreme Court’s decision in Hall Street Associates LLC v. Mattel, Inc.4, extra-statutory standards of review came under harsher criticism. The Court decided to limit the parties’ ability to expand the statutory standards of review in the Federal Arbitration Act5 (the “FAA”), and courts have responded by reviewing their decisions on extra-statutory standards of review. The current result is a diversity of decisions in the appellate courts, some clinging to extra-statutory grounds of review and others wholly discarding them. The Supreme Court has yet to clarify this confusion, but it should embrace the demise of extra-statutory standards of review. Extra-statutory standards of Quinn Smith is a shareholder at Smith International Legal Consultants in Miami. His practice focuses on international dispute resolution and advising on cross-border transactions. He can be reached at quinn.smith@smintlaw.com.

There 13 circuits in the U.S. Each circuit is a geographical area including different states and territories. Under the U.S. legal system, these courts are the final word on all federal matters within their circuit unless a Supreme Court decision states otherwise.

3 In the United States, each state has state courts with general jurisdiction. There are also federal courts with jurisdiction over issues arising under federal law and disputes between citizens of different states or a state and a foreign country.

Jurisdiction in the state and federal courts can be exclusive on some matters and concurrent on others. As a result, state and federal courts can arrive at different conclusions on similar matters.

4 See Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396 (2008).

5 The FAA is the federal statute governing arbitration. The Supreme Court has interpreted the FAA as superior to every state statute on arbitration where the state statute does not encourage arbitration. Due to Supreme Court precedent, the FAA is most important arbitration statute in the U.S. The FAA has three chapters. The first chapter is the default chapter and applies to all arbitrations unless the FAA states otherwise. The second chapter incorporates the New York Convention, and the third chapter incorporates the Panama Convention.

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review have errantly supplanted contract law, invited courts to wrongly review the merits of arbitral awards, and contaminated international arbitration with the political debates of mandatory consumer arbitration.

This article will look at the history of extra-statutory standards of review and the recent changes brought by Hall Street. Because these changes are important to international practitioners, the article will analyze some of the cases interpreting Hall Street and the current state of the law. The article will then go a step further, arguing for courts to change their approach to extra-statutory standards of review. This discussion will provide a foundation for analysis of judicial decisions in other countries, including Peru, and provide suggestions on how to view arbitration in the twenty first century.

1. It all Started with Dicta Although the United States adopted the FAA in 1925, few cases initially tested its contours, especially in the area of the annulment of arbitral awards. In the 1950’s, the Supreme Court decided the case of Wilko v. Swan6, vacating the decision of an arbitral tribunal to pass judgment on a case arising under securities law.

While discussing some of the drawbacks of arbitration in the context of a statute regarding the sale of securities to consumers, the Supreme Court listed some of its concerns with arbitration: While it may be true, as the Court of Appeals thought, that a failure of the arbitrators to decide in accordance with the provisions of the Securities Act would ‘constitute grounds for vacating the award pursuant to section 10 of the Federal Arbitration Act,’ that failure would need to be made clearly to appear. In unrestricted submission, such as the present margin agreements envisage, the interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation7.

In other words, the Supreme Court described a potential ground to challenge an arbitrator’s decision based on an incorrect interpretation of the law, using the words “manifest disregard.” Although the Supreme Court added little to describe the words “manifest disregard,” the words appeared to derive from something outside the FAA. The Court later overruled this precedent8, but the possibility to challenge an award based on a legal ground outside the statutory text of the FAA laid the groundwork for extra-statutory grounds of review. The words of Wilko gained new life, and courts generated a wide array of standards of review derived from judicial decisions, not the FAA. The case is Wilko v. Swan, 346 US 427 (1953).

See id. at 436-437.

8 See e.g. supra note 4 at 584.

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Since the decision in Wilko, different standards have emerged9. Some circuits labored to create a defined standard known as “manifest disregard of the law.”

Under this framework, the tribunal had to know the law and intentionally choose to not follow it. Other courts held the tribunal to a standard of rationality, analyzing awards to determine if they are “completely irrational,” “fundamentally irrational,” or “arbitrary and capricious.” These characterizations of rationality presented further problems, leading the court to potentially study the arbitration record for any rational basis in the facts, not just the law. Still other courts used a public policy ground to study awards, although no such ground for vacatur exists under the FAA. All of these grounds were extra-statutory, and often, each circuit would allow certain kinds of extra-statutory grounds of review but not others.

Despite widespread criticism, by the early part of the twenty-first century it seemed extra-statutory grounds of review had become a settled feature of federal law. The standard of review appeared in state and federal cases and touched on decisions under the FAA and the New York Convention. It appeared courts and commentators could only look for a way to reconcile the different decisions applying extra-statutory grounds of review until the Supreme Court looked at the issue in 2008.

2. A Sea Change Starts in a Slightly Different Context Many practitioners, scholars, and judges accepted the continuing existence of extra-statutory grounds of review until the Court’s opinion in Hall Street. In Hall Street, a party seeking to vacate an award under a contractually created standard of review used the courts’ ability to create non-statutory standards of review as justification for parties creating non-statutory standards of review. The Supreme Court rejected the argument, stating that that the FAA sections 10 and 11 “provide the exclusive grounds for expedited vacatur and modification.” The Court went on to discuss “manifest disregard” and seemingly closed the door on its application as a non-statutory ground of review: Hall Street reads this statement [from Wilko] as recognizing “manifest disregard of the law” as a further ground for vacatur on top of those listed in § 10 . . . Hall Street sees this supposed addition to § 10 as the camel’s nose: if judges can add grounds to vacate (or modify), so can contracting parties.

But this is too much for Wilko to bear. Quite apart from its leap from a supposed judicial expansion by interpretation to a private expansion by contract, Hall Street overlooks the fact that the statement it relies on expressly rejects just what Hall Street asks for here, general review for an arbitrator’s legal errors. Then there is the vagueness of Wilko’s phrasing. Maybe the term See Kenneth Davis, When Ignorance of the Law Is No Excuse: Judicial Review of Arbitration Awards, 45 Buff. L. Rev. 49, 88-101 (1997). This article helpfully charts the development of the theory and provides the terms used in this paragraph.

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“manifest disregard” was meant to name a new ground for review, but maybe it merely referred to the § 10 grounds collectively, rather than adding to them. Or, as some courts have thought, “manifest disregard” may have been shorthand for § 10(a)(3) or § 10(a)(4), the paragraphs authorizing vacatur when the arbitrators were “guilty of misconduct” or “exceeded their powers.”

We, when speaking as a Court, have merely taken the Wilko language as we found it, without embellishment, and now that its meaning is implicated, we see no reason to accord it the significance that Hall Street urges. (internal citations omitted) Stated simply, courts cannot create standards of review, and parties cannot do so either. This result in Hall Street opened the door for courts and litigants to apply the language of Hall Street to other standards of review found outside the FAA. A. Some Courts Cling to Extra-Statutory Grounds of Review The Second Circuit10 directly looked11 at the issue first at the appellate level12.

In Stolt-Nielsen S.A. v. AnimalFeeds Intern. Corp.13, the Second Circuit analyzed the availability of extra-statutory grounds of review under a strict reading of Hall Street. It noted the Hall Street court had demonstrated some uncertainty regarding the meaning of “manifest disregard.” The Second Circuit took this uncertainty to mean extra-statutory grounds of review could still exist but as a way to describe the statutory grounds of review under section 10 of the FAA. This narrow reading of Hall Street provided the foundation for the decisions of other courts to keep the reasoning of extra-statutory grounds of review in various forms.

The Third Circuit14 adopted a similar path without a lengthy analysis of Hall Street15. The court merely noted the reasoning behind the “irrational” standard of review of arbitral awards, classified it as part of section 10(a)(4) of the FAA, and proceeded to analyze the award using its prior case law. Based on this decision, the Third Circuit seemed to have little qualms adopting the reasoning behind extra-statutory grounds of review, not even troubling itself with an analysis of Stolt-Nielsen or Hall Street.

Includes New York, Connecticut, and Vermont.

The First Circuit referenced the impact of Hall Street before the Second Circuit’s decision. See Ramos-Santiago v.

United Parcel Svc., 524 F.3d 120, 124 (1st Cir. 2008). While the First Circuit stated extra-statutory grounds of review did not exist, it made this statement in dicta with little analysis. The case before the First Circuit dealt with arbitration under state law, not the FAA. The First Circuit’s statement should provide adequate indication of the court’s direction in future in decisions. The First Circuit includes Puerto Rico, Rhode Island, Massachusetts, New Hampshire, and Maine.

12 See Stolt-Nielsen SA v. AnimalFeeds Intern. Corp., 548 F.3d 85 (2d Cir. 2008).

13 548 F.3d 85, 94 (2d Cir. 2008). The case was later overruled on other grounds, which means the case is still binding law on the issue of extra-statutory grounds of review but is not binding law on those issues where the Supreme Court overruled the decision.

14 Includes Pennsylvania, New Jersey, and Delaware.

15 See Ario v. Underwriting Members of Syndicate 53 at Lloyds for 1998 Year of Account, 618 F.3d 277, 295 (3d Cir. 2010).

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In Coffee Beanery16, the Sixth Circuit17 found that “manifest disregard” still exists and vacated an award on this standard, reaffirming the validity of extrastatutory grounds of review. The Sixth Circuit took a similar path as the Second Circuit, writing that the Supreme Court “did not come to a conclusion regarding the precise meaning of Wilko [the case creating non-statutory grounds of review], holding only that Wilko could not be read to allow parties to expand the scope of judicial review by their own agreement.” The Sixth Circuit went on to note that “[i]n light of the Supreme Court’s hesitation to reject the “manifest disregard” doctrine in all circumstances, we believe it would be imprudent to cease employing such a universally recognized principle”18. In this way, the Sixth Circuit went a step further, not only holding extra-statutory grounds of review exist but continue to operate as an independent ground of review, not just a description of section 10.

Other circuits later adopted the position defended by the Second and Sixth Circuits. In Comedy Club, Inc. v. Improv West Associates, the Ninth Circuit took its turn defining manifest disregard after Hall Street19. The Ninth Circuit rejected the notion that Hall Street eliminated manifest disregard as a ground of review.

Instead, the court reaffirmed its position that manifest disregard is only a way to describe the existing standard of review contained in 9 USC 10(a)(4), which allows the court to vacate an award where the arbitrators “exceed their powers.”

For those courts attempting to keep the manifest disregard standard, their decisions face a problem in their analysis. The Supreme Court clearly stated that the FAA is the exclusive ground for vacating an award, and this statement must be given effect. Merely reclassifying extra-statutory grounds of review to describe section 10 does little to interpret the statute or support the decision in Hall Street.

From a strict stare decisis point of view, perhaps the courts supporting manifest disregard have a viable foundation for their argument. These courts read Hall Street to not specifically decide the question of whether manifest disregard existed. Rather, it focused on the language in the opinion where the Supreme Court seemed to equivocate, stating that manifest disregard might be merely a reference to the statutory grounds of review, not the creation of a nonstatutory ground of review. But the Supreme Court did not definitively adopt the position of the Second, Third, Sixth, and Ninth Circuits. To the extent Hall Street addresses manifest disregard, the opinion focuses on the ability of courts to generally review the law and evidence, and it resoundingly rejects such broad review. There is no language in Hall Street favoring the decision of courts to retain extra-statutory grounds of review or their reasoning, but there is language questioning the ability of courts to generally review the arbitrator’s decision.

See Coffee Beanery, Ltd v. WW, LLC, No. 07-1830, 2008 WL 4899478 (6th Cir. Nov. 14, 2008).

Includes Tennessee, Kentucky, Ohio, and Michigan.

18 See supra note 16.

19 See Nos. 05-55739, 05-56100, 2009 WL 205046 (9th Cir. Jan. 29, 2009).

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Further, the decision of these courts does not change a core, troubling concept of reliance on extra-statutory grounds of review. At their core, extra-statutory grounds of review (and their reasoning) are a judicially crafted ground of review with widely divergent standards and terms of art. Even if a court re-classifies the doctrine as describing one of the statutory grounds of review, the analysis underlying the doctrine is still a judicial concoction. As a result, courts are left grappling with a standard not related to the foundations of arbitration: contracts and the statutes that enable arbitration20. Upon these two foundations, the courts can apply time-tested analytical techniques with wide application instead of a narrow, unmanageable mess of distinctions requiring a review of the evidence21.

B. Other Courts Readily Dispatch with Extra-Statutory Grounds of Review Undaunted by the decisions in the Second, Sixth, and Ninth22 Circuits, the Fifth, Eighth, and Eleventh Circuits took their own paths, crafting decisions leading the courts in their circuits away from extra-statutory grounds of review.

To support their decisions, the Fifth and Eleventh Circuits have looked to the history of arbitration in the U.S., their own precedent, and the Supreme Court’s ruling in Hall Street. These two circuits have found unequivocally there is further application of extra-statutory grounds of review.

In many ways, the Fifth Circuit’s opinion in Citigroup Global Markets, Inc. v. Bacon is the ideal case to analyze manifest disregard of the law23. The court reviewed a decision by the Federal district court vacating the award for manifest disregard of the law. The district court did not rule on any other grounds, and the Fifth Circuit limited its decision to whether a district court could apply manifest disregard as a non-statutory grounds of vacatur. Looking to the facts of the case and the history of arbitration in the United States, the Fifth Circuit reversed the district court, finding that manifest disregard no longer existed as a non-statutory ground of review24.

The Fifth Circuit unequivocally stated that manifest disregard is not a nonstatutory ground of review. To support this decision, the court looked into the 20 Compare the manifest disregard jurisprudence with the decisions of the Florida state courts. Under Florida state law, courts do not apply manifest disregard. As a result, the decisions interpret the contract and the statute. The courts’ decisions have broad applicability and provide a solid foundation to challenge an arbitral award. See e.g. Raynor v. Florida State Lodge, 987 So. 2d 152, 154 (Fla. 1st DCA 2008) (deciding that due process and double jeopardy are inherent to a contractual relationship and arbitrator does not exceed powers when applying the principles).

21 Some circuits have offered no opinion on their direction, waiting instead for the proper case to make a decision on the application of Hall Street to extra-statutory grounds of review. See DMA Intern., Inc. v. Qwest Intern., Inc., No: 08-1392, 2009 WL 3627941 (10th Cir. Nov. 4, 2009); Hicks v. Cadle Co., 355 Fed.Appx. 186, 197 (10th Cir. 2009); MCI Constructors LLC v. City of Greensboro, 610 F.3d 849, 857 (4th Cir. 2010). In other courts, it is unclear if they will reject extra-statutory grounds of review and their reasoning or apply the reasoning as a gloss on section 10. See e.g. Contech Constr. Prods. Inc. v. Heierli, Nos. 09-01483 and 09-02204, 2011 WL 453236 at *12 (D.D.C. Feb. 4, 2011).

22 Includes New Mexico, Colorado, Utah, Wyoming, Kansas, and Oklahoma.

23 See Citigroup Global Markets, Inc. v. Bacon, 562 F. 3d 349, 350 (5th Cir. 2009).

24 A decision can varying levels of weight as a matter of precedent. Decisions relying on more case law with a longer history and citations to other decisions by the Circuit Court of Appeals are stronger because they are less open to change without disregarding large portions of case law. In addition, an opinion gains strength when it effectively addresses counter-arguments. This decision does all of those things and thus holds more precedential value.

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history of arbitration, the legislative history underlying the FAA, and its own precedent. At every turn, it found that courts cannot review arbitral awards for an error of law, including manifest disregard of the law.

Looking to the history of arbitration, the court relied heavily on an opinion25 from the US Supreme Court in 1854 written with little dissent26. In that case, the appellants sought to vacate an arbitral award on the grounds that the tribunal considered matters outside those submitted to it and acted in a fraudulent and corrupt manner. The Supreme Court affirmed the lower court and reiterated its position that arbitration should be encouraged and awards should not be set aside for an error in law or fact. The Supreme Court confidently laid out these standards, declaring them to “too well settled by numerous decisions to admit of doubt.”

The Fifth Circuit picked up on these remarks regarding the general principles of arbitration and tied them both to the text of the FAA and the legislative history of the statute. The court noted that the standards laid out in 1854 mirrored those enacted in 1925 and accurately reflected the statements in considering the legislation by one of the principle drafters that an award may only be set aside for reasons enunciated under the statute27.

In light of this line of reasoning, the Fifth Circuit took on its own precedent and the decisions of the other Circuits. To strengthen its position, the court noted both the weakness of relying on the case that ostensibly provides the foundation for manifest disregard and the Fifth Circuit’s own reticence to adopt the standard. The court noted how the Fifth Circuit was one of the last Circuits to adopt the standard in 2003 and never fully agreed with the position. For the court, these factors illustrate the shaky reasoning behind manifest disregard.

Turning to the decisions of the other Circuits, the Court took issue with their rulings. Most directly, it criticized the Sixth Circuit one two grounds, arguing that the Sixth Circuit read the decision in Hall Street too narrowly, limiting it only to contractually agreed upon standards of review. The Fifth Circuit also criticized the Sixth Circuit for finding hesitation in the Supreme Court’s treatment of Wilko.

The Fifth Circuit found no dispute from the Supreme Court that Hall Street stood for both the proposition that the FAA does not support non-statutory grounds of review and that Wilko provides no further help.

Addressing the Second and Ninth Circuits, the Fifth Circuit backed away from direct criticism. Although it allowed that the Second Circuit’s reasoning was plausible in light of Hall Street, the Fifth Circuit seemed to want to limit See Burchell v. Marsh, 58 US 344, 349-350 (1856).

Perhaps foreshadowing future decisions, the dissent took issue with the decision, arguing it should be set aside because it was too excessive. But the dissent is only a paragraph, offering no citation to case law or dispute with the general principles guiding the court. In addition, it appears that only 2 of the 9 justices joined in the dissent.

27 Interestingly, the Fifth Circuit relied, at least in part, on the legislative history of the FAA as stated by the Supreme Court. Thus, we can see a string of legislative history supporting this line of decisions, a stark contrast to the widely held view that courts should only consider the “plain meaning” of the statute and not its legislative history.

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it, arguing that the Second Circuit’s description of manifest disregard should be “very narrow.” And the Fifth Circuit seemed even more hesitant to criticize the Ninth Circuit, merely describing how the Ninth Circuit relied on its precedent28.

Bacon provided the foundation for the Eleventh Circuit to decide extrastatutory grounds of review no longer existed in light of Hall Street 29. In Frazier, the Eleventh Circuit analyzed a parties’ motion to vacate an award as arbitrary and capricious, manifest disregard of the law, and against public policy. The Eleventh Circuit noted the different decisions, citing to the opinions from the Second, Sixth, and Ninth Circuits. Without engaging in a direct attack on any of these decisions, the Eleventh Circuit decided simply to adopt the ruling of the Fifth Circuit: “We hold that our judicially-created bases for vacatur are no longer valid in light of Hall Street. In so holding, we agree with the Fifth Circuit that the categorical language of Hall Street compels such a conclusion.” In short, the Eleventh Circuit followed the Fifth Circuit with little to add.

While these two circuits have reached the right correction, a change in their analysis could put them on stronger footing. The Fifth and Eleventh Circuits have correctly read prior Supreme Court precedent as well as giving effect to the ruling in Hall Street. But they have not created a framework for better applying the standards of review in section 10 of the FAA (and by extension the standards of review in chapters two and three of the FAA). These circuits could benefit from a contract-based approach, as discussed below30.

C. The Current State of the Law Remains Murky As can be frustratingly common in U.S. jurisprudence, the result of the decision in Hall Street and later lower court decisions is a mix of certainty and confusion. The state of affairs is clear in the circuits who have directly reviewed the question. Within the Sixth Circuit, extra-statutory grounds of review exist and will continue to be in effect until a contrary decision of the Supreme Court.

In the Second, Third, and Ninth Circuits, the reasoning behind extra-statutory grounds of review continues to exist but under the heading of the statutory grounds of review in Chapter One of the FAA. In the Fifth and Eleventh Circuits, extra-statutory grounds of review have ceased to exist, and their reasoning has perished as well. In the remaining circuits, the issue remains open until a ruling by The Fifth Circuit’s criticism of its sister Circuits is an excellent example of the strengths and weaknesses of other 28 cases. The Sixth Circuit strayed furthest from its precedent and willingness to challenge the Supreme Court. As such, it was much easier to criticize. The Second Circuit relied sparingly on its own precedent but addressed the Supreme Court’s reasoning, making it slightly harder to criticize. And the Ninth Circuit relied heavily on its own precedent and strongly addressed the Supreme Court’s reasoning, giving the Fifth Circuit much less ground to criticize it. Thus, this case is an excellent didactic tool.

29 See Frazier v. CitiFinancial Corp., LLC, 604 F. 3d 1313, 1324 (11th Cir. 2010) 30 It appears the Eighth Circuit has also decided to eliminate extra-statutory grounds of review and their reasoning, but there is no clear statement of this intent. The Eighth Circuit could still take the path of the Third Circuit and recite the words eliminating extra-statutory grounds of review but keep the reasoning to describe section 10. Because there is no explicit direction, this article puts the Eighth Circuit in the same heading as the Fifth and Eleventh Circuits until further clarification. The Eighth Circuit’s decision is found at the following citation: Medicine Shoppe Intern., Inc. v. Turner Investments, Inc., 614 F.3d 485, 487 (8th Cir. 2010). The Eighth Circuit includes Arkansas, Missouri, Iowa, Minnesota, Nebraska, South Dakota, and North Dakota.

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the Supreme Court or the governing circuit of appeal. Each of these circuits will be free to arrive at its decision, accepting, rejecting, or modifying extra-statutory grounds of review.

The law remains murkier in rulings under the second and third chapters of the FAA. These chapters deal with international arbitrations, and there is no indication as to the effect of Hall Street in these cases. Many have argued there is no application of extra-statutory grounds of review under these two chapters because the Supreme Court has never addressed the issue. In other words, without a ruling by a competent court, there can be no judicially created, extrastatutory grounds of review. Further, extra-statutory grounds of review have a strong foundation in the protection of consumers. Wilko dealt with a consumer contract, and other applications of manifest disregard and other extra-statutory standards of review appear most frequently in cases involving contracts of adhesion, franchise contracts, and other types of contracts reformers have tried to protect through legislative initiatives like Arbitration Fairness Act and its proposed chapter four of the FAA. International arbitrations rarely implicate these kinds of sensitive situations, further limiting the need for extra-statutory grounds of review. Regardless of the arguments supporting the inexistence of extra-statutory grounds of review under Chapters Two and Three, there is little explicit certainty from the Supreme Court clarifying the role of extra-statutory grounds of review.

In addition, all of the decisions (or lack thereof) mentioned in this section do not have the benefit of a Supreme Court decision harmonizing the divergent interpretations of the various circuit courts of appeal. When and if the Supreme Court decides to rule on the issue, the law could emerge as something distinct from anything currently in existence. In sum, a great deal of uncertainty remains.

3. Courts Should Reject the Application of Extra-Statutory Grounds of Review The lack of certainty regarding interpretation of extra-statutory grounds of review is nothing new31. In fact, uncertainty and doubt has been the rule rather than the exception. The creation of extra-statutory grounds of review rose from cryptic dicta and gained life through a variety of decisions and interpretations in state and federal courts. Now, courts still struggle with the correct interpretation of extra-statutory grounds of review, as seen by the panoply of decisions responding to Hall Street. Courts have had difficulty with extra-statutory grounds of review32 for one simple reason: the standards themselves have little to no basis in the core contractual concepts governing arbitration and the FAA. 31 As Professor William Twining has stated, “when “a ‘movement’ relating to law develops in the United States, one outcome is almost invariably a massive, confusing and largely unsystematic body of literature of variable quality.” See William Twining, Alternative to What? Theories of Litigation, Procedure and Dispute Settlement in Anglo-American Jurisprudence: Some Neglected Classics, 46 Mod. L. Rev. 380 (1993).

32 In this section, the article uses the term “extra-statutory standards of review” to refer to both the standards and their reasoning. In any case where the court keeps the reasoning underlying extra-statutory standards of review, it has not solved the core conceptual issues addressed below. For brevity sake, the article has eliminated the reference to “reasoning.”

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A. Extra-Statutory Grounds of Review are Anathema to the Foundational Concepts of Arbitration Arbitration is a contractual creation requiring the application of contract principles of consent and the will of the parties33. Courts should therefore view arbitration through this lens. The text of the FAA supports this position. Section 2 of the FAA makes explicit the validity and enforceability of agreements to arbitrate. This section places the consent of the parties as the rule; courts must enforce it where it exists and any exceptions must be explicit. Section 2 also places contracts as the core element of the statute. When courts interpret the statute, they are fulfilling the command of the legislature to enforce a contract34.

Viewing the FAA in this light, concepts governing contract law take precedence, and the rest of the FAA enforces the parties’ contract.

Studying the grounds of review in Section 10 illustrates this point. At first glance, the text of Section 10(a) may appear to be a series of due process controls on arbitration, limiting the enforceability of badly conducted arbitrations. But there is no command in the statute to incorporate elements of due process historically found in court practice: service, jurisdiction, venue, rules of evidence, constitutional rights to confrontation of witnesses, and other concepts forming the firmament of constitutional due process standards. The FAA leaves these items out, directing courts only to enforce agreements to arbitrate. Interpretation of the FAA should therefore place this emphasis on enforcement of the contract as the primary purpose and direction of the statute.

Viewed in the context of enforcing contracts, Section 10(a) is merely a mechanism to ensure courts enforce the parties’ agreement. In the same way a contracting party cannot agree to be defrauded, Section 10(a)(1)-(2) makes clear the parties to an arbitration agreement cannot agree to a corrupt arbitrator or an award procured by fraud. When the parties agree to agreement, they have contractually mandated an individual or group of individuals resolve their dispute. Section 10(a)(3) protects this contractual obligation by allowing a court to vacate the award where a tribunal refuses to carry out the task the parties have required it to do. Section 10(a)(4) provides a sort of catch-all provision for the enforcement of the arbitration agreement by allowing vacatur where the tribunal exceeds the contractual duties and obligations given to it, further supporting the 33 According to one author’s interpretation of Hobbes and his state of nature, this first statement fits into a familiar framework for arbitration: “But as the history of the procedures adopted for arbitration shows, these procedures were always designed to try to ensure that that the arbitrator’s decision properly responded to the parties’ reasoned arguments. In other words, we should not let the fact that there may have been no formal remedy for flaws in the arbitration process blind us to the fact that there is much more to the role of arbitrator than rendering a final decision.

He was expected, as Hobbes makes clear, to follow the laws of nature.” See David Dyzenhaus, The Very Idea of a Judge, 60 U. Toronto L.J. 61, 71 (2010).

34 The FAA derives largely from the New York state arbitration act passed a few years prior to the FAA. Writing for the highest court in New York, the widely respected Justice Cardozo wrote of arbitration as merely a contract and found the arbitration statute strengthened contractual obligations, not weakened them. See Berkovitz v. Arbib & Houlberg, 130 N.E. 288, 290-291 (N.Y. 1921).

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central tenet of contract enforcement35. In sum, every facet of Section 10(a) points to primary goal of enforcing the parties’ contract.

Extra-statutory grounds of review do not fit within this contract-based paradigm. Extra-statutory grounds of review have their foundation in a manufactured obligation to police arbitral proceedings. This is not the primary focus of the FAA, and such a supervisory role directs courts to non-contractual concepts, like the guidelines of due process under the Constitution and rules of service and jurisdiction. These concepts derive from a different type of noncontractual consent, specifically the consent given by citizens of a country to be managed by a government and the statutes it promulgates.

B. Extra-Statutory Grounds of Review Invite Courts into an Area of the Law Incapable of Sufficient Definition In addition to the conceptual differences noted above, the application of extrastatutory grounds of review leads courts down a fuzzy, uncertain path. Because of their different conceptual foundation, extra-statutory grounds of review direct courts into unnecessary contortions to fit scenarios with bad facts. A simple example can help show the distinctions in the analysis: a tribunal that will not follow the law presented to it. Under an extra-statutory ground of review like manifest disregard of the law, the court must determine the intent of a third party who is a non-party to the vacatur proceedings. Specifically, the court must decide whether the tribunal knew of the law and then chose to reject it. Proving mental state is always difficult, and it is even more difficult where the mind the court is trying to read is not present to testify. Under a contract-based view, the court can take a simpler process: (i) look at the law the parties have contractually obligated the tribunal to follow; and (ii) read the award to see if the tribunal followed the parties’ will. Instead of trying to determine the tribunal’s state of mind, the court can focus on the parties’ intent and the result.

This is a simpler interpretation and one providing a strong foundation for future decisions. In a case with slightly different facts, the next court does not have to adjust its analysis to look at the intent of the tribunal, drawing on concepts of due process normally foreign to the decision maker (after all, it is difficult, if not impossible, to hold non-judges to judicial standards of behavior). The next court can focus on the contractual obligations of the parties and the performance of those obligations, something which courts do with great frequency in the context of nearly every commercial case.

35 Professor Rau writes in support of this position. Looking at the topic of “manifest disregard,” Professor Rau argues “the lion’s share of the ‘manifest disregard’ cases can be re-distributed and placed within an alternative analytical construct--a simple inquiry into the contractual powers of the arbitrator required by &sect 10(a)(4).” See Alan Scott Rau, The Culture of American Arbitration and the Lessons of ADR, 40 Tex. Int’l L.J. 449, 532 (2005).

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Further, courts can stick to familiar concepts of contract law instead of having to create new names and definitions for different factual scenarios. It is no coincidence courts have created names like “arbitrary and capricious” and “irrational” to describe extra-statutory grounds of review. There is no clear definition in the FAA, and there are no statutes describing the standard of review. The result is a shifting sand of names and standards, each crafted to fit the situation. A contractual analysis saves this troublesome work. Courts can instead rely on concepts like “consent” and “expectations” of the parties, drawing on hundreds of years of decisions interpreting contracts. There is no need to create new terms or standards when there is sufficient definition in the field of contract law.

C. Contract-Based Analysis Provides a Wider Spectrum of Protection for more Sensitive Arbitration Issues In following the analytical framework described above, the court has many tools to analyze the variety of situations coming before it, including issues of arbitration involving consumer, civil rights, labor, and franchise law. In these scenarios where one party has weakened bargaining power, courts can look to those statutes or principles derived from contract law, applying them where necessary. Although weak, there are still concepts of contract law meant to protect consumers, and these concepts address contract formation, a time the court can scrutinize without the need for considering the intent of the arbitrator when rendering the award.

Extra-statutory grounds of review also apply indiscriminately, often importing decisions meant to protect a consumer into general arbitrationrelated jurisprudence. It should be expected courts will more closely scrutinize arbitration awards unfavorable to consumers despite the existence of strong facts in favor of the consumer. When this happens, the court will often turn to extra-statutory grounds of review, sometimes attempting to correct a miscarriage of justice. While this may seem appropriate in some cases, its application at the award analysis stage will read like a second guess of a tribunal, opening the door for more sophisticated parties to use a similar second guess when it is intended only to frustrate proper compliance with the award.

D. Towards a Different Concept of Arbitration through the Rejection of Extra-Statutory Grounds of Review Based on the reasons listed above, courts should steer far from extra-statutory grounds of review. But in the process, they should direct their focus to the contractual principles underlying arbitration. In the context of extra-statutory grounds of review, this may seem obvious, but there are further grounds for study and application. Judges, lawyers, scholars, and users of arbitration have long viewed arbitration as a sort of competitor to the judiciary, requiring the judiciary 180

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to either be “friendly” or “hostile” to the process. This is a false dichotomy for many reasons, not least the correct analysis of the arbitration process.

Courts around the world generally pride themselves in enforcing parties’ contracts. This is a core element of the court’s mission, to enforce the decisions of individuals to enter into financial transactions and commerce. Courts tend to refuse this direction when enforcement of the contract works some sort of inequality on a weaker party or removes those needing protection from the watchful eye of the court. Through the contractual analysis described above, courts can both enforce parties’ agreements to arbitrate while also using familiar concepts of contract law to protect parties in need of the equalizing scale of justice. As such, there should be no system that is “friendly” or “hostile” to arbitration because no courts should have to choose between honoring a contract or losing its duty to defend the powerless. Both concepts can coexist under a contractually focused framework.

Courts in the United States would benefit from this analysis, but courts in other countries like Peru can also use it. Although Peru has little notion of extrastatutory grounds of review, the concepts underlying extra-statutory grounds of review may present challenging cases in the future. The contractual analysis described above should provide a helpful tool for dealing with tough cases. While it may be applied today to the issue of extra-statutory grounds of review, in the future it should have broader use to create a world where arbitration works in tandem with the courts, not as inferior competition.

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