State Law: Overturning Binding Arbitration

Binding arbitration is a process where an arbitrator hears evidence from both sides of a dispute and delivers a binding decision. In most cases, the arbitrator's decision is final and cannot be reviewed or overturned by a court. However, in certain limited circumstances, such as fraud, misuse of power, or bias, the decision may be overturned. The applicability of binding arbitration and the grounds for overturning it can vary depending on state law and the specific circumstances of each case. In some cases, federal law, such as the Federal Arbitration Act (FAA), may take precedence over state law. This topic explores the circumstances under which binding arbitration can be overturned and the interplay between state and federal laws in this context.

Binding arbitration and state law: when binding arbitration can be reviewed

Arbitration is a way to keep the cost of lawsuits down and shorten the time it takes for a case to get resolved. It is a process that can be mandatory or voluntary, and the arbitrator's decision may be binding or non-binding. In binding arbitration, the arbitrator's decision is final and can only be reviewed or overturned by a court in very limited circumstances. These include instances where fraud or misuse of power has been involved, or when the arbitrator has exceeded their power as set out in the arbitration agreement.

In the United States, the Federal Arbitration Act (FAA) governs arbitration agreements and the Supreme Court has held that the FAA overrides any state law that runs counter to its pro-arbitration policies. This means that arbitration agreements are generally enforceable, and it is difficult to avoid arbitrating a dispute. However, in the case of DIRECTTV, Inc. v. Imburgia, the Supreme Court accepted review to determine whether the state's interpretation of a contract conflicted with the FAA and should be overturned. This case arose in California, where class-action waivers in consumer contracts were held to be unenforceable, and the state court refused to enforce the waiver in the arbitration clause.

The Supreme Court has also ruled on several cases that directly implicated allegations of employment discrimination or related federal labor and employment laws. For example, in Wright v. Universal Maritime Service Corp. (1998), the Court held that a collective bargaining agreement (CBA) could require arbitration of an Americans with Disabilities Act (ADA) claim if the CBA terms had "clearly and unmistakably" waived the right to pursue claims in court. Similarly, in Circuit City Stores v. Adams (2001), the Court held that the FAA renders most employment-related arbitration agreements enforceable, except for those involving "transportation workers" engaged in the movement of goods in interstate commerce.

In summary, while binding arbitration decisions are generally final and cannot be reviewed or overturned by courts, there are limited circumstances where this is possible, such as in cases of fraud or misuse of power. Additionally, while the FAA generally overrides state law, there have been instances where the Supreme Court has reviewed and potentially overturned state interpretations of contracts that conflict with the FAA.

Grounds for overturning an award

In binding arbitration, the arbitrator's decision is typically final and cannot be reviewed or overturned by a court, except in limited circumstances. These circumstances include instances of fraud, misuse of power, or evident partiality by the arbitrator.

The Federal Arbitration Act (FAA) §10(a) outlines four statutory grounds for vacating an arbitration award:

• Corruption, fraud, or undue means were involved in procuring the award.
• There was evident partiality or corruption on the part of the arbitrators.
• The arbitrators were guilty of prejudicial misconduct during the hearing.
• The arbitrators exceeded their powers or imperfectly executed them, resulting in a lack of mutual, final, and definite award upon the subject matter submitted.

For international awards, the New York Convention, a treaty ratified by over 150 countries and incorporated into the FAA, provides additional grounds for vacating an award. These include instances where:

• The parties were under some incapacity or the arbitration agreement was invalid under the law of the country where it was made.
• The party against whom the award was invoked did not receive proper notice or was unable to present their case.
• The award deals with a dispute beyond the scope of the arbitration agreement.
• The composition of the tribunal or the arbitral procedure did not align with the parties' agreement.
• The award has not yet become binding or has been set aside by a competent authority.

It is important to note that the grounds for overturning an arbitration award are interpreted narrowly, and errors in fact, contract interpretation, or law are generally not sufficient reasons for vacating an award.

The role of the Supreme Court

The US Supreme Court has played a significant role in shaping the current interpretation of arbitration law. In the 1980s, the Supreme Court expanded the scope of the Federal Arbitration Act (FAA) to include all types of disputes, whether in federal or state court. This expansion set the stage for the Court's later rulings on the enforceability of arbitration agreements.

One notable case is Circuit City Stores v. Adams (2001), where the Court held that the FAA renders most employment-related arbitration agreements enforceable, except for those involving transportation workers engaged in interstate commerce. This ruling reinforced the pro-arbitration stance of the FAA, which the Court has emphasised takes precedence over conflicting state laws.

In another case, DIRECTTV, Inc. v. Imburgia, the Supreme Court reviewed a state court's refusal to enforce a class-action waiver in an arbitration clause. The state court in California held that class-action waivers in consumer contracts were unenforceable, but the Supreme Court's review questioned whether the state's interpretation conflicted with the FAA. This case highlights the Court's role in determining the interplay between state contract law and the FAA.

The Supreme Court has also addressed concerns about the use of arbitration in employment discrimination claims. In Wright v. Universal Maritime Service Corp. (1998), the Court held that a collective bargaining agreement could require arbitration of an Americans with Disabilities Act (ADA) claim if the agreement clearly waived the right to pursue ADA claims in court. This decision demonstrated the Court's willingness to uphold arbitration agreements, even in sensitive employment discrimination matters.

However, in Lamps Plus, Inc. v. Varela (2019), the Supreme Court concluded that class arbitration could not be required if the agreement was ambiguous. This decision underscored the importance of clear contractual language in arbitration agreements and provided guidance on interpreting ambiguous contract terms.

In summary, the US Supreme Court has consistently interpreted the FAA broadly, favouring arbitration as a means of resolving disputes. Its rulings have established the enforceability of arbitration agreements, clarified the interplay between state law and the FAA, and addressed concerns related to employment discrimination claims. The Court's decisions have had a significant impact on the current landscape of arbitration law, influencing how lower courts interpret and apply arbitration clauses in various contexts.

Mandatory arbitration and employment contracts

Mandatory arbitration clauses are common in employment contracts. These clauses require employees to waive their right to sue in court as a condition of employment. Instead, employees must resolve legal claims through an arbitration procedure outlined in the contract. This procedure is unilaterally developed and imposed by the employer. While seemingly voluntary, employees must sign these agreements to get the job.

In the United States, more than half of all non-union private sector employers include mandatory arbitration clauses in their employment contracts, affecting over 60 million workers. These clauses are legally enforceable under the Federal Arbitration Act (FAA), which was passed in 1925 to allow companies to agree to arbitrate contract disputes. The FAA applies only to contractual disputes, but in the 1980s, the Supreme Court expanded its scope to include all types of disputes, in both federal and state courts. The Supreme Court has also held that the FAA overrides any state law that conflicts with its pro-arbitration policies.

The use of mandatory arbitration in employment contracts has been criticised for depriving workers of their rights and limiting their access to courts. Employees are less likely to win arbitration cases and often recover lower damages compared to court proceedings. Employers have a significant advantage in the process as they define the procedures and select the arbitration providers. Additionally, arbitration awards are private, and arbitrators lack the power to order ongoing compliance, potentially allowing illegal employer practices to continue.

Despite these concerns, courts have consistently enforced arbitration clauses in employment contracts since the 1990s. In two key decisions, AT&T Mobility LLC v. Concepcion (2011) and American Express Co. v. Italian Colors Restaurant (2013), the Supreme Court held that class-action waivers in mandatory arbitration agreements were broadly enforceable. This gave businesses an incentive to include such waivers in their contracts, preventing workers from litigating their cases jointly and forcing them to proceed with individual claims through arbitration.

Arbitration fees and affordability

Arbitration is often considered an alternative to traditional court litigation, as it offers more privacy, is speedier, and is less expensive. However, in some cases, the high cost of arbitration can be a concern, especially when compared to other methods of dispute resolution. In India, for example, the present arbitration regime has been criticised for its high costs, which some argue defeat the purpose of having arbitration as a more affordable option.

In response to this, the Indian government introduced an amendment in 2015 that aimed to increase the affordability of arbitration. This amendment, based on the Delhi International Arbitration Centre (DIAC) Rules Model Fee, added Section 31A to the Arbitration Act, 1996, defining the cost regime and specifying what "costs" would be considered for arbitration. The 2019 Amendment further clarified that arbitrators appointed by the parties must abide by the rates outlined in the Fourth Schedule.

In the United States, arbitration fees can vary depending on the institution and the specific rules and laws governing the proceedings. Generally, there are two main categories of costs: filing or registration fees and administrative fees. Filing fees are typically required to initiate arbitration proceedings and can vary based on the number of parties involved. For example, JAMS, a US-based arbitration service provider, charges a $2,000 filing fee for two-party matters and $3,500 for three or more parties. Additionally, JAMS charges a reduced fee of $400 for matters based on employment conditions and $250 for consumers.

Other costs associated with arbitration include hearing costs, such as payment for the venue, stenographers, and translators, as well as minor costs like producing hard copies and hearing bundles. These costs can add up quickly and significantly impact the overall affordability of arbitration. It is worth noting that some arbitration agreements specify which party will bear these costs, while others may require each party to pay equal shares.

While arbitration can offer a more affordable alternative to traditional litigation in some cases, it is important to consider all associated fees and expenses to ensure it is a feasible option.

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