From Lexology, Jeanne Harrison discusses the finality of arbitration agreements under the Federal Arbitration Act (FAA). Jeanne writes:
Parties involved in a dispute may face a choice between arbitration and litigation. Previous articles in this series have discussed various factors that can influence that choice. One generally perceived advantage of arbitration is finality. But how final and binding is an arbitration award? The answer is governed primarily by the Federal Arbitration Act.
The Federal Arbitration Act
The Federal Arbitration Act (FAA) is a statute enacted in 1925 which provides the basic legal principles applicable to arbitration in the United States. At its core is the following principle—arbitration agreements involving interstate or foreign commerce (which includes virtually all construction contracts in the United States) must be considered:
- Irrevocable; and
- Enforceable, except on legal or equitable grounds for the revocation of a contract.
The FAA is recognized to preempt state laws that would otherwise prevent enforcement of a construction arbitration agreement. In addition, the FAA also details those circumstances under which an arbitration award can be corrected, modified, or vacated. These rules, which are discussed further below, establish the extent to which an arbitration award is final and binding.
Vacating an Award
Courts will only vacate an arbitration award if the petitioner serves an action to vacate on the adverse party within three months of the award being filed or delivered and then can demonstrate that the award is a product of fraud, corruption, or some serious misconduct by the arbitrator. The FAA provides four grounds for vacating an award:
- Where the award was procured by corruption, fraud, or undue means.
- Where there was evident partiality or corruption in the arbitrators, or either of them.
- Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.
- Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
The FAA does not give the arbitrator the authority to review the evidence submitted to the arbitrator and reach a different decision based upon the merits of the case.
The authority to vacate an award does not give a court the authority to review the evidence submitted to the arbitrator and reach a different decision on the merits.
An arbitration award is far more final and binding than a decision by a state or federal trial court. A party seeking to avoid enforcement of an arbitration award is required to show by clear and convincing evidence that the award was the product of fraud or corruption; that the complaining party was deprived of a fair hearing, or that the arbitrator went beyond the powers granted by the parties’ contract. The practical implication being that an arbitration award is far less likely to be appealed than a state or federal trial court decision.
Read the full story at Is Arbitration Final and Binding? – Lexology