Arbitration a Creature of Statute More than Contract?

One of the justifications traditionally advanced in favor of arbitration is that it gives the parties to a potential dispute the freedom to select the manner in which such a dispute would be resolved. Thus, parties can choose the forum for arbitration, and can limit the issues they submit to arbitration. One of the fears that is sometimes expressed about arbitration, however, is that the parties are almost completely at the mercy of the arbitrator they have chosen. They have very limited ability to obtain review of an arbitration decision that is unsupported by the law or the evidence. So the question has arisen whether parties can creatively design a system that combines some of the features of arbitration (e.g., limited discovery and simplified procedures) with some features of the judicial process (a genuine right to appeal an arbitrator's decision that cannot be supported on the law or the facts).



Last year, the United States Supreme Court rebuffed efforts to create these kinds of hybrid agreements in Hall Street Associates, LLC v. Mattel, Inc.. The Supreme Court held that the grounds specified in the Federal Arbitration Act for overturning an arbitration award are exclusive, meaning they cannot be supplemented by contract. Therefore, even though arbitration is thought of as a private, contractual remedy, the parties may not obtain enforcement of a private contract that provides for expanded judicial review of arbitration decisions.

California has chosen to follow a somewhat different path. In Cable Connection Inc. v. DIRECT TV, Inc.
the California Supreme Court accepted the Supreme Court's invitation to allow enforcement in the state courts of an agreement providing for judicial review of the merits of an arbitration decision.

Ironies and complications now abound. On the one hand, we have the freedom to contract. On the other, we have the federal policy favoring arbitration. On the other other hand, we have the possibility that the federal refusal to enforce private agreements to create a hybrid system may dissuade some parties from pursuing arbitration at all. And finally, we have a different policy in some states, which means that the enforceability of a private agreement may depend on which court gets the first crack at deciding whether or not to enforce it.