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Stolt-Nielsen: Who Exceeded Powers – Court or the Tribunal?

In this post, MARIJA SOBAT revisits the United States Supreme Court’s rationale in Stolt Nielsen and questions whether it had the authority to conduct the extensive review of the award, as it did.

In Stolt-Nielsen the United States Supreme Court granted a certiorari to decide whether imposing class arbitration on parties whose arbitration clause is silent on that issue is consistent with the Federal Arbitration Act (FAA). A brief background to the facts of the case can be found here and here. The Tribunal’s decision that the arbitration clause allowed for class arbitration was vacated by the District Court under the ground of “manifest disregard” of the law. The Court of Appeals overruled District Court’s decision and the Supreme Court granted a certiorari concluding that the question presented before the Court is ripe for review.

The Court found that the arbitration panel exceeded its powers by imposing its own policy instead of “identifying and applying a rule of decision derived from the FAA or either maritime or New York law.” The Court observed, “Rather than inquiring whether the FAA, maritime law, or New York law contains a “default rule” under which an arbitration clause is construed as allowing class arbitration in the absence of express consent, the panel proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such situation.”

The Court’s decision was based on two lines of arguments. Primo, the Court stated that the FAA imposes certain rules of fundamental importance, including the “[b]asic precept that arbitration is a matter of consent not coercion.” The Court opined that the parties “may specify with whom they choose to arbitrate their disputes.” Hence, the Court found that a “party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

Secundo, the Court drew the sharp, distinctive line between bilateral arbitration and the class action arbitration and found that the “fundamental changes” brought about by the transformation from bilateral arbitration to class-action arbitration are of such a degree that “it cannot be presumed [that] the parties consented to [class action arbitration] by simply agreeing to submit their disputes to an arbitrator.” The Court concluded that the “differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.”

In this post, I intend to revisit and examine the rationale behind the court’s decision. The primary question I deal with here is whether the Court had the authority to revisit the tribunal’s interpretation of the clause and consequently vacate the award – and, if yes, under what statutory grounds?

The Court vacated the partial final award under Section 10 (a) (4) of the FAA, on the ground that the arbitrators exceeded their powers “for the task of an arbitrator is to interpret and enforce a contract, not to make public policy.” The Court held that in order to vacate the decision of the arbitration panel, petitioners must clear a “high hurdle”. In the words of the Court: “it is not enough for petitioners to show that the panel committed an error-or even a serious error” but “[o]nly when arbitrator strays from interpretation and application of the agreement and effectively dispense[s] his own brand of industrial justice” his decision may be held unenforceable.

It seems, however, that the Court itself strayed from the proper interpretation of the grounds for vacatur of arbitral awards. Firstly, the parties themselves empowered the arbitrators to render their clause construction award. Justice Ginsburg in her dissenting opinion rightly noted that “the panel did just what it was commissioned to do.” However, Justice Ginsburg erred in saying that “the Court acts without warrant in allowing Stolt-Nielsen essentially to repudiate its submission of the contract-construction issue to the arbitration panel.” The Justice, thus, questioned the Court’s jurisdiction for reviewing the arbitrator’s award. Her criticism is closely related to the question whether class action arbitration is as a matter of jurisdiction or admissibility. Indeed, in general, if one considers class action arbitration as a matter of jurisdiction, then the Court had the authority to question the arbitrators’ award – since jurisdictional decisions are subject to judicial recourse. If, on the contrary, class action arbitration is considered to be a matter of admissibility, which appears to be Judge Ginsburg’s position, the Court would be prevented from revisiting a decision already taken by the arbitrators – for such decision is considered to be final.

However, this debate is redundant in the present case, because the AAA Supplementary Rules (which the parties had agreed upon) explicitly provide that the arbitral disposition on issue of class action arbitration is subject to subsequent judicial review. Rule 3 of the AAA’s Supplementary Rules gives the right to any party to move a Court of competent jurisdiction to confirm or vacate clause construction award. Therefore, Stolt-Nielsen had every right to seek judicial review of the clause construction award under any of the grounds listed in Section 10 of the FAA. Similarly, the Court had the authority to decide about the annulment of the award – under limited grounds for annulment provided under Section 10 of the FAA. The fundamental error in the reasoning was rather the Court’s misinterpretation of Section 10 (4) (a) of the FAA.

William Park says “[t]he line between arbitral excess of authority that makes an award a nullity, and an error of law or fact that makes an award wrong but not ultra vires, is thin enough that any judge who ventures to correct excess of authority risk imposing his or her own opinion about the merits of the dispute.” In the UK, House of Lords drew a clear distinction between the tribunal purporting to exercise a power which it did not have and it exercising a power that it did have albeit with errors. Provided that the tribunal is exercising power which it does have, it is irrelevant how significant the error is – no relief would be granted under Section 68 of the English Arbitration Act.

As discussed above, if the Tribunal has jurisdiction, the award is final and binding on the parties, subject to limited grounds for vacatur of the award. It is not for the Court to agree or disagree with the award. Judicial review is statutorily limited. It is undeniable that disagreement with the Tribunal’s award is not one of the limited grounds for annulment under the FAA.

Another remark of the Court deserves attention. The Court criticized the panel’s award by holding that the panel proceeded “as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such a situation.” This begs a fundamental question – What is wrong with arbitrators trying to find the best solution to be applied to a specific case before them? Is this not what ‘l’esprit de l’arbitrage’ actually represents? Indian jurist Fali Nariman had opined that the task for a good arbitrator is to ask himself in every single arbitral proceeding as to what justice demands in the fact situation presented, and then to inquire whether there is anything in the applicable law which would militate against the tribunal arriving at a just decision. The arbitrators in the present case did exactly that. They have construed the arbitration agreement as they deemed best considering the circumstances of the case and its broadness. It appears that the Supreme Court misunderstood the role of the arbitrators and equalized it to its own.

The Stolt-Nielsen decision is at odds with limited judicial screening power of the arbitration awards provided by the FAA. Moreover, the Court disregarded advantages of class action arbitration compared to class action litigation and concentrated only on the obvious differences between bilateral and multi party arbitration. While this was an opportunity for the Supreme Court to go a step further from its decision in Green Tree, it chose to walk two steps back In doing so, it unjustifiably disturbed the arbitrator’s decision through a wrong interpretation of Section 10 (4) (a) of the FAA.

One response »

  1. Pingback: Making a Favourable National Law on Arbitration: How Difficult can it be? « BLOG ARBITRATION

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