August 16, 2016
The Massachusetts Supreme Judicial Court (SJC) recently ruled that the parties to an arbitration agreement cannot, by contract, expand the grounds upon which a court may set aside an arbitrator’s award beyond the very narrow grounds specified in the Massachusetts Arbitration Act (MAA). Katz v. Levine, 473 Mass. 784 (2016).
The contract in question provided that the arbitrator’s decision could be set aside by a court "solely in the event of a material, gross and flagrant error by the arbitrator." The appellant Levine argued that the arbitrator had fundamentally misinterpreted the terms of the agreement between him and his former business partners and therefore the arbitration decision should be set aside. The SJC disagreed. In deciding that the arbitration clause in question exceeded the more narrow grounds for setting aside an arbitrator’s decision in the MAA, the SJC focused on two clauses in the MAA. First, Section 11 provides that, upon application of a party, the court "shall confirm" an arbitration award "unless grounds are urged for modifying or correcting an award" as provided in Section 12 of the MAA. Section 12, in turn, provides in relevant part that the court shall vacate an award if it "was procured by corruption, fraud or other undue means" or "the arbitrators exceeded their powers." (emphasis added). The SJC ruled that the MAA’s use of the term "shall confirm" precluded the parties from expanding the scope of a court’s review beyond that set forth in the MAA and therefore the arbitrator’s ruling would stand.
The SJC’s decision cited and is consistent with earlier decisions taking a hard line on when a court can change an arbitrator’s decision. For example:
• A court is "strictly bound by an arbitrator’s findings and legal conclusions, even if they appear erroneous, inconsistent, or unsupported by the record at the arbitration hearing." Lynn v. Thompson, 435 Mass. 54, 61 (2002).
• An error of law or fact will not be reviewed by a court unless there is fraud; even a grossly erroneous decision is binding in the absence of fraud. Trustees of Boston & Me. Corp. v. Massachusetts Bay Transp. Auth., 363 Mass. 386, 390 (1973).
• "Short of fraud, arbitrary conduct, or significant procedural irregularity, the arbitrator’s resolution of matters of fact or law is binding…." Grobert File Co. of Am. V. RTC Sys., Inc. 26 Mass. App. Ct. 132, 135 (1998).
The SJC cited several policy considerations underlying its decision. It determined that allowing parties to expand the grounds for judicial review would "‘undermine the predictability, certainty, and effectiveness of [arbitration].’" (citing Plymouth-Carver, 407 Mass. at 1007). It also ruled that if parties were able to redefine by contract language the scope of what a court was to review with respect to every arbitration award, it would spawn potentially complex and lengthy case-within-a-case litigation devoted to determining what the parties intended by the contractual language they chose. See Lawrence v. Falzarano, 380 Mass. 18, 28 (1980). Lastly, it found that the purpose of the MAA is "to provide … speedy resolution of disputes by a method which is not subject to delay and obstruction in the courts."
Takeaways
There are two lessons to take away from this case. First, parties to a contract should never assume that they can, by the terms of their agreement, avoid or alter the impact of local, state or federal laws or statutes. Second, parties must be aware that, if they choose arbitration to resolve a dispute, they will have to live with the decision because there is very little likelihood that a court will overrule an arbitrator’s decision (even if your name is Tom Brady).
Final Note
We would be remiss if we did not point out that two organizations which oversee arbitrations, the American Arbitration Association and JAMS, have rules which allow for "appeals" of arbitrators’ decisions to a "higher" panel of arbitrators (not a court). However, in order for a party to be able to appeal an arbitrator’s decision under these rules, both parties must agree to utilize the appeal rules in writing. Whether or not a party wants to agree to utilize the appeal rules is a discussion for another day. However, it is worth noting that, by adding an appeal process, arbitration begins to sound a lot like litigation.
If you have any questions regarding the above information, please contact Sara P. Bryant at 617.457.4048 or sbryant@murthalaw.com.
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