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Is Arbitration Final and Binding?

Business

By Jeanne M. Harrison, Smith Currie

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:

  • Valid
  • 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.

Confirmation of an Award

While an arbitration agreement empowers the arbitrator to issue an award, the agreement does not grant the arbitrator the power to enforce the award. More often than not, the losing party, having agreed to arbitrate, will pay the arbitrator’s award and move forward. If that does not happen, the arbitration award is enforceable in court.

The FAA gives the prevailing party one year to apply for an order confirming the arbitration award. But the losing party has only three months to file a motion to vacate. If a motion to vacate is filed, the prevailing party can file a cross-motion to confirm the arbitrator’s award. For domestic awards, the FAA specifies that a copy of the arbitration agreement and a copy of the arbitrator’s award must be filed with the motion to confirm.

If the winning party prevails on its motion to confirm, the court enters a judgment on the award, which according to the FAA “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered.”

The judgment entered on the award is appealable, but appellate review will be limited to the FAA’s grounds for vacating, correcting, or modifying an award discussed below. Neither the trial court nor an appellate court can alter the merits of an arbitration award.

Correction or Modification of an Award

Within three months of an arbitration award, a party may initiate an action to correct or modify the award. The FAA provides the following three grounds for correction or modification of an award:

  1. Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.
  1. Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.
  1. Where the award is imperfect in matter of form not affecting the merits of the controversy.

It is important to note that the FAA does not give a court the authority to review the evidence submitted to the arbitrator and reach a different decision on the merits. A court’s review is limited to defects or miscalculations that are evident in the award itself.

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:

  1. Where the award was procured by corruption, fraud, or undue means.
  1. Where there was evident partiality or corruption in the arbitrators, or either of them.
  1. 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.
  1. 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.

Conclusion

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.

For more, visit smithcurrie.com.

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