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April 27, 2010

First Thoughts on Stolt-Nielsen: When Deference is Not Due

The Supreme Court’s decision today in Stolt-Nielsen S.A. v. Animalfeeds International Inc., No. 08-1198, slip op., April 27, 2010, ends months of speculation about whether the Court would clarify the status of the “manifest disregard” disregard doctrine. The District Court in Stolt-Nielsen had relied upon the manifest disregard doctrine, before the Hall Street case, in deciding to vacate the arbitration panel’s decision in favor of class arbitration. The Second Circuit in Stolt-Nielsen held, after Hall Street, that the doctrine survives as a “judicial gloss” on Section 10(a)(4) of the FAA, i.e. as a description of the circumstances in which an arbitrator exceeds her powers. Today the Supreme Court, by a 5-3 vote, reversed the Second Circuit’s decision and held that the arbitrators exceeded their powers by permitting class arbitration where the parties had stipulated that their arbitration agreement was silent about class agreement and that they had made no agreement on that subject.

The Court declined to decide whether the “manifest disregard” doctrine survived Hall Street in any form. But the Court probably made an important contribution to the eventual demise of “manifest disregard” by its own description of the circumstances in which an arbitral award must be vacated because the arbitrator exceeded her powers:

“It is not enough for the petitioners to show that the panel committed an error – or even a serious error. … ‘It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively dispense[s] [her] own brand of industrial justice that [her] decision may be unenforceable.’…In that situation, an arbitration decision may be vacated under §10(a)(4) of the FAA on the ground that the arbitrator ‘exceeded [her] powers,’ for the task of an arbitrator is to interpret and enforce a contract, not to make public policy.”

Slip op. at 7 (internal citations omitted).

The arbitration panel’s decision permitting class arbitration, the Court held, was based entirely on the panel’s conception of good public policy, and not upon the intention of the parties or an applicable rule of law. By “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 a situation.” For the majority, “[t]he conclusion [was] inescapable that the panel simply imposed its own conception of sound policy.”

The majority opinion says surprisingly little about what deference was due to the decision of the arbitral panel, to whom the parties had expressly committed the contract interpretation issue under the AAA’s Supplementary Rules for Class Arbitrations. But the Court does address the so-called “gap filler” argument –i.e. that in permitting class arbitration the panel was simply providing a reasonable rule where the parties’ agreement was indefinite and some rule was needed. The Court observed that the rule – articulated in the Howsam case — that procedural questions growing out of the dispute and bearing on its final disposition are presumptively for the arbitrator to decide, is based on a general principle of contract law that when the parties have made an agreement but omitted a term essential to determining their rights and duties, the court (or an arbitrator) may supply a term that is reasonable in the circumstances. But class arbitration so dramatically changes the complexion of the proceedings and the stakes, the Court held, that it cannot be viewed as a “gap filler,” i.e. as a reasonable term that parties presumably would have adopted if they had focused on the specific issue.

Many commentators will focus on what Stolt-Nielsen portends for class arbitration. But there is a broader theme in the decision. It is that arbitral discretion is not without important boundaries once the parties have agreed to arbitrate, or even once the parties have agreed to arbitrate a particular issue. The boundary is crossed when the arbitrator incorporates a term in the contract that is not only not expressly set forth, but is not ascertainable from (i) available indicia of party intent, (ii) industry custom and usage, (iii) an applicable rule of law, or (iv) a common-sense judgment about “gap filler” rules that the parties would likely have agreed upon if they had addressed the matter.

This principle likely will have importance in future litigation over arbitral interpretation of the rules of arbitration agreed upon by the parties. Whereas those rules are incorporated terms of the contract, the principles articulated in Stolt-Nielsen are relevant. Is the arbitrator relying upon some indicia of the intent of a rule’s drafters? Or is she instead engaging in ad hoc procedural reform? It seems reasonable to think that after Stolt-Nielsen, the boundaries of arbitral discretion in matters of contract (and rule) interpretation have become more precisely drawn, and that arbitrators have been invited to engage in careful examination of the bases and motives for their procedural rulings.

One Response to “First Thoughts on Stolt-Nielsen: When Deference is Not Due”

  1. Bill Knull says:

    It seems to me that the reciprocal of your point that Stolt-Nielsen establishes “important boundaries” for arbitral discretion is that the courts now have considerably more support at the highest level for injecting themselves into arbitration. The decision vacated an award on a subject the parties had unequivocably submitted to the arbitrators to decide. Moreover, while the rationale of the decision was the absence of consent, presumably the respondent had signed identical arbitration agreements with each of the entities that would have constituted the class; certainly the class could and should have been so constituted. As a result, the issue was not consent to arbitrate but consent to the procedural mechanism of a class action. While the dividing line between consent to arbitrate vel non reserved to the courts on the one hand and the procedural specifics left to the arbitrators is not a bright one, this decision seems to have substantially expanded the role of the courts and in the process brought into question the finality of awards on a much greater scale than just the class context.

    Bill Knull