Arbitration and the Fourth Circuit
“I meant what I said and I said what I meant.” You might. But the courts don’t care, at least not with respect to resolving disputes by methods alternative to litigation.
Alternative methods of dispute resolution are becoming increasingly popular. Especially in contracts of any sophistication, parties will typically include language calling for the resolution of disputes thereunder by alternative methods. Oftentimes, however, the courts will refuse to give effect to what the parties said. Oftentimes they will affect just the opposite.
Knowing one’s jurisdiction’s tendencies, one can, hopefully, draft contract language that its courts will interpret to give effect to the parties’ intentions. Or, at least, one can avoid surprise at its court’s refusal to affect the parties’ intentions. This article considers the tendencies of the Fourth Circuit.
We start with what is commonly referred to as “binding arbitration.” The Federal Arbitration Act requires courts to honor parties’ agreements to resolve disputes by arbitration, stating that “[a] written provision in any … contract … to settle by arbitration a controversy … arising out of such contract … shall be … enforceable.” 9 U.S.C. §2. In connection therewith, the Act requires both that: (i) “[i]f any suit … be brought … upon any issue referable to arbitration under an agreement in writing for such arbitration … the court … shall … stay the trial of the action until such arbitration has been had,” and (ii) “[a] party aggrieved by the … failure … of another to arbitrate under a written agreement for arbitration may petition any United States district court … for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9
U.S.C. §§3 and 4. In other words, if the parties have agreed to resolve the dispute by arbitration, the courts will refuse to hear the case. Rather, the courts will stay any suit on the dispute, and direct the parties to proceed to arbitration. As used in the Federal Arbitration Act, the word “arbitration” is not limited to arbitration per se. It encompasses various alternative dispute resolution methods. See, e.g., AMF Inc. v. Brunswick Corporation, infra. So far, so good. It appears that parties’ agreements to resolve disputes via arbitration will be enforced. But appearances can be deceiving. In agreements where arbitration is not required to finally resolve the dispute, and as such is not binding on the parties, various courts have refused to stay litigation or to order the parties to engage in arbitration, reasoning that it would be futile to require parties to engage in arbitration where a party has announced its intention not to adhere to the resulting resolution. See, e.g., Brennan v. King, infra.
Other courts have held the opposite. They have enforced the parties’ agreement notwithstanding the fact that the form of arbitration on which the parties agreed will not result in a binding resolution. See, e.g., Wolsey, Ltd. v. Foodmaker, Inc., infra; AMF Inc. v. Brunswick Corp., infra.
The Court of Appeals for the Fourth Circuit has adopted a middle ground. Rather than focus strictly on the binding nature of the resolution, the court focuses on whether the arbitration likely will produce a resolution which the parties will respect. The court adopted its rule in the recent case of United States v. Bankers Insurance Company, 245 F.3d 315 (4th Cir. 2000). The United States brought suit under a contract providing that “any … dispute may be submitted to arbitration for a determination [that] shall be binding ….” Id. at 318. Notwithstanding the reference to the arbitration being binding, Federal law, at the time, prohibited Federal agencies from agreeing to binding arbitration. Accepting that the arbitration would not be binding on the United States, however, the court stayed the suit pending the conduct of arbitration, stating that: Although non-binding arbitration may turn out to be a futile exercise, because the United States can ultimately reject an arbitrator’s decision, this fact does not, as a legal matter, preclude a non-binding arbitration agreement from being enforced. See Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1209 (9th Cir. 1998) (holding non-binding arbitration clause to be enforceable); AMF Inc. v. Brunswick Corp., 621 F. Supp. 456, 461 (E.D. N.Y. 1985) (court could compel the parties to submit their dispute to a third party for an advisory non-binding opinion); Compare Brennan v. King, 139 F.3d 258, 265 (1st Cir. 1998) (refusing to enforce arbitration clause because arbitrator lacked authority to resolve “substantive” issues dividing the parties).
Whether an agreement to enter into a non-binding arbitration process is enforceable under the FAA is a matter not well-settled in the federal courts, and we have not yet directly addressed this question. Some courts have chosen to focus on whether the arbitration process is likely to resolve the issues, and whether the parties agree not to pursue litigation until the process is completed. In evaluating a similar issue, Judge Weinstein observed, “The arbitrator’s decision need not be binding … [as long as there are] reasonable commercial expectations [that] the dispute will be settled by this arbitration.” AMF Inc., 621 F. Supp. at 460-461.
The Government’s position, viewed in a pragmatic manner, makes some sense. If the Government can reject an arbitration decision, the arbitration process is unlikely to provide a resolution to this case. However, because the Government would presumably act reasonably and rationally, and would approve an arbitration award or decision that it found favorable, the court was unable to conclude that arbitration proceedings would be futile. Id. at 322.
The year following the court’s decision in Bankers Insurance, the District Court for the Eastern District of Virginia appeared likewise to endorse a pragmatic approach to the matter in Parisi v. Netlearning, Inc., stating “[c]ourts … have stayed litigation and compelled participation in non-binding procedures as long as there are ‘reasonable commercial expectations’ that the procedures would ‘settle’ disputed issues.” 139 F. Supp.2d 745, 750 (E.D. Va. 2001). In sum, notwithstanding the fact that the parties have said that they will resolve disputes by methods alternative to litigation, the courts likely will not enforce their agreement unless the method(s) selected likely will result in a resolution which the parties will accept. It is unlikely, for example, that the courts would enforce the parties’ agreement to resolve disputes by non-binding mediation.
We turn now to what is commonly referred to as “mandatory arbitration.” The Federal Arbitration Act does not compel parties to arbitrate. Rather, it provides for enforcement of agreements to arbitrate. A threshold question in many cases then is whether the parties agreed to refer their dispute to arbitration; that is, whether the parties intended that arbitration be mandatory. The issue typically arises in connection with language to the effect that “either party may submit its dispute to arbitration.” Notwithstanding such permissive language, various courts, including the Court of Appeals for the Fourth Circuit, have held that such language requires parties to submit their disputes to arbitration. Such courts will stay court proceedings pending the conduct of arbitration.
The leading case in the Fourth Circuit is, again, Bankers Insurance, supra. The parties there agreed that “any … dispute may be submitted to arbitration….” 245 F.3d at 318. The United States forwent arbitration and immediately brought suit in court on the parties’ dispute. In response to Bankers’ motion to stay the suit, the United States argued that the parties had not agreed to submit disputes to arbitration. Rather, the parties agreed only that a party “may” submit a dispute to arbitration. The court disagreed, concluding that, although expressed in permissive language, submission of disputes to arbitration was, in fact, mandatory, stating that, “[a]lthough the arbitration provision … is framed in permissive terms, its use of permissive phraseology is not dispositive. In Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 875 (4th Cir. 1996) we … held that a clause providing that “disputes … may be referred to arbitration” has the effect of giving “an aggrieved party the choice between arbitration and abandonment of his claim, … he ‘may’ either arbitrate or abandon the claim.” As Judge Widener properly observed, the contrary interpretation “would render the arbitration provision meaningless for all practical purposes,” since parties “could always voluntarily submit to arbitration.”
Second, other courts have had the opportunity to construe comparable “permissive” arbitration agreements and have reached similar conclusions. Id. at 320-21.
In short, notwithstanding the expressive import of what the parties said, the courts likely will interpret agreements providing that the parties “may” submit disputes to arbitration to require them to do so.
Judicial Review of Arbitral Awards
Finally, we consider judicial review of arbitral awards. In keeping with its respect for parties’ agreements to resolve disputes by arbitration, the Federal Arbitration Act provides for extremely limited judicial review of arbitral awards. 9 U.S.C. §10. Absent extraordinary circumstances, courts will not, for example, review awards to determine if they are consistent with applicable law, or are supported by the evidence in the case.
It is not uncommon, however, for the parties to agree to judicial review of their arbitral award on bases more extensive than those provided for in the Federal Arbitration Act. The most common scenario is where the parties agree that the courts may review the award to determine if it is consistent with applicable law, or is otherwise supported by the evidence.
Focusing on the Federal Arbitration Act’s respect for the parties’ agreement, various courts have reviewed arbitral awards on the more extensive bases on which the parties
agreed. See, e.g., Roadway Package System, Inc. v. Kayser, 257 F.3d 287 (3rd Cir. 2001). Other courts have refused to do so citing matters of jurisdiction and judicial administration. See, e.g., Bowen v. Amoco Pipeline Co., 254 F.3d 925 (10th Cir. 2001).
The Court of Appeals for the Fourth Circuit has weighed in on the side of honoring parties’ agreements for judicial review more extensively than provided for by the Federal Arbitration Act. Unfortunately, however, the court did so with little discussion, and in an unpublished decision (which under the court’s rules are afforded only limited precedential value). Syncor Int’l Corp. v. McLeland, 120 F.3d 262, 1997 WL 452245 (4th Cir. 1997); CTA4 Rule 36(c). Notwithstanding its lack of formal precedential value, the courts of the Fourth Circuit likely will follow the ruling of Syncor Int’l.
In any case, if the parties intend to allow judicial review on bases more extensive than those set forth in the Federal Arbitration Act, the parties must clearly state the bases on which the court should review an award. See, e.g., Mantle v. The Upper Deck Co., 956 F. Supp 719, 726 (N.D. Tex. 1997) (“[r]egardless whether it is permissible to expand the scope of judicial review by agreement, there is no support for enlarging review in the absence of the clearly expressed intent of the parties.”).
Chalk one up for the parties. If they mean to allow judicial review on bases more extensive than those set forth in the Federal Arbitration Act, and say so clearly, the courts of the Fourth Circuit likely will review any award as the parties said.
In sum, you may mean what you say; however, at least with respect to non-binding, and mandatory, arbitration, the courts are likely not to put significant emphasis on what you say. The courts will decide the issues according to their own dictates.
With knowledge regarding tendencies of the court, parties may draft their agreements to resolve disputes through methods alternative to litigation in such a manner as to, if not ensure that their intentions will be met, at least to increase the likelihood that they will. For example, if the parties intend to require that they attempt to resolve their disputes through non-binding mediation before going to court, the parties might consider, on the basis that litigation is more costly than mediation, impose liquidated damages on either party that refuses to attempt to resolve disputes through mediation. It is likely that the courts will enforce this type of provision. Thus, while the courts might not require a party to engage in mediation as such, faced with liquidated damages, a reluctant party may well voluntarily engage in mediation. There are a number of similar drafting techniques that the parties might employ to the same effect.
In any case, even if one cannot draft language that the courts will enforce to give effect to what the parties said, now knowing the court’s tendencies, one should not surprised if the court acts accordingly.
Submitted by Joseph J. Dyer of Seyfarth Shaw, who can be reached by e-mail at firstname.lastname@example.org.
- Dr. Suess, Horton Hatches the Egg, (Random House 1940).
- For a more extensive discussion of this issue, see Joseph J. Dyer, Expanding Judicial Review Of Arbitral Awards, Contract Management, Vol. 39, Issue 11 (Nov. 1999).