In a dispute arising from the break-up of an accounting partnership, the Massachusetts Supreme Judicial Court has held that parties to a contract cannot agree to expand the grounds on which a court can vacate a commercial arbitration award beyond the bases explicitly set forth in the Massachusetts Arbitration Act (MAA). Katz, Nannis & Solomon, P.C. v. Levine, 473 Mass. 784 (2016). Thus, even where contracting parties wish to give the court more power to review (and perhaps restrain) the power of an arbitrator, the MAA forbids them from doing so, according to the SJC.
The dispute in Katz arose from alleged serious misconduct of one of the firm’s founders; as a result, the remaining partners voted him out. The ousted partner, Levine, took the matter to binding arbitration (per the partnership agreement). The arbitrator held that the vote was proper, that sufficient evidence supported a vote to eject Levine “for cause,” and awarded the partnership more than $1.7 million, plus interest.
The partnership moved to confirm the arbitration award in Superior Court and Levine moved to vacate it. The Superior Court confirmed the award, added an award of attorneys’ fees, and Levine appealed to the SJC, per its grant of a request for direct appellate review.
As noted by the SJC, “[a]t the core of Levine’s challenge to the arbitrator’s award – and to the . . . confirmation of the award – is the claim that the arbitrator fundamentally misinterpreted the agreement.” Katz, 473 Mass. at 790. Levine argued that the parties in this case had explicitly contracted to give the courts a broader power of review than usual over the arbitrator’s decision: “the parties specifically provided for judicial review of an award to determine whether there was a ‘material, gross and flagrant error’ by the arbitrator.” Id. at 791.
The SJC flatly rejected Levine’s proposition that parties to an arbitration agreement could expand on the power of the Massachusetts courts to vacate arbitration awards, as that power had been granted to the courts by the Legislature.
“The directive of [General Laws chapter 251] § 11, is that a court ‘shall confirm’ an award unless grounds for vacating it pursuant to §§ 12 and 13 are shown; this statutory language ‘carries no hint of flexibility.’ Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008).” Id.
The SJC’s ruling in Katz is in accord with the U.S. Supreme Court’s 2008 ruling in Hall Street, which similarly held that parties could not expand on the grounds for vacatur set forth in the Federal Arbitration Act.
The concept was something of a novelty in 2008, when the common assumption was that parties were free to tailor their arbitration agreements as best suited their own particular needs. As noted by the SJC in the Katz decision, most states have since followed SCOTUS’s lead and interpreted their state’s Arbitration Act as providing the sole grounds for vacatur. Katz, 473 Mass. at 794 n. 13. Most, but not all. See also id. at 791 n.11.
While the SJC’s decision in Katz may be seen by some as yet another encroachment on contracting parties’ rights to fashion their own alternative dispute resolution mechanisms, there is something to be said for the consistency and predictability of a well-defined structure for judicial confirmation/vacatur of arbitration awards.