Friday, March 25, 2016

In Massachusetts, Arbitration Agreement Cannot Change Standard of Review

In Katz Nannis & Solomon, P.C. v. Levine, the Supreme Judicial Court of Massachusetts concluded that parties to an arbitration agreement cannot change the statutory standard of judicial review. 

The underlying dispute involved shareholders in an accounting firm. The subject agreement delineated the shareholders' professional association and relationship.  When three of the shareholders determined to terminate the fourth, the ousted shareholder challenged the involuntarily termination under the agreement.  At the arbitration, the award favored the three shareholders with the determination that the fourth was properly terminated.  The award was confirmed in Superior Court and the motion for new trial and relief from judgment was denied.  The shareholder appealed.

The shareholder's challenge to the arbitrator's award and the confirmation of the award was that the arbitrator misinterpreted the agreement.  And because the arbitration clause of the agreement  provided for judicial review of an award to determine whether there was a "material, gross and flagrant error" by the arbitrator, the shareholder argued that the court could consider the merits of his claim. "He reasons that arbitration is strictly a creature of contract, that the aim of the [Massachusetts Arbitration Act (MAA)] is to enforce the parties' contractual agreement to arbitrate, and that, therefore, the parties' agreed-upon standard of judicial review should be enforced."

The Katz Court disagreed.   It recounted that the MAA requires "[u]pon application of a party, the court shall confirm" an arbitration award unless "grounds are urged for vacating or modifying or correcting the award" as provided in §§ 12 and 13. M.G. L. c. 251, § 11. Per § 12, the court shall vacate an award if it "was procured by corruption, fraud or other undue means," or "the arbitrators exceeded their powers." G. L. c. 251, § 12 (a) (1), (3). 

As for the contractual argument--that the parties have a right to decide their own terms--the Court referred to the seminal case Hall St. Assocs., L.L.C. v. Matell, IncIn Hall St, the Supreme Court of the United States, held that under the Federal Arbitration Act "the statutory grounds are the exclusive grounds for judicial review and parties are unable to contract otherwise."  That said, the Court also held that the states can reach different conclusions.  In Massachusetts, however, the Court determined that following Hall Street was the proper result.

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