Oh No, You Didn't: Parties cannot contractually expand the scope of judicial review of an arbitr
The Massachusetts Supreme Judicial Court today in Katz, Nannis & Solomon,P.C. v. Levine, ruled that parties to an arbitration agreement that is subject to the Massachusetts Arbitration Act, G.L. c. 251 ("MAA"), cannot contract around the "exclusive grounds" for judicial review set forth in the MAA.
The Court concluded that the statute's plain language, legislative intent and policy considerations of preserving arbitration as "an expeditious and reliable alternative to litigation" all supported its decision. Allowing parties to modify contractually the limited grounds for judicial review under the MAA would, the Court explained, "spawn potentially complex and lengthy case-within-a-case litigation devoted to determining what the parties intended by the contractual language they chose."
The case stems from a dispute among four members of an accounting firm, Levine, Katz, Nannis & Solomon, P.C. that arose when three of the firm's members, Allen Katz, Lawrence Nannis and Jeffrey Solomon ("KNS") voted to terminate the fourth member, Bruce Levine as a shareholder and director of the firm, Levine disputed their ability to do so under the stockholders' agreement, left, started a competing firm, and took some of the firm's employees with him.
The stockholders' agreement provided that it was "subject to and governed by the laws of the Commonwealth of Massachusetts pertaining to agreements executed in and to be performed in the Commonwealth of Massachusetts." It contained an arbitration clause providing for "binding arbitration" of any dispute regarding "any aspect of the Agreement" before a single arbitrator apppointed by the American Arbitration Association.
The arbitration provision stated that the arbitrator's decision "shall be final," but stated that "in the event of a material, gross and flagrant error by the arbitrator, such decision shall be subject to review in court. . ." This provision, if enforced, would have expanded the scope of judicial review available under the MAA, which since its 1960 enacted has provided for judicial review only to determine if an arbitrator exceeded the scope of his or her authority, or decided the arbitration based on "fraud, arbitrary conduct, or procedural irregularity in nthe hearings."
Noting the the parties' agreement was governed by the MAA, the Supreme Judicial Court, following United States Supreme Court precedent in Hall St. Assoc., L.L.C. v. Matell, Inc., 552 U.S. 576 (2008), in which the Supreme Court ruled that parties could not contractually modify the "exclusive grounds" for judicial review in the FAA, ruled that parties cannot, through contract, "modify the scope of judicial review that is set out in sections 12 and 13 of the MAA.
The SJC explained:
The "directive" of section 11 of the MAA provides that a court "shall confirm" an arbitration award unless a party demonstrates grounds for vacating it under sections 12 and 13 of the MAA: "this statutory language 'carries no hint of flexibility.'" Slip op. at 12 (quoting Hall St. Assoc., 552 U.S. at 587).
The legislative intent forbidding contractual expansion of the statutory grounds for judicial review is demonstrated by comparing the language of the judicial review provisions, which are directives and not default provisions, with other provisions of the MAA that provide a statutory default in case the parties do not include a governing provision in their contract. One example the Court gave of a default provision to contrast was the provision in section 3 of the MAA, which states how an arbitrator is appointed if the parties have not provided a method of appointment in their contract.
The Court's reading of sections 11 through 13 of the MAA comports with 56 years of court decisions interpreting the MAA, all of which have concluded that arbitration awards are subject to a very narrow scope of review on very limited grounds.
"[S]trong policy considerations" support limiting the scope of judicial review, because, the SJC explained, "[a]llowing parties to expand the grounds for judicial review would undemrine the predictability, certainty, and effectiveness of the arbitral forum that has been voluntarily chosen by the parties." Slip op. at 17 (quotation omitted).