On November 7, 2007, the United States Supreme Court heard oral arguments in Hall Street Associates, L.L.C. v. Mattel, Inc., Case No 06-989, an arbitration case that could have significant implications for any insurer or reinsurer that uses arbitration provisions in its contracts. Typically, insurers that arbitrate are bound by the arbitrators' decision, with only very limited rights to appeal a decision they think is wrong. The Supreme Court's decision in Hall Street may change that.

Hall Street involved an environmental clean-up dispute, a portion of which the parties agreed to arbitrate. As part of their arbitration agreement, the parties agreed to broaden substantially the rights they would ordinarily have to appeal from the arbitrator's decision. They agreed that the district court could review the arbitration award for compliance with the evidence and for errors of law, both of which are beyond the limited review courts ordinarily undertake with respect to arbitration rulings.

The arbitrator ultimately issued a decision in Mattel's favor and Mattel sought to confirm the award in court under the Federal Arbitration Act (FAA). Hall Street responded by filing a motion to vacate, modify, or correct the award, invoking the enlarged grounds for review provided in the parties' arbitration agreement. The district court agreed and, applying the broader review standard, vacated the award for legal error. On remand, the arbitrator amended his decision (based on the district court's ruling) and entered a decision in favor of Hall Street. The district court confirmed the revised award in part and modified it in part, again applying the broader review standard agreed to by the parties.

Then, in the first of two rounds of appeals from the district court, the United States Court of Appeals for the Ninth Circuit reversed the district court's judgment. The Ninth Circuit concluded that Sections 10 and 11 of the FAA provide the exclusive grounds for review of an arbitration award and remanded the case to the district court with instructions to confirm the arbitrator's initial award in favor of Mattel unless the district court determined that the award should be vacated, modified, or corrected on the grounds allowable under the FAA.

On remand, the district court again held that the arbitrator's award should be vacated, this time purporting to apply the FAA review standard and concluding that the arbitrator's award was based upon an "implausible" interpretation of the contract. This led to a second appeal and reversal, with the Ninth Circuit holding that "implausibility" is not a valid ground for avoiding an arbitration award under the FAA.

The case has now been brought to the U.S. Supreme Court, where oral argument has been heard. The Supreme Court's decision, which can be expected within the next several months, will decide whether parties may extend the limited scope of review of arbitration awards provided for in the FAA. Hall Street has implications for insurers that have arbitration provisions in agency agreements or reinsurance contracts. If the Supreme Court opens the door for parties to contract for broader standards of review from arbitration awards, every insurer with arbitration clauses in its contracts should consider whether to seek a change in the standard of review to be applied by the courts in their review of arbitration awards.

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