Why Courts Review Arbitral Awards

WHY COURTS REVIEW ARBITRAL AWARDS*

Judicial review of arbitral awards constitutes a form of risk management. In most countries courts may vacate decisions of perverse arbitrators who have ignored basic procedural fairness, as well as those of alleged arbitrators who have attempted to resolve matters never properly submitted to their jurisdiction.¹ In some countries judges may also correct legal error² or monitor an award’s consistency with public policy.³

Public scrutiny of arbitration is inevitable at the time of award recognition. Judges can hardly ignore the basic fairness of an arbitral proceeding when asked to give an award res judicata effect by seizing assets or staying a court action.

Less evident is why the arbitral situs should necessarily monitor an award prior to an enforcement action. When the controversy is international, an arbitral situs is often chosen only for geographical convenience or procedural neutrality.⁴ If a dispute involves neither property nor activity at the place of arbitration, that country might arguably dispense with review of the arbitrator’s decision. At least one scholar suggests complete elimination of pre-enforcement judicial review.⁵

The thesis of this modest note in honor of Professor Böckstiegel is that judicial review of awards at the place of arbitration usually does make sense in international arbitration. Court scrutiny of an arbitration’s integrity promotes a more efficient arbitral process by enhancing fidelity of the parties’ shared pre-contract expectations. In some instances review also furthers the development of commercial norms to guide business managers in planning future transactions.

A. Judicial Control Mechanisms

Finality and fairness

Efficient arbitration implicates a tension between the rival goals of finality and fairness. Freeing awards from judicial challenge promotes finality, while enhancing fairness calls for some measure of court supervision. An arbitration’s winner looks for finality, while the loser wants careful judicial scrutiny of doubtful decisions.

Finality in arbitration enhances the political and procedural neutrality that is compromised if the winner must re-litigate the case in a public forum. Without finality, parties to international business transactions may have no reliable alternative to the uncertainty of third country courts⁶ or the perceived bias of the other side’s “home-town justice.”⁷ Absent the possibility of binding arbitration, some transactions will remain unconsummated. Others will be concluded only at increased prices, to reflect the risk of potentially biased adjudication.⁸

Procedural safeguards to promote basic fairness constitute another element in efficient arbitration. Aberrant decisions reduce community confidence in the arbitral process. Commercial actors are unlikely to feel comfortable with a dispute resolution system allowing arbitrators to decide cases by a roll of the dice, or in a way that otherwise denies due process.

Although no system will perfectly reconcile these rival goals of finality and fairness, a middle ground provides judicial review for the grosser forms of procedural injustice. To this end, legislators and courts must engage in a process of legal fine tuning that seeks a reasonable counterpoise between arbitral autonomy and judicial control mechanisms.

Models of judicial scrutiny

Several models have emerged for review of awards at the arbitral seat. The most popular gives losers a right to challenge awards only for excess of authority and basic procedural defects such as bias or denial of due process.⁹ Another paradigm supplements scrutiny of an arbitration’s procedural fairness with a right to appeal an award’s substantive legal merits.¹⁰

Some countries allow a choice between these alternatives. Default rules require that litigants either “opt in”¹¹ or “opt out”¹² of appeal on the substantive merits of the case.¹³ Certain arbitral regimes provide hybrid grounds for vacatur, such as “manifest disregard of the law”¹⁴ or “arbitrariness,”¹⁵ which imply something beyond a simple mistake, but not necessarily clear excess of authority.

The text of the law, of course, must be read in the context of its application. Even a statute that allows challenge only for defects related to procedural regularity may allow wiggle room for an overzealous judge to examine a dispute’s legal merits under the guise of correcting arbitrator excess of authority.¹⁶ Moreover, in parts of the world lacking a tradition of judicial independence, the business community may prefer no judicial review at all, taking its chances with potential arbitrator misbehavior as the lesser of two evils.

B. Situs Review

Historical perspective

The proper extent of judicial review of awards at the arbitral situs has been the subject of considerable debate. Some jurists urge a relatively “delocalized” regime that imposes little or no judicial scrutiny of international arbitration,