Based on a recent decision by the Fourth Circuit Court of Appeals, business owners may want to think twice before including an arbitration clause in a contract. In the case of PPG Industries, Inc. v. Int’l Chemical Workers Union Council, the Fourth Circuit considered whether a reviewing court must defer to an arbitrator’s construction of a contract even when the court believes that the arbitrator construed the contract incorrectly. In a decision that may be of some surprise to business owners, the Fourth Circuit held that even if a court is convinced that the arbitrator committed serious error, a court cannot overturn the arbitrator’s decision.
In its reversal of the district court, the Fourth Circuit held that, except in “very limited” instances, a court has no right to determine the correctness of an arbitrator’s award when the parties to a contract have agreed that disputes should be submitted to arbitration. Once the arbitrator has ruled, then the court’s only function, with respect to that decision, is to determine “whether the arbitrator did his job – not whether he did it well, correctly, or reasonably, but simply whether he did it.” Unless the arbitrator ignores “the plain language of the contract,” a court cannot overturn a clearly erroneous award.
Although the PPG Industries, Inc. decision isn’t new law, business owners should pay it special attention. Over the past couple of years, I have had many clients request an arbitration clause in a business contract because they believe that it is a quicker and cheaper alternative to court litigation. While arbitration does have some advantages over litigation, those advantages come at a heavy price: the substantial risk of having no recourse for a bad or incorrect arbitration award.
In Virginia, where courts are renowned for their “rocket dockets”, business owners may want to think twice before inserting an arbitration clause into a contract. Without the advantage of a quicker resolution, it may be best to forego an arbitration clause in favor of permitting court litigation. Although courts and juries aren’t always perfect, at least you will have the option to appeal an erroneous decision.