COMMENTMitigating Arbitration’s Externalities: A Call for Tailored Judicial Review
Karen A. Lorang*
59 UCLA L. Rev. 218
Arbitration has changed dramatically since Congress enacted the Federal Arbitration Act in 1925. Increasingly, unsophisticated parties are asked to enter into binding arbitration agreements before any dispute has arisen. As a result, mandatory laws are frequently interpreted and enforced by arbitrators rather than judges. Nonetheless, judicial review of arbitration awards is still largely limited to determining whether the arbitrator made procedural errors, rather than substantive errors.
As the law of arbitration has fallen behind arbitration practice, four negative externalities have developed. First, legally inaccurate arbitration awards, if left uncorrected, may allow for ongoing legal violations that harm third parties. Second, inaccurate awards undermine enforcement and may thereby reduce the law’s deterrent effect. Third, unreasoned or inaccurate awards create uncertainty about the legal rights and obligations of third parties. Finally, arbitration can elicit public controversy if outside observers believe victims are being denied their day in court.
Mitigating these externalities requires tailoring judicial review of arbitration awards based on the timing of the agreement to arbitrate, the types of claims involved, and the relative sophistication of the parties. Unequal bargaining power at the contracting stage must be addressed without unduly limiting parties’ freedom to avoid the costs of litigation. This Comment argues that the proper balance can be struck by drawing on federal securities law. Rule 144A of the Securities Act of 1933 classifies certain investors as qualified institutional buyers who may enter into transactions without the additional protections otherwise afforded by the law. This Comment explains how the principles behind Rule 144A can be extended to arbitration, allowing what I call qualified arbitration participants greater control over the level of substantive judicial review applicable to their arbitration awards without sacrificing safeguards for less sophisticated parties.
* Articles Editor, UCLA Law Review, Volume 59; J.D. Candidate, UCLA School of Law, 2012; B.A., Swarthmore College, 2007. The author received UCLA Law Review’s Award for Outstanding Student Scholarship for this Comment in March 2012.
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