Arbitrator Liability: Reconciling Arbitration and Mandatory Rules

In this Article, Professor Guzman resolves the tension that exists between mandatory legal rules and the widespread use of arbitration. In recent years, U.S. courts have expanded the range of enforceable arbitration agreements to include agreements that cover areas of law previously thought to be within the exclusive domain of courts. Among the disputes that are now deemed arbitrable are those that implicate mandatory rules such as securities and antitrust laws. Under current law, the willingness of courts to enforce arbitration agreements and to uphold the resulting arbitral awards with minimal judicial review makes it possible for the parties to a transaction to avoid mandatory rules of law. Until now, it has generally been believed that the legal system must either restrict the use of arbitration or permit arbitration and accept that doing so turns all mandatory rules into default rules. This Article proposes a mechanism that permits the continued use of arbitration without abandoning the mandatory nature of legal rules. The recommended approach, called “arbitrator liability,” allows the losing party in an arbitration to sue the arbitrator on the ground that a mandatory rule was ignored. Under existing legal rules, arbitrators have an incentive to ignore mandatory rules of law in favor of the contractual terms agreed to by the parties. Arbitrator liability gives arbitrators an incentive to apply mandatory rules of law. Giving proper incentives to arbitrators will ensure that mandatory † Boalt Hall School of Law, University of California at Berkeley. I owe thanks to Richard Brooks, Richard Buxbaum, David Caron, Stephen Choi, Robert Cooter, Jesse Fried, Stephen Ware, David Wilkins, and John Yoo, as well as participants at both the 1999 Friedmann Conference on International Securities Regulation and Antitrust and the Latin American Law and Economics Association 1999 Annual Meetings for helpful comments and discussions. Special thanks to Nicholas James and Jeannie Sears. Melissa Kennedy, Philip Tendler, and Ryan Waterman provided invaluable research assistance. GUZMAN TO PRINTER (FINAL).DOC 09/21/00 12:59 PM 1280 DUKE LAW JOURNAL [Vol. 49:1279 rules are enforced, thereby eliminating the incentive for the parties to draft arbitration agreements intended to avoid those rules. The benefits of arbitration can be retained without sacrificing the ability of lawmakers to adopt mandatory rules.