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American Lawyer Media News Service New York-Arbitration may be a good alternative to litigation, but it has its limits. This was the message sent recently by the 2d U.S. Circuit Court of Appeals in finding that as minimal as judicial review of an arbitration award may be, parties may not agree to cut the court out of the process entirely. “Since federal courts are not rubber stamps, parties may not, by private agreement, relieve them of their obligation to review arbitration awards for compliance with Section 10(a)” of the Federal Arbitration Act, the court wrote. Hoeft v. MVL Group Inc., No. 02-9155. “The manifest disregard standard together with Section 10(a) represent a floor for judicial review of arbitration awards below which parties cannot require courts to go, no matter how clear the parties’ intentions,” the court said. “You don’t get a lot of safeguards in arbitration,” said David E. Robbins, an arbitration expert and partner at New York’s Kaufmann, Feiner, Yamin, Gildin & Robbins who was not involved with the case. “What the court is saying is ‘we’re here as the safety net, and you should not want to take that away from us.’ “ The case arose out of the February 2000 sale of a market research company called Discovery Research Group. The parties ultimately disagreed on the amount owed the sellers, which was based in part on any increase in the value of the company. As they had provided for in the purchase and sale agreement, they took their dispute to a designated arbitrator, whose decision, the agreement stated, “shall not be subject to any type of review or appeal whatsoever.” The arbitrator, an accountant named Steven Sherrill, found in favor of the sellers, awarding them $1.4 million. Upon a motion by the buyers, U.S. District Judge Kimba M. Wood vacated the award, finding that the arbitrator had manifestly disregarded the law by not applying the proper accounting standards to his calculation of the increased value of the company. On appeal, the 2d Circuit reversed the lower court and ordered that the judgment be confirmed. Yet while it upheld the arbitrator’s award, it also sent a stern warning to parties looking to create a lock-tight dispute resolution process, unreviewable by any court of law. “The freedom to contract, like any freedom, has its limits,” wrote Judge Barrington D. Parker Jr. for the unanimous panel. Also on the panel were judges Reena Raggi of the 2d Circuit and Richard W. Goldberg of the U.S. Court of International Trade, who was sitting by designation.

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