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. lit recent yea rs, U.S. courts have expanded the range of enforceable arbitration agreemen ts to include agreements that cover areas of law previously thought to be w ithin the exclusive domain of courts. Among the disputes that are now deeme d arbitrable are those that implicate mandatory rules such as securities an d antitrust laws. Under current law, the willingness of courts to enforce a rbitration agreements and to uphold the resulting arbitral awards with mini mal judicial review makes it possible for the parties to a transaction to a void mandatory rules of law. Until now, it has generally been believed that the legal system must either restrict the use of arbitration or permit arb itration and accept that doing so turns all mandatory rules into default ru les. This Article proposes a mechanism that permits the continued use of arbitra tion without abandoning the mandatory nature of legal rules. The recommende d approach, called "arbitrator liability," allows the losing party in an ar bitration to sue the arbitrator on the ground that a mandatory rule was ign ored. Under existing legal rules, arbitrators have an incentive to ignore m andatory rules of law in favor of the contractual terms agreed to by the pa rties. Arbitrator liability gives arbitrators an incentive to apply mandato ry rules of law. Giving proper incentives to arbitrators will ensure that m andatory rules are enforced, thereby eliminating the incentive for the part ies to draft arbitration agreements intended to avoid those rules. The bene fits of arbitration can be retained without sacrificing the ability of lawm akers to adopt mandatory rules.