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When Does an Arbitration Panel Exceed its Authority in Issuing Awards? Some New Cases Take a Look

by ~ Robert A. Whitney (Email)

Several recent federal cases explore the question of when a court may vacate an arbitration award on the grounds that an arbitration panel has exceeded its authority.

I. Framework for Review of Arbitration Panel Decisions

In order to place these rulings in context, it is important to first understand the role that courts play in reviewing arbitration panel rulings.

Reinsurance contracts have traditionally contained clauses stating that the arbitrators shall interpret the reinsurance contract as an “honorable engagement, and not merely as a legal obligation. Such “honorable engagement clauses relieve reinsurance arbitrators from following the strict rules of law, and allows them to use their expertise and experience in reaching a result that is consistent with the reinsurance contract and with the custom and practice of the reinsurance industry.

This flexibility and broad discretion may manifest itself in many ways. Although freed from following strict rules of law and contract interpretation, reinsurance arbitrators are still bound to resolve the dispute based on the reinsurance contract before them. The honorable engagement clause is not an invitation to the arbitrators to ignore express provisions of the parties contract. Similarly, arbitrators may not base their decisions on thoughts, feelings, policy, or law that come from outside of the contract, unless the arbitration agreement itself allows the arbitrators to do so.

The United States Supreme Court has noted that “Congress enacted the FAA to replace judicial indisposition to arbitration with a national policy favoring it and placing arbitration agreements on equal footing with all other contracts. Hall Street Assocs., L.L.C. v. Mattel, Inc.., 552 U.S. 576, 581 (2008). “In consenting to arbitration, a party trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration. Bowen v. Amoco Pipeline Co., 254 F.3d 925, 932 (10th Cir. 2001). “An application [to vacate an arbitration award] will get streamlined treatment as a motion, obviating the separate contract action that would usually be necessary to enforce or tinker with an arbitral award in court. Hall Street Assocs., 552 U.S. at 582.

Under the FAA:

If the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, and shall specify the court, then at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and thereupon the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.

9 U.S.C.  9 (emphasis added).

Section 10 provides:

(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C.  10.7 (emphasis added).

There is a strong presumption under the FAA in favor of upholding arbitration awards, and a court may not vacate an award if the panel’s interpretation of the parties agreement is “in any rational way derived from the agreement. Pa. Power Co. v. Local Union No. 272, 276 F.3d 174, 178 (3d Cir. 2001). In other words, a court may not vacate a panel’s decision merely because the Court disagrees with the panel’s interpretation of an agreement. Id.

It is not the court’s role to re-weigh or re-examine the evidence, but to “determine if the form of the arbitrator’s award can be rationally derived either from the agreement between the parties or from the parties submissions to the arbitrators. Mutual Fire, Marine & Inland Ins. Co. v. Norad Reins. Co. Ltd., 868 F.2d 52, 56 (3d Cir. 1989). Similarly, courts do not have the authority to overturn an award even if the panel was mistaken in fact, misinterpreted the contract, or made erroneous legal conclusions. See Citgo Asphalt Refining Co. v. The Paper, Allied-Indus., Chem., and EnergyWorkers Int’l Union Local, 385 F.3d 809, 815-16 (3d Cir. 2004). Indeed, a court’s “review of the arbitration panel’s decision under the FAA is strictly limited; this highly deferential standard has been described as ‘among the narrowest known to the law.’” Bowen, 254 F.3d at 932 (quoting ARW Exploration Corp. v. Aguierre, 45 F.3d 1455, 1462 (10th Cir. 1995)). Section 10 “provide[s] the FAA’s exclusive grounds for expedited vacatur of an arbitration award. See Hall Street, 552 U.S. at 584.

Courts should intervene, however, if the panel’s award “does not draw its essence from the . . . agreement and the arbitrator is dispensing his or her own brand of industrial justice, or if there is a “manifest disregard of the agreement. Pa. Power Co., 276 F.3d at 178. A court may vacate an arbitration award if the panel’s interpretation of the agreement was “totally unsupported by principles of contract construction. Exxon Shipping Co. v. Exxon Seamen's Union, 73 F.3d 128, 1295 (3d Cir. 1996).

II. Recent Decisions on the Issue of Arbitration Panel Authority

A. Cat Charter LLC v. Schurtenberger

In one recent decision, the Eleventh Circuit Court of Appeals concluded that the arbitrators had sufficiently explained the basis for their ruling and thus had sufficiently provided a “reasoned award, and did not exceed their powers. Cat Charter LLC v. Schurtenberger, 646 F.3d 836 (11th Cir. 2011). The parties had agreed that the panel would provide a “reasoned award and that the panel would determine a prevailing party on each of the various claims. Following the arbitration hearing, the panel issued a six-paragraph award.

The Court determined that a “reasoned award is an “award that is provided with or marked by the detailed listing or mention of expressions or statements offered as a justification of an act  the ‘act here being, of course, the decision of the Panel. Applying this definition to the facts and circumstances of the case, the Court held that the award was sufficiently “reasoned. Because the award provided detailed reasons regarding at least one claim, and because the controversy had turned primarily upon “credibility determinations made by the Panel, the court therefore interpreted the award to state that the Panel found the plaintiff’s witnesses to be more credible.

B. Harper Insurance Limited v. Century Indemnity Company

In another recent case, the U.S. District Court for the Southern District of New York held that the arbitration panel did not exceed its powers where it imposed a prepayment obligation on the reinsurer not found in the original contracts. Harper Insurance Limited v. Century Indemnity Company, 2011 WL 3366484 (S.D.N.Y. Jul. 28, 2011). Specifically, the panel ordered the reinsurers to pay 75 percent of any disputed reinsurance billing that Century might submit.

The reinsurers contended that the panel exceeded its authority by fashioning relief not specifically requested, even though the relief was ordered to remedy an issue the reinsurers conceded was submitted to the panel. The court held that the panel did not exceed its powers. The court concluded that, “[w]hile we are sympathetic to [the reinsurers’] concerns that the Final Order includes obligations not explicitly bargained for by the parties, we do not believe that the arbitrators materially rewrote the contract or acted outside the scope of their authority. The court added that the panel had noted that the reinsurance agreement has an “honorable engagement clause, which directed the arbitrators not to interpret the contract literally “but to effect the ‘general purpose . . . in a reasonable manner.’” Id. at *5. Quoting from the Second Circuit’s decision in Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d 255, 261 (2d Cir. 2003), the court said, “Courts have read [honorable engagement] clauses generously, consistently finding that arbitrators have wide discretion to order remedies they deem appropriate.

C. Charles Abbott v. Law Office of Patrick J. Mulligan

The Tenth Circuit Court of Appeals also recently affirmed the confirmation of an arbitration award, concluding that the panel did not exceed its powers in ruling on an attorneys fees dispute. Charles Abbott v. Law Office of Patrick J. Mulligan, No. 10-4113, slip op. (10th Cir. Sep. 21, 2011). Here, Charles Abbott and Patrick Mulligan, both attorneys, had entered into an agreement to jointly handle litigation arising from the Fen-Phen national class action settlement. A dispute arose over the terms of their contract when Mulligan discovered that Abbott was keeping some cases for himself and referring others to a different attorney, who agreed to pay him a greater share of any recoveries. Abbott asserted that the panel “manifestly disregarded Utah law by awarding Mulligan his gross profits, rather than his net profits.

The Tenth Circuit rejected Abbott’s argument that the court should modify its earlier precedent to conclude that an arbitrator who “manifestly disregards the law exceeds his powers under Section 10. Instead, the Court stated that “in the absence of firm guidance from the Supreme Court, we decline to decide whether the manifest disregard standard should be entirely jettisoned. And it is not necessary to do so because this case does not present exceedingly narrow circumstances supporting a vacatur based upon manifest disregard of the law.

The court held that the arbitrators did not exceed their authority. The court noted that “The role of the courts in reviewing arbitral awards is limited to the determination of whether the arbitrator’s award draws its essence from the contract of the parties. If an arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, the fact that a court is convinced he committed serious error does not suffice to overturn his decision. The court concluded that the panel did not exceed its authority because it based its award on the contract: “Whether we agree with the award is irrelevant. There was a contractual basis on which the arbitration panel based its conclusion. Its decision is, as a practical matter, immune from judicial oversight.

III. Conclusion

Plainly, courts continue to struggle with determining their appropriate role in reviewing awards issued by arbitration panels. This is particularly so where the panels have allegedly exceeded their authority and essentially “rewritten the terms of the reinsurance contracts before them in resolving disputes between the arbitration participants. Indeed, even where the parties have agreed to have the arbitration panel issue a “reasoned award, there is little doubt that disputes will continue arise as to what was meant by term “reasoned award.gucci outlet,rolex watches for sale,replica bvlgari watches and iwc replica can be found here.

Robert Whitney is a member of the Massachusetts Reinsurance Bar Association, and may be reached at rawhitney@gmail.com.

 2012 Robert A. Whitney. All rights reserved.

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