How To

How Arbitrators Exceed Their Powers

When an arbitration panel allots a final award, any challenge to that award faces an uphill battle. It’s because under the Federal Arbitration Act (“FAA”) a final arbitral award must be upheld (if requested) and can only be set aside for a very limited set of reasons. Of the four vacatur grounds under Section 10 of the FAA, subsection (a)(4) provides that an award may be set aside “when the arbitrators exceeded their powers, or executed them so imperfectly that no final, final, and mutual award was made on the matter before them. Where the arbitral award is based on the parties’ contract, the courts do not generally consider the arbitrators to have exceeded their powers, even if their award interprets the contract differently from that of the court. But when arbitrators make use of their industrial justice mark and read the provisions of the contract, the conclusion that the arbitrators have exceeded their powers is a likely outcome.

In a recent non-insurance/reinsurance case in the 9th Circuit, both the district and circuit courts found that the arbitrator in a dispute relating to a government contract over termination exceeded his powers by issuing an award that essentially wrote in the contracts the essential terms and conditions needed by the federal government for government contractors.

In Aspic Engineering & Cons. Co. v. EEC Centcom Constructors LLC, No. 17-16510, 2019 U.S. App. LEXIS 2774 ( 9th Cir. 28 January 2019), the court upheld an order setting aside an arbitral award that exceeded the arbitrator’s powers. The underlying subcontracts had provisions incorporating Federal Acquisition Regulation (“FAR”) clauses governing the termination of contracts for convenience. After the subcontracts were terminated for convenience, a dispute arose over the damages of the termination and arbitration commenced. The arbitrator defended the subcontractor and determined that the subcontracts did not reflect a true meeting of views between the parties based on local procurement rules as compared to U.S. government contracting.

In confirming the district court’s order to set aside the arbitral award, the circuit court stated that the issue on appeal was not whether the award was reasonable, but whether the arbitrator exceeded his powers by declaring that the subcontractor did not have to comply with the provisions of the FAR. The tribunal stated that an arbitrator could not “disobey the provisions of the contract to achieve the desired result”. While an arbitrator may translate the contract taking into account the intentions of the parties as manifested through acts and conduct, the arbitrator may not use his or her rationalization to replace the parties’ previous proceedings.

The court resolved that when the arbitrator determined that the subcontractor did not have to comply with the requirements of the FAR, it exceeded its authority and did not remove the essence of the contract award. Because the award did not take into account the specific provisions of the plain text of the contract to avoid what the arbitrator considered to be an unfair result, the award was irrational under the FAA. The award was in direct conflict with the contracts, with no evidence that the parties’ previous practices had departed from them to achieve the desired result.

Here is a good quote from the opinion that applies to insurance and reinsurance disputes under the FAA:

We have become a nation of arbitration. A growing number of private disputes are not resolved by the courts, but by the arbitrators. Although courts play a limited role in reviewing arbitral awards, our duty remains important. When an arbitrator disregards the simple text of a contract without legal justification simply to arrive at a result he considers fair; we must intervene.

The capability of arbitrators is limited by the contract under interpretation. If you move too far away from the contract, the award cannot be confirmed.

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