Parties routinely agree in advance to resolve their commercial and business disputes by binding arbitration. Sometimes, the parties may merely identify the relevant institutional rules of procedure that will govern the future arbitration if a dispute arises. On other occasions, the parties will go much further and spell out, detail by detail, what the parties expect the arbitrator or panel of arbitrators to do from the inception of the arbitration to its conclusion when they announce their award. Let's assume the parties, either in the arbitration agreement or at some other preliminary stage after the arbitration commences, agree that the arbitrator or panel will render a "reasoned award." How "reasoned" must a "reasoned award" be to pass muster? As two recent decisions from the Eleventh and Seventh Circuits illustrate, merely asking for a "reasoned award" may not get you the result you seek.
In Cat Charter, LLC v. Schurternberger, No. 10-11674 (11th Cir. July 13, 2011), the Eleventh Circuit decided that the arbitral panel that resolved a dispute over the construction of a yacht pursuant to the Commercial Arbitration Rules of the American Arbitration Association (AAA) provided a sufficiently "reasoned award" as agreed to by the parties, and did not exceed their powers under the arbitration agreement under section 10(a) (4) of the Federal Arbitration Act (FAA).
After the panel conducted the preliminary hearing, it issued its report and scheduling order, and the order provided in part that the parties would agree on the form of the ultimate award. Pursuant to Arbitration Rule R-42(b), "[t]he arbitrator need not render a reasoned award unless the parties request such an award in writing prior to the appointment of the arbitrator, or unless the arbitrator determines that a reasoned award is appropriate." The parties informed the panel of their desire for a "reasoned award," and after discovery and a five-day hearing and briefing, the panel issued its award in favor of the claimants.
In the six-paragraph award, the panel stated: (1) The claimants had proven two of their claims (for violation of the Florida Deceptive and Unfair Trade Practices Act and breach of contract) "by the greater weight of the evidence"; (2) all other claims and counterclaims were denied; (3) the claimants were entitled to attorney fees, arbitration expenses, and costs; and (4) on the claimants' civil-theft claim, there were sufficient factual issues "relating to missing resin and the cost of the skiff" to warrant a denial of attorney fees to the respondents on that claim, even though the panel denied the underlying claim by the claimants.
The claimants moved the district court to confirm the award, and the respondents moved to vacate the award, arguing that the panel "exceeded its powers" pursuant to section 10(a) (4) of the FAA by not issuing a "reasoned award" as the parties had agreed upon. "A district court may vacate the Award if, by not providing a reasoned award, '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.'" The district court agreed with the respondents and vacated the award. Cat Charter LLC v. Schurtenberger, 691 F. Supp. 2d 1339, 1344–45 (S.D. Fla. 2010).
In General What Constitutes a Standard "Reasoned Award"?
The Eleventh Circuit reversed the district court. First, the Eleventh Circuit addressed the question of what constitutes a "reasoned award." Noting that the FAA, the Arbitration Rules, and the parties' contract do not define the term, the court analyzed the nature of arbitral awards in general. On one end of the spectrum lies the "standard award," in which the arbitrator simply announces the result, and on the other end lies the award in which the arbitrator makes "findings of fact and conclusions of law." (Citing United Steelworkers v. Enterprise Wheel & Car Co., 363 U.S. 593, 598 (1960) ("Arbitrators have no obligation to the court to give their reasons for an award."), and citing ARCH Dev. Corp. v. Biomet, Inc., No. 02 C 9013, 2003 WL 21697742, at *4 (N.D. Ill. July 30, 2003). In ARCH, the court examined the award and concluded that the award was a "reasoned award":
Here, the Arbitrator did more than simply state who wins and who loses in the form of a "bare" award. He cited the relevant contractual provisions and definitions. He explained that the License Agreement has not terminated because it "was not restricted to a three-plane knee, which Biomet was not selling" and thus plainly rejected Biomet's main argument. Finally, he listed eight findings and conclusions that he made. In sum, it cannot be said that the September Award was devoid of explanation and thus not a reasoned award.
The Eleventh Circuit held that a "reasoned award" therefore was "something short of findings and conclusions but more than a simple result." Cat Charter, citing Sarofim v. Trust Co. of the W., 440 F.3d 213, 215 n.1 (5th Cir. 2006), quoting Holden v. Deloitte & Touche LLP, 390 F. Supp.2d 752, 780 (N.D. Ill. 2005).
Dictionary Definition of "Reasoned"
The Eleventh Circuit then also looked at the dictionary definition of "reasoned," and concluded that for something to be "reasoned" it would be "marked by a detailed listing or mention of reasons." Webster's Third New Int'l Dictionary: Unabridged 1892 (1993). Strictly speaking, then, 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. Armed with this definition, the Eleventh Circuit held that the panel's award survived scrutiny under section 10(a) (4) of the FAA:
The context of the Panel's statements and the fact that the Award provides detailed reasons regarding one claim, however, leads us to disagree with the Defendants. Put simply, the controversy here turned primarily upon credibility determinations made by the Panel. Either the transactions proceeded along the lines of a duly executed contract—the Defendants' story—or the transaction surrounding construction of the Magic was punctuated by misrepresentations and dubious behavior on the Defendants' part—the Plaintiffs' story. The statement that "[o]n the claim of the Claimants . . . for breach of contract . . . we find that Claimant . . . has proven its claim against MTI by the greater weight of the evidence" is easily understood to mean that, in the swearing match between the Plaintiffs and the Defendants, the Panel found the Plaintiffs' witnesses to be more credible. We certainly cannot say that this statement is devoid of any statements offered as a justification; the reason for the Plaintiffs' victory is plainly provided.
While the panel could have provided more details in the award, and the parties could have requested explicitly that the panel provide findings of fact and conclusions of law, the Eleventh Circuit held that the standard for a "reasoned award" should be interpreted broadly and flexibly so that the parties ultimately receive what they bargained for: a speedy, fair resolution of their dispute.
Eleventh Circuit Considers Prior Court Decisions
The court noted that its holding was consistent with the sparse precedent on the standard for a reasoned award. See, e.g., Green v. Ameritech Corp., 200 F.3d 967, 970, 974–76 (6th Cir. 2000) (Sixth Circuit reversed district court's decision to vacate arbitral award). In Green, the arbitration agreement called for the arbitrator to provide "an opinion which explains the arbitrator's decision with respect to each theory advanced by each Plaintiff and the arbitrator's calculation of the types of damages, if any, awarded to each Plaintiff." Green, at ¶ 8 (emphasis added). In this case, the arbitrator issued a six-page opinion on the plaintiff's claims of age and race discrimination and retaliation, and the opinion concluded as follows:
AGE DISCRIMINATION Considering all the evidence, the Arbitrator finds that Plaintiff Daniel Green has not met his burden of proof that the decision to terminate his employment in November of 1992, constituted age discrimination in violation [of the] Elliott-Larsen Civil Rights Act.
RACE DISCRIMINATION Considering all the evidence, the Arbitrator finds that Plaintiff Daniel Green has not met its burden of proof that the decision to terminate his employment in November of 1992, constituted race discrimination in violation [of the] Elliott-Larsen Civil Rights Act.
RETALIATION Considering all the evidence, the Arbitrator finds that Plaintiff Daniel Green has not met its burden of proving, in accordance with the standards set under the Elliott-Larsen Civil Rights Act, that retaliation for protected activity was a factor which made a difference in the decision to terminate his employment in November of 1992. The Arbitrator finds no evidence to support the Plaintiff's position that retaliation was, in any way, a factor in Plaintiff Daniel Green's termination.
Id. at ¶¶ 15–17.
Although the Green court did not speak of "reasoned awards," the analysis of whether the arbitrator's opinion "explain[ed] the arbitrator's decision" focused on the arbitrator's overall attempt to justify his decision on each theory advanced by the plaintiff. The court was persuaded that this opinion, though "minimal," sufficed and withstood scrutiny; moreover, the court held that if the parties wanted more detail in the opinion, it was incumbent upon them to set forth the degree of specificity in the arbitration agreement.
The Cat Charter court also cited to Vold v. Broin & Assocs., Inc., 699 N.W.2d 482, 484–85 (S.D. 2005). In Vold, the court affirmed the trial court's decision to vacate an arbitration award in an arbitration conducted pursuant to the Construction Industry Arbitration Rules of the AAA. The arbitrator agreed to issue a "reasoned award," and the two-page award was held to be deficient by the court for the following reason. It itemized the various dollar amounts allowed for each of Vold's claims, but gave no reason for each award and no reason for rejecting Broin's claims. The award did not mention any of the relevant contract provisions at issue, cite any law, or discuss any of the evidence admitted during the four-day hearing.
In Affymax, Inc. v. Ortho-McNeil-Jannsen Pharmaceuticals, Inc., No. 11-2070 (7th Cir. Oct. 3, 2011), the Seventh Circuit also opined on the latitude of arbitrators vis-à-vis the issues they address in an award, without explicitly addressing what constitutes a "reasoned award." Nevertheless, the court's analysis is instructive, given the few cases that have historically addressed the issue.
The two parties in Affymax had entered into a joint venture, and subsequent to the commencement of the joint venture, Affymax sued for a declaration of ownership of certain patents, which suit was stayed in favor of arbitration (as the parties had an arbitration provision in the joint-venture agreement). After a 35-day hearing before an arbitral panel appointed by the International Center for Dispute Resolution (ICDR), the panel issued its award, and Affymax appealed to set aside the award. The district court vacated the award only as it related to the panel's ruling on ownership of foreign patents, concluding that the panel "manifestly disregarded the law" by ruling on the foreign patents without analysis.
The Seventh Circuit held that manifest disregard of the law was not a ground to set aside the panel's award pursuant to the FAA and ultimately reversed the district court. However, the key point to be gleaned from the Seventh Circuit's opinion was that its holding was "not the only problem":
What law, precisely, did the arbitrators violate? The district court's opinion does not say. No rule of law requires arbitrators to render opinions—or, having chosen to write an opinion, to discuss every issue that the parties contested. Federal courts themselves often let issues pass in silence, and arbitration need not be as formal as litigation. Many an arbitration ends with an award saying who won but omitting reasons . . . [A]rbitrators are free to act summarily, unless the parties' contract requires an opinion.
Although the Cat Charter decision and the prior scant jurisprudence interpreting the concept of a "reasoned award" offer some insight as to what a "reasoned award" means, the flexibility inherent in the Eleventh Circuit's analysis will no doubt invite parties to act more strategically and prospectively at the contractual drafting stage to make it abundantly clear that if they want a full-fledged award with findings of fact and conclusions of law, do not assume that a request for a "reasoned award" will suffice. Otherwise, as the Affymax court noted, the parties should be held to the bargain struck in their relevant agreements, and if the parties did not provide greater detail to specify the expectations of the arbitrator or the panel, the courts will not fill in those unspoken wishes for the parties.
Keywords: litigation, alternative dispute resolution, reasoned, award, vacated