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November 11, 2015 Articles

A "Reasoned Award" Requires That the Reasoning Be Expressed

By Sara Kula

In 2009, Tully Construction Co. filed a demand for arbitration against Canam Steel Corp., concerning a dispute over a contract to supply steel. Tully sought over $20 million in damages for breach of contract and intentional and negligent misrepresentation. Canam counterclaimed for approximately $5 million. Tully Constr. Co. v. Canam Steel Corp., No. 13 Civ. 3037, 2015 U.S. Dist. LEXIS 25690 (S.D.N.Y. Mar. 2, 2015).

After a full hearing, the selected arbitrator, John Krol, issued an award granting Tully almost $7 million in damages on its claim, and granting Canam over $350,000 on its counterclaim. The arbitrator listed out categories of alleged damages and the amount awarded for each.

The Dispute
After Krol issued the award, Canam requested that he withdraw the award and instead issue a "reasoned award." Canam's argument for a reasoned award was premised on the parties' arbitration agreement itself and a scheduling order issued by the arbitrator. Specifically, the arbitration agreement governing the dispute provided that the arbitration would be covered by the AAA Arbitration Rules for Complex Construction Cases. Such rules provide that, unless the parties agree otherwise, the arbitrator shall issue a "reasoned award." Krol had also issued a scheduling order stating that the "arbitrator's decision shall be reasoned."

Krol denied Canam's request to withdraw the award, responding that his final award was a reasoned award because it "sufficiently and specifically incorporates all credible evidence adduced during the hearings, detailing the liability for each item of claim and counterclaim."

When Tully sought confirmation of the arbitrator's award in the United States District Court for the Southern District of New York, Canam opposed the petition arguing, among other things, that the arbitrator had exceeded his authority by failing to issue a reasoned award.

What Is a Reasoned Award?
The default rule in arbitration is that the arbitrator may issue a standard award that simply announces the result. However, because arbitration is a matter of contract, parties are free to contract around the default rule. To the extent that parties do so, the award must give effect to the parties' intent.

According to the Tully court, a reasoned award is considered to fall somewhere in between a standard award (requiring no explanation) and "findings of fact and conclusions of law" (which requires the most explanation). A reasoned award requires the arbitrator to set out his or her key findings and, where necessary, the reasons for those findings.

Reviewing Krol's order, the court found that it contained no explanation whatsoever for the arbitrator's rulings. The arbitrator did not set forth relevant facts, explain the nature of the claims, or offer any reason or rationale for his determinations as to liability and damages. He simply listed various categories of monetary damages without any explanation as to how he calculated those figures or determined liability. Because the arbitrator failed to include any justification for his decisions, the court found that he had failed to issue a reasoned award.

The Result of the Arbitrator's Failure
The court then went on to consider whether the arbitrator's failure to issue a reasoned award justified vacatur of the decision under section 10(a)(4) of the Federal Arbitration Act. Section 10(a)(4) provides that an arbitration award may be vacated "where the arbitrators exceeded their powers." The court concluded that the arbitrator did exceed his power by rendering a form of award that did not satisfy the requirements stipulated to by the parties in their arbitration agreement. Accordingly, the court held that the arbitrator's award could not stand and went on to consider the proper remedy.

Tully argued that the proper remedy for the arbitrator's failure to issue a reasoned award was for the court to remand the matter back to the arbitrator to fulfill his obligation under the agreement. Canam did not address the remedy issue. Before reaching a conclusion, the district court considered the common law doctrine of functus officio—a "doctrine [which] dictates that, once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreements by the parties, to redetermine th[ose] issues" (internal quotation marks omitted). The court rejected the application of functus officio under the circumstances because the arbitrator had not actually completed his duty under the agreement. Accordingly, the court remanded the matter back to Krol to issue a reasoned award.

Takeaway for Arbitrators
In addition to clarifying the requirements of a reasoned award, the Tully decision highlights how important it is for an arbitrator to be familiar with the terms of the parties' arbitration agreement and to comply with all of the requirements therein.

Keywords: litigation, ADR, reasoned award, remand, exceeded authority, functus officio

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