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March 16, 2017 Articles

Did the Seventh Circuit Expand the Grounds for Vacating an Arbitration Award?

By Charles E. Harris II and Joseph M. Snapper

A court has an extremely circumscribed role in an action to vacate an arbitration award. Indeed, the U.S. Supreme Court has declared that even if a court is convinced that an arbitrator committed a grave error in applying the terms of a contract, it should not vacate the resulting award if the arbitrator even arguably applied the contract provisions. In Bankers Life & Casualty Insurance Co. v. CBRE, Inc., 830 F.3d 729 (7th Cir. 2016), a divided Seventh Circuit held that an arbitration award did not satisfy this deferential standard, and some have concluded that the court expanded the grounds for vacating an award. While the court somewhat uncharacteristically commented on the merits of the petitioner’s breach of contract claim, rather than simply deciding whether the arbitrators applied the contract terms, the court did purport to vacate the award based on one of the limited grounds for doing so—i.e., that the arbitrators exceeded their authority.

It is well established that the review of an arbitration award, notably one based on an arbitrator’s construction or application of a contract, is narrowly circumscribed. Courts have said that, while it may be “tempting to think that [they] are engaged in judicial review” of an arbitration award, “they are not.” Wise v. Wachovia Sec., LLC, 450 F.3d 265, 269 (7th Cir. 2006) (Posner, J.). To be sure, “the issue for the court is not whether the contract interpretation is incorrect or even wacky but whether the arbitrators had failed to interpret the contract at all, for only then were they exceeding the authority granted to them.” Id. (citations omitted). An arbitrator exceeding his or her powers is, in fact, one of the few grounds under the Federal Arbitration Act or similar state statutes, such as the Illinois Uniform Arbitration Act, on which a court may properly vacate an arbitration award. 9 U.S.C. § 10(a)(4); 710 Ill. Comp. Stat. 5/12(a)(4).

A three-arbitrator panel of former judges with over 65 years of combined experience in federal and state courts issued the arbitration awards in Bankers Life. The panel found in the awards that the respondent, a commercial realtor, did not breach its agreement with Bankers Life & Casualty Insurance Co. (Bankers). However, the Seventh Circuit overturned the panel’s award, holding that the panel exceeded its authority by ignoring the agreement and relying on a document outside it. Some commentators have questioned whether the Seventh Circuit created a less deferential standard of review for vacating an arbitration award in Bankers Life. As discussed below, we don’t think so.

The Sublease/Lease Deal and Listing Agreement
The dispute between Bankers and the realtor arose from a lease and sublease deal. In 2011, Bankers entered into a multiyear lease for space in a building on the West Side of Chicago (the property). Shortly after it moved in, the realtor approached Bankers to gauge if Bankers would be interested in subleasing the property to Bankers’ neighbor, Groupon. The idea appealed to Bankers, so it agreed to an “exclusive listing agreement” with the realtor that provided that the realtor would negotiate the sublease with Groupon and assist Bankers with finding a new space.

In particular, the agreement stated that the realtor would “‘accept delivery of and present [to Bankers] all offers and counteroffers to buy, sell, or lease [the] property’ of Bankers.” Bankers Life, 830 F.3d at 730. It also stated that the realtor “‘would assist [Bankers] in developing, communicating, negotiating, and presenting offers, counteroffers, and notices’; and would ‘answer [Bankers’] questions relating to the offers, counteroffers, notices, and contingencies.’” Id.

Bankers purportedly wanted to net a cost savings of at least $7 million from the deal. So the realtor presented several cost-benefit analyses (CBAs) to Bankers that compared the costs of leasing new space to the benefits of subleasing the property. One such CBA showed that Bankers would achieve a savings of $6.9 million if it leased the property and moved to a downtown Chicago space. Relying on this CBA, Bankers leased the downtown space and subleased the property. But the realtor’s net savings calculation in the CBA omitted a $3.1 million tenant improvement allowance that Bankers agreed to pay to Groupon as part of the deal. Thus, Bankers’ would really profit about $3.8 million from the deal.

The Underlying Arbitration
Bankers brought an arbitration against the realtor alleging, among other things, that it breached the agreement by presenting the incomplete CBA. Bankers sought to recover the $3.1 million shortfall and $2.7 million in commissions that it paid to the realtor, as well as attorney fees and costs. The arbitration panel rejected Bankers’ claims and entered an award for the realtor. It concluded that the realtor’s misreporting of the cost savings did not breach the agreement because the agreement’s terms did not require that Bankers be correctly assured of those savings. More specifically, the panel stated that “the mistake in [the realtor’s] analysis . . . is not a violation of its obligation to assist Bankers ‘in developing, communicating, negotiating and presenting offers[,] counteroffers and notices’” or a failure to “answer [Bankers’] questions relating to offers, counteroffers, notices, and contingencies.” Bankers Life, 830 F.3d at 731.

Bankers asked the panel to reconsider its initial award. The thrust of Bankers’ argument was that, while the CBA was not an offer or counteroffer, the agreement required that the realtor answer questions relating to such offers or counteroffers, and there is an implicit requirement that the realtor must answer those questions precisely. In responding to Bankers’ request, the panel held that, while the agreement did require that the realtor answer questions about offers and counteroffers accurately, providing the CBAs to Bankers fulfilled that obligation, and, besides, the CBAs included an express disclaimer that provided that the realtor “was not guaranteeing that there were not any errors contained in the CBA.” Id. Further, the panel noted that Bankers’ personnel reviewed the CBAs independently and failed to discover the error.

Bankers filed a motion to vacate the arbitration award, arguing that, under the Illinois Uniform Arbitration Act, the arbitrators exceeded their authority by entering an award that purportedly ignores the terms of the agreement. The district court declined to vacate the award.

The Seventh Circuit Opinion
On appeal, a divided Seventh Circuit vacated the arbitration award. Writing for the majority, Judge Posner observed that, while Illinois courts generally do not vacate arbitration awards for mere “errors in judgment,” they do so if there is a “gross error[] of judgment” that is “apparent upon the face of the award.” Bankers Life, 830 F.3d at 732 (quoting Garver v. Ferguson, 389 N.E.2d 1181, 1183–84 (Ill. 1979)). He also noted that “arbitrators’ authority is limited by the unambiguous contract language,” and they “do not have the authority to ignore the plain language of the contract and to alter the agreement, as the ultimate award must be grounded on the parties’ contract.” Id. (quoting First Merit Realty Servs., Inc. v. Amberly Square Apartments, L.P., 869 N.E.2d 394, 399 (Ill. App. Ct. 2007)). Relying on this case law, the court held that the face of the arbitration award showed that the panel exceeded its authority by ignoring relevant language in the agreement and relying on an extrinsic document, the CBA disclaimer. The court said that the CBAs were just the vehicle for answering questions about the negotiation of the new lease in downtown Chicago. “But as such responses—responses to Bankers’ ‘questions relating to offers, counteroffers, notices, and contingencies’—were inaccurate, they were not responsive, and thus violated the [agreement].” Id.

The dissenting judge, Diane Sykes, strongly disagreed. She stated that however “erroneous” the panel’s interpretation of the agreement, its decision “is plainly grounded in the contract” and the court should uphold the award. Id. at 734–35 (Sykes, J., dissenting). In closing, she surmised that “[o]n plenary review I might agree with my colleagues that the arbitrators mistakenly read the disclaimer and the agreement together. But the limited judicial review . . . requires us to uphold an arbitration decision that ‘draws [its] essence from the parties’ contract.’” Id. at 735.

Takeaways from Bankers Life
Bankers Life is notable in that the Seventh Circuit considered the merits of whether the realtor breached the agreement, as opposed to limiting its review to whether the arbitrators arguably applied the provisions of the agreement. In the end, however, the court vacated the arbitration award on the ground that the arbitrators exceeded their authority by ignoring the terms of the agreement, which, again, is an accepted ground to vacate an award. Bankers Life, 830 F.3d at 731–32 (majority opinion). Contra id. at 735 (Sykes, J., dissenting) (concluding that “[t]he arbitrators quoted and construed the relevant language in the agreement”). Therefore, we do not view Bankers Life as a decision that expanded the bases for vacating an award.

Bankers Life is actually back before the Seventh Circuit. On remand, the district court entered judgment on liability against the realtor based on, among other language in Bankers Life, Judge Posner’s statement that the realtor “violated” the agreement, id. at 732 (majority opinion); the court remanded the action to a new arbitration panel to decide damages. Late last year, the realtor appealed the district court decision and is asking the Seventh Circuit to remand the matter to the district court with strict instructions to remand the proceeding to the original panel for a finding on liability. We will follow and report the results of this second appeal.

Keywords: litigation, ADR, arbitration Bankers Life, vacate, grounds, review

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