August 29, 2017 Articles

Reversal of Arbitration Awards: A Potpourri of Cases

By Sheila J. Carpenter

It is not easy to persuade a court to vacate an arbitration award, but it does happen. Here are a few recent cases where a court did just that, and one where that attempt was rejected. The causes for the courts' actions range from arbitrators behaving badly to simple mistakes by an arbitration panel.

Arbitrator Misconduct: Lying about Credentials
Section 10 of the Federal Arbitration Act (FAA), 9 U.S.C. § 10, provides that an arbitration award procured by fraud may be vacated.

In Move, Inc., v. Citigroup Global Markets, 840 F.3d 1152 (9th Cir. 2016), the arbitrator himself was a fraud. Move, Inc., claimed that Citigroup Global Markets had mismanaged its substantial funds. The arbitration agreement between the parties provided that the chairperson had to be an attorney. The person chosen to chair the panel was only masquerading as an attorney, using the credentials of an attorney with the same name to participate in Financial Industry Regulatory Authority (FINRA) arbitrations. His fraud was discovered more than four years after the final award in favor of Citigroup.

The FAA requires that a motion to vacate be filed within three months of an award. 9 U.S.C. § 12. The question before the Ninth Circuit was whether equitable tolling is available under the FAA, a question of first impression in that circuit, and, if so, whether it was available to the claimant. The court answered both questions in the affirmative, finding that the structure, language, and purpose of the FAA do not suggest that tolling should be unavailable. In balancing the need for finality in arbitration while preserving due process, the court ruled, "the arbitral process will not be disrupted if parties are permitted to satisfy the high bar of equitable tolling in limited circumstances. More importantly, permitting equitable tolling will enhance both the accuracy and fairness of arbitral outcomes." Move, Inc., 840 F.3d at 1158. Although the court said that the issue of whether Move, Inc., was entitled to equitable tolling was not before it because neither party had briefed it, the court nonetheless assumed that Move, Inc., had acted with due diligence and that respondent had not been prejudiced.

Having decided that the motion to vacate was timely, the court held that Move, Inc., had not received what it contracted for—an arbitration before a panel of qualified arbitrators. With the panel chair an imposter and thus not qualified to be a FINRA arbitrator, the award was vacated.

Arbitrator Misconduct: Improper Ex Parte Communication
In Star Insurance Co. v National Union Fire Insurance Co. of Pittsburgh, Pa., App. Nos. 15-1403, 15-1490 (6th Cir. Aug. 18, 2016), a reinsurer disputed claims submitted by a group of ceding companies. As is common in reinsurance contracts, the arbitration clause provided for each party to appoint an arbitrator, and those arbitrators were to choose the umpire. The arbitrators could not agree, so the umpire was chosen by lot. As has also been common in reinsurance arbitrations, the parties were permitted ex parte contact with their respective arbitrators until they filed their first prehearing brief. After the panel entered an interim award in favor of the reinsurer, counsel for the reinsurer started talking with his party-appointed arbitrator again. The panel entered a final award that greatly increased the damages awarded the reinsurer. The ceding companies challenged the award based in part on the ex parte contacts between the interim and final awards.

The reinsurer asserted that while the panel's scheduling order had an effective date for the no contact rule, it had no specified end date, and thus it was reasonable to assume that contact was permitted after the initial decision on the merits had been made. "You didn't say I couldn't" is not a phrase judges want to hear, though; and in an unpublished opinion, the Sixth Circuit held that the ex parte contact was "misconduct prejudicing a party's rights" under the Michigan equivalent of the FAA, not because ex parte contact itself is always misconduct but because in this case it violated the scheduling orders agreed to by the parties and the panel. Further, because the parties' agreement had been violated, the aggrieved party did not need to show prejudice.

Practice Tip: Interim awards are not unusual. In Star Insurance, the interim award called for additional substantive consideration and not merely the additional calculations that are common reasons for interim awards. Once an arbitrator or panel issues a final award, it is functus officio—its duties are complete, and it can no longer take any action. An interim award, however, is issued because there is further work to do. Because an interim award means there will be another award issued, unless the parties agree otherwise, it will almost always be improper for a party to contact an arbitrator ex parte prior to the final award.

Arbitrator Overreach: Rewriting the Parties' Contract
Nappa Construction Management v. Flynn, 152 A.3d 1128 (R.I. 2017), involved a troubled construction contract for a commercial building. The contract provided that the owners could terminate the contract for convenience. However, they never did. Instead, they issued a stop work order due to defective work on the building floor. The construction company then billed the owners for its work to date, including the work on the defective floor. When the owners refused to pay, the construction company terminated the contract for nonpayment. The arbitrator found the construction company's actions in terminating the contract to be improper as the owners had not violated the contract. However, the arbitrator viewed continuing the contract as hopeless and treated it as if it had been terminated for convenience by the owners. The Supreme Court of Rhode Island, by a 3-2 vote, held it improper for the arbitrator to engage in the fiction of termination for convenience because while an arbitrator can misconstrue a contract, it cannot construe it in a way that the court views as irrational.

Arbitrator Overreach: Rewriting the Misconduct Charges Against an Employee
In Bound Brook Board of Education v. Ciripompa, 153 A.3d 931 (N.J. 2017), a teacher was accused of conduct unbecoming a teacher, conduct that included inappropriate comments to and about female staff members, asking them out in front of students, sending and receiving nude photos on school computers, and other obviously bad behavior. The board of education's decision to terminate the teacher was reviewed by an arbitrator. The arbitrator construed one of the two counts against the teacher as being a sexual harassment claim even though the original charge did not specifically state that it was for sexual harassment. The arbitrator then applied the strict standards of proof that would have been applied to such a claim. He found that the teacher's conduct did not meet this standard and changed the discipline from dismissal to a 120-day suspension without pay.

The case made its way to the Supreme Court of New Jersey. The grounds for overturning an arbitration award in New Jersey are essentially the same as those in the FAA. Citing authority from the Third Circuit, the court held that a "claim that an arbitrator decided a legal question not placed before him or her by the parties is tantamount to the claim that the arbitrator 'imperfectly executed [his or her] powers' as well as a claim that the arbitrator exceeded his or her authority." Bound Brook, 153 A.3d at 937. In this case, by converting the board's claim of "conduct unbecoming" into a sexual harassment claim, the arbitrator "erroneously tasked the Board with substantiating charges it did not file." Id. at 940. In doing so, he imperfectly executed his powers and exceeded his authority. The court vacated the award and remanded the case to be heard by a different arbitrator.

Arbitrator Mistake: Occasional Grounds for Vacatur
In most circumstances, a mistake by an arbitration panel is not grounds to vacate its award. But in New Hampshire, the state's arbitration statute provides that "plain mistake" is a permitted ground for seeking relief from an award.

The language in section 10 of the FAA does not mention "plain mistake":

(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.
(b) If an award is vacated and the time within which the agreement required the award to be made has not expired, the court may, in its discretion, direct a rehearing by the arbitrators.

9 U.S.C. § 10.

In comparison, New Hampshire Revised Statutes § 542:8 reads thus:

At any time within one year after the award is made any party to the arbitration may apply to the superior court for an order confirming the award, correcting or modifying the award for plain mistake, or vacating the award for fraud, corruption, or misconduct by the parties or by the arbitrators, or on the ground that the arbitrators have exceeded their powers. Where an award is vacated and the time within which the agreement required the award to be made has not expired, the court may in its discretion, direct a rehearing by the arbitrators or by new arbitrators appointed by the court.

(2016) (emphasis added). The "plain mistake" language in this New Hampshire statute has been broadly construed by the New Hampshire courts to include mistakes not apparent on the face of the award.

In Finn v. Ballentine Partners, 143 A.3d 859 (N.H. 2016), the Supreme Court of New Hampshire discussed the plain mistake standard versus the stricter standards of the FAA at length. In Finn, a founding shareholder (Finn) was squeezed out of her company and her shares repurchased. An arbitration panel found in her favor on her wrongful termination claim, awarding her several million dollars for the value of her shares and $720,000 for lost wages. The company later restructured and received a substantial payment from another entity. Finn then brought a second claim in arbitration for additional monies for her shares pursuant to a clawback provision in the shareholder agreement providing that a founder was entitled to recover a higher price for shares resold within eight years. The second arbitration panel rejected her breach of contract claim because the first panel had resolved that claim. However, it awarded her $600,000 in damages for unjust enrichment. On cross-motions, the trial court vacated the award because res judicata barred the unjust enrichment claim on account of the damages received from the first arbitration. The trial court applied the "plain mistake" standard of review.

Finn unsuccessfully moved for reconsideration, arguing that the FAA applied to the case because the agreement affected interstate commerce. She also argued that the FAA preempted the looser state law.

The Supreme Court of New Hampshire held that the FAA was not the exclusive method for reviewing arbitration awards in New Hampshire. The FAA would have applied had review been sought in federal courts, but in the state courts of New Hampshire, the state law allowing review for plain mistake applied. The court reasoned that in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576, 590 (2008), the Supreme Court had noted that other avenues for judicial enforcement of awards exist besides the FAA. It noted that the parties' choice of law clause specified New Hampshire law without reference to the FAA. The court held that a plain mistake of law occurs "when the panel clearly misapplied the law to the facts." Finn, 143 A.3d at 873. In this case, because the injury claimed in the second arbitration was the same as that claimed in the first—the shareholder's improper termination—and only the damages were different, the arbitration panel should have applied res judicata and denied her claim.

In New Hampshire state courts, there does not appear to be much difference between the "plain mistake" standard of review and the standards of review that appellate courts apply to the decisions of trial courts.

Reasonable Arbitrator Action: Refusing to Postpone a Hearing
CM South East Texas Houston, LLC v. CareMinders Home Care, App. No. 16-11054 (11th Cir. Oct. 7, 2016), is an unpublished decision that considers the meaning of the portion of 9 U.S.C. § 10(a)(3) allowing vacatur: "where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown . . ."

The arbitration in this case was originally scheduled for December 2014, but the parties requested two postponements due to scheduling conflicts. The third set of hearing dates was in early March 2015. Shortly before the hearing, a key witness advised that his mother was severely ill, and he would need to be in Chicago with her during her health crisis. Because it was not known how his mother's health would progress, but it was known that she would not be better in the short term, the party affected suggested putting off the arbitration some months.

The arbitrator refused. While sympathetic to the witness, and offering to allow him to testify via video, the arbitrator believed that it would be improper to put off the hearing months past the original hearing date since arbitration is supposed to be a quick and efficient process. The arbitrator did grant a short postponement and shortened the scheduled hearing days from five to four.

The witness's mother died less than a week after the hearing ended. The party represented by this witness lost the arbitration and sought to vacate the award on that basis that the arbitrator's refusal to postpone the hearing, despite both parties' consent, was misconduct. It argued that the witness was unable to concentrate on the hearing and his performance suffered.

The Eleventh Circuit held that the arbitrator's decision was not misconduct under the FAA. The arbitrator tried to accommodate the witness's situation but also had an obligation to the competing interest of expeditious resolution of the case. The court rejected the argument that refusal to grant a postponement when both parties agree is per se unreasonable. An arbitrator is entitled to consider not only the convenience of the parties and witnesses but also the arbitrator's convenience and may "take into consideration the need to ensure the expeditious resolution of the case." Id.


Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).