September 02, 2016 Practice Points

Seventh Circuit Holds Panel Exceeded Its Authority

By Heather K. Afra

The Seventh Circuit reversed a district court’s decision upholding an arbitration award. It held that, by relying on a disclaimer in documents outside the parties’ contract, the arbitration panel exceeded its authority. Bankers Life & Cas. Ins. Co. v. CBRE, Inc., No. 15-1471, 2016 WL 4056400, at *2–3 (7th Cir. July 29, 2016).  

Insurance company Bankers hired real estate company CBRE to negotiate a sublease of Bankers’ space and to find Bankers a new location. Bankers and CBRE signed a Listing Agreement providing, among other things, that CBRE would “assist [Bankers] in . . . presenting offers” and “answer [Bankers’] questions relating to the offers.” Id. at *1. Bankers told CBRE that it wanted to net $7 million in savings from the deal. In turn, CBRE presented Bankers with a series of cost-benefit analyses (CBAs). When one CBA showed $6.9 million in net savings, Bankers accepted the deal, subleased its space, and relocated. CBRE’s calculation was inaccurate, however, and Bankers’ savings were only $3.8 million.  

In arbitration, Bankers sought to recoup the deficiency and to avoid paying commissions. It contended, among other things, that CBRE violated the Listing Agreement by failing to provide accurate information. The arbitration panel (Panel) acknowledged that the Listing Agreement required CBRE to answer questions accurately and that CBRE made a material mistake. Nonetheless, the Panel issued an arbitration award (Award) in favor of CBRE. It reasoned that the CBAs constituted the answers that, under the Listing Agreement, CBRE was required to provide and that the CBAs contained a disclaimer for errors in the CBAs. On this ground, the Panel ruled that CBRE had not violated the Listing Agreement.  

Bankers challenged the Award in district court, lost, and appealed to the Seventh Circuit. In a majority opinion by Judge Posner, the Seventh Circuit reversed, holding that the Panel exceeded its authority by relying on the disclaimer in the CBAs.  

With regard to the disclaimer, the Listing Agreement, and the Panel’s Award, the court concluded as follows: The disclaimer only appeared in the CBAs, the CBAs were not part of the Listing Agreement, and the CBAs did not amend the Listing Agreement (because Bankers did not agree to the CBAs). In addition, the Panel relied upon the disclaimer in making its Award.  

With regard to judicial review, the court recited federal law recognizing that arbitrators may not exceed their authority. Noting the court’s diversity jurisdiction, the court looked to Illinois law to define the scope of that authority. The court observed that, under Illinois law, the Panel’s authority was limited by the unambiguous language of the contract. The court also observed that “Illinois courts will not vacate an arbitration award for mere ‘errors in judgment or mistakes of law’ unless ‘gross errors of judgment in law or a gross mistake of fact’ are ‘apparent upon the face of the award.’” Id. at *2 (quoting Garver v. Ferguson, 389 N.E.2d 1181, 1183–84 (Ill. 1979)).  

Applying these principles, the court held that the Panel exceeded its authority. In the court’s analysis, the Panel was authorized to interpret the parties’ contract, which was the Listing Agreement. According to the court, the Panel was not authorized to rely on the disclaimer because the disclaimer only appeared in the CBAs and the CBAs were not part of the Listing Agreement. The court concluded that, consequently, by relying on the disclaimer the Panel exceeded its authority. The court further concluded that gross errors of judgment in law or a gross mistake of fact appeared upon the face of the Award. 

Judge Sykes dissented. In the dissent’s view, although the Panel’s reasoning was potentially erroneous, the Panel’s Award was grounded in the Listing Agreement. The dissent concluded that, for this reason, the Panel did not exceed its authority in the relevant sense, and the Award could not be vacated. 

Practice Pointer
On its face, this decision teaches that a party who seeks the protection of a disclaimer should make the disclaimer part of the governing contract; otherwise, the disclaimer may not be effective. More broadly, this decision arguably stands for the proposition that an arbitration panel exceeds its authority by committing something similar to “manifest error.” This decision is important because it arguably expands the circumstances under which courts will vacate arbitration awards.  

Keywords: alternative dispute resolution, litigation, disclaimer, arbitration award, judicial review, gross error, contract interpretation 

Heather K. Afra is a staff attorney at Novack and Macey LLP in Chicago, Illinois.

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