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March 07, 2017 Top Story

Court Refuses to Defer to Arbiter Who Exceeded Power

Arbitrator exceeds authority interpreting silence as ambiguity

Candice A. Garcia-Rodrigo

When an agreement clearly provides responsibilities of parties, an arbitrator exceeds its authority by interpreting silence in an agreement to be an ambiguity, according to the U.S. Court of Appeals for the Seventh Circuit.

Straying from the limited judicial review of arbitration decisions, the Seventh Circuit Court reversed the arbitrator's interpretation of the parties' collective bargaining agreement.ABA Section of Litigation leaders agree the opinion expands the scope of judicial review of arbitration decisions, and drafters should avoid the provision used in this case. U.S. Soccer Federation, Inc. v. US National Soccer Team Players Assoc.

Judicial Deference to Arbitrators Has Limits

The U.S. Soccer Federation and its players' association negotiated collective bargaining and uniform player agreements providing for an approval process for ads containing players' images. The agreements included an arbitration clause limiting the arbitrator's scope of authority to interpreting, applying, and determining compliance with the provisions of the agreements. The arbitrator could not "add to, subtract from, or alter" terms of the agreements.

The association demanded arbitration after the U.S. Soccer Federation declared the agreements did not require association's approval for a particular advertisement, though the U.S. Soccer Federation had in the past. The arbitrator concluded the agreements were silent on the issue of approval of this advertisement and did not set forth another approval process, thereby creating an ambiguity. To resolve the ambiguity, the arbitrator applied the parties' past practices in ruling in favor of the association.

Following the standard of judicial deference, the district court affirmed the award because the arbitrator interpreted the agreement as bargained for by the parties. The appellate court reversed. In reviewing an arbitrator's award, the question is whether the arbitrator interpreted the contract, not whether he erred in his interpretation.

Acknowledging that judicial review is limited, the appellate court proclaimed that judicial deference to arbitration is limited. The "court is empowered to vacate an arbitrator's award if 'the arbitrator had exceeded the powers delegated to him by the parties,'" declared the appellate court. The arbitrator's decision must show a contract interpretation route to the award. If the court cannot possibly see the interpretive route, then the court will infer a non-contractual basis.

No Judicial Deference to Arbitrator's Contract Interpretation

The appellate court ruled the arbitrator erred in finding an ambiguity when the contract is silent as to the approval process for the advertisement. The court defines an ambiguity as the possibility a party can interpret a document in more than one way. Finding an ambiguity led the arbitrator to adding the parties' past practice of seeking approval to the terms of the written contract. The appellate court disagreed, finding no ambiguity.

The appellate court determined the arbitrator exceeded the powers delegated to him by the parties in his interpretation. The decision followed two prior cases involving employment and collective bargaining disputes. In both cases, the court reversed the arbitration awards finding the arbitrators exceeded their authority in modifying the parties' contracts by finding ambiguities based on the conduct of the parties. The court did not give deference to the arbitrators who ignored unambiguous terms of the contracts.

Arbitrators Should Avoid Lessening Predictability of the Contract Terms

Some Section of Litigation leaders disagree about the implications of this case. While it appears the court expanded its judicial review of an arbitrator's award, this case may be limited to the facts, according to Section leaders. Leaders agree that you cannot draft a different clause than the one employed in this case to prevent this outcome.

"Everyone seems to agree the arbitrator did not decide the case correctly," says Paula M. Bagger, Boston, MA, vice-chair of the Section's Commercial & Business Litigation Committee. "The Seventh Circuit properly articulated the standard of review for arbitration decisions, but it did not apply that standard," she continues. "The arbitrator looked at the contract and acted like he was interpreting the contract. Although he may have been wrong, he did what the parties bargained for. The Seventh Circuit should have affirmed the district court, which deferred to the arbitrator's award," explains Bagger.

"This is an expansion of judicial review of arbitration," opines Michael S. LeBoff, Newport Beach, CA, cochair of the Section's Commercial & Business Litigation Committee. "The court could not reasonably figure out how the arbitrator found ambiguity in the contract. There was not enough support to justify the decisions," says LeBoff. "The goal of contracts is to have predictability," explains LeBoff. If the arbitrator is rewriting the agreement, then parties lose that predictability, he continues.

"Based on this case, it appears the courts will try to enforce the parties' agreement by limiting the arbitrator's ability to stray too far from the contract's terms. The court took a more active role in reviewing the merits of the arbitrator's decision. The facts of this case are case-specific, however," LeBoff warns.

"This decision reflects the tension between applying a limited standard of review of arbitration awards and ensuring that an arbitrator has not added substantive terms to a contract," points out Stephen D. Feldman, Raleigh, NC, cochair of the Section's Appellate Practice Committee. "To some degree, when a contract is construed to include an implied term, that construction can be characterized as adding to the contract," Feldman remarks. Commercial litigation lawyers should be cognizant of how the agreement defines the arbitrator's authority, he explains. The more that the agreement appears to confine that authority, the greater the tension with the limited standard of review that governs arbitration award she expounds.

In light of this case, most Section leaders advise that if the parties want finality of the arbitration decision, then drafters should avoid the provision used in this case because the arbitrator's authority is limited. One thing is certain, on appeal the losing party should argue the arbitrator exceeded his authority advises LeBoff.


Candice A. Garcia-Rodrigo is a contributing editor for Litigation News.

Keywords: arbitration, contract interpretation, judicial review, judicial deference

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