When an arbitration award is ambiguous or fails to address a contingency that later arises, arbitrators retain the legal power to clarify or alter that award. This rule reflects a formal exception to the doctrine of functus officio, which would otherwise prohibit an arbitrator from exercising any authority after he or she has adjudicated the issues presented. ABA Section of Litigation leaders say this exception is in line with current trends and will further arbitration’s goals of settling disputes efficiently and avoiding expensive and protracted litigation.
Arbitrators Permitted to Clarify Ambiguity in Award
In General Re Life Corporation v. Lincoln National Life Insurance Company, the U.S. Court of Appeals for the Second Circuit considered an appeal of a trial court’s confirmation of an arbitration award which had been modified by the arbitrators after it was originally issued. The underlying arbitration involved a dispute over the calculation and payment of insurance premiums. The arbitration panel ordered that General Re was entitled to increased premiums, but that Lincoln National was entitled to “recapture” life insurance policies issued by General Re rather than pay those additional premiums. Lincoln National exercised this right, but General Re refused to repay certain categories of premiums to Lincoln National.
Notwithstanding that the arbitration panel had already issued its final award, Lincoln National advised the panel that the parties had a remaining dispute regarding which premiums General Re was required to repay because of Lincoln National’s recapture, and asked the panel to resolve that issue. General Re opposed this request, arguing that Lincoln National was seeking a reconsideration and fundamental change to an unambiguous and final arbitration award, which the panel did not have the legal authority to provide. The arbitration panel sided with Lincoln National and issued a “clarification” specifying the circumstances under which General Re would have to repay the disputed premiums to Lincoln National. The trial court confirmed that clarified award, and General Re appealed.
The doctrine of functus officio dictates that once arbitrators have fully adjudicated the issues submitted to them, their authority over the matter is ended and they retain no further authority to reconsider or resolve disputes between the parties. This doctrine exists to prevent any reconsideration by a nonjudicial officer who might be subject to outside influence. The court of appeals used a three-part test to determine when an arbitrator is permitted to alter a final award: (1) the award is ambiguous, (2) the change merely clarifies the award, rather than substantively modifying or rewriting it, and (3) the clarification comports with the parties’ intent as reflected in the agreement giving rise to the arbitration.
Furthering the Goals of Arbitration
Section leaders recognize that arbitrators need the freedom to correct an ambiguous award. “A truly ambiguous final award should not be the end result of all of the time and expenses the parties have invested, especially when the ambiguity may not have been evident until a later date when the parties’ differing interpretations are put to the test,” opines Henry R. Chalmers, Atlanta, GA, cochair of the Section’s Alternative Dispute Resolution Committee. “Parties in arbitration are entitled to finality and the savings of time and expense that arbitration is designed to offer,” he notes.
The General Re decision aligns with numerous other federal courts which have held that an arbitrator may clarify or alter an otherwise final arbitration award when the award is ambiguous. “Overall, the Second Circuit’s decision not only adopts a well-settled rule and provides a helpful three-part framework for analyzing the applicability of the rule/exception, it also furthers the Federal Arbitration Act’s purpose of respecting the parties’ agreement to arbitrate by leaving potential clarifications to the arbitration, as opposed to letting a court weigh in on a disputed issue about an ambiguous arbitration award,” opines Mary-Christine "MC" Sungaila, Costa Mesa, CA, cochair of the Section’s Appellate Practice Committee. “The Second Circuit has now produced a narrowly focused rule that will maintain the twin objectives of arbitration: settling disputes efficiently and avoiding long and expensive litigation,” she adds.
Ambiguity May Be in the Eye of the Beholder
While judicial economy and efficiency may increase, concerns remain about how to define an ambiguity in an arbitration award and what constitutes a “clarification,” as opposed to something more substantive. “Notwithstanding the court’s effort to delineate a clear test for when the exception applies, there is an opportunity for mischief. An unhappy party may resist the confirmation of a modified award on the basis that the arbitral tribunal made a change to it instead of a clarification. This will elongate proceedings, instead of shorten them,” says Betsy A. Hellmann, New York, NY, cochair of the Section’s Alternative Dispute Resolution Committee.
Josephine M. Bahn is a contributing editor for Litigation News.
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- Sunu M. Pillai, “Ambiguity in Final Award is Exception to Functus Officio Doctrine,” Alternative Dispute Resolution (May 23, 2019).
- Michael S. Oberman, “Second Circuit Recognizes Exception to Functus Officio Doctrine,” Alternative Dispute Resolution (Feb. 6, 2019).
- Sarah Miller Espinosa, “Clarification—A Valid Exception to Functus Officio,” Alternative Dispute Resolution (Nov. 28, 2017).
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