Parties to an arbitration recently learned what happens if their selected arbitrator fails to issue a “reasoned award.” On a motion to vacate such an award under the Federal Arbitration Act, a federal district court found that the arbitrator exceeded his authority. But instead of vacating the award, the court remanded the case to the arbitrator for clarification.
A Dispute Is Generated
In Smarter Tools, Inc. v. Chongqing SENCI Import & Export Trade Co., the parties quarreled over sales by a Chinese company to a Virginia corporation of thousands of units of a gas-powered inverter generator. There was no dispute that the buyer failed to pay for some of the delivered generators. But the buyer claimed that it required the generators to be compliant with both EPA and California air standards and that they were not. It also argued that the seller unilaterally cancelled several transactions. As a result, the buyer complained that it had to cease sales of the generators in the United States and that it was fined $507,000 for selling non-compliant generators in California.
The purchase orders for the generators provided for arbitration of disputes in New York “under the International Commercial Dispute Resolution Proceedings of the American Arbitration Association (AAA).” The seller commenced arbitration, and the buyer counterclaimed. There was no dispute that the parties had requested a “reasoned award.”
Arbitrator Rules in Favor of Seller
In a six-page award, the arbitrator awarded the seller approximately $2.4 million, observing that the seller’s claim was “well-founded and supported by the evidence.” The arbitrator said little, however, about the buyer’s counterclaims. He commented only that he did not find evidentiary support for these claims and that he did not find the testimony of the buyer’s expert witness to be credible. But the award “ma[de] no finding as to whether any generators provided by [the seller] were defective or non-compliant, nor whether [the seller] unilaterally cancelled scheduled deliveries.”
District Court Faults Award for Lack of Explanation
The parties filed cross-motions to confirm and to vacate the arbitration award in the U.S. District Court for the Southern District of New York. As the court observed, “Section 10 of the Federal Arbitration Act provides that a court may vacate an award,” among other things, if “the arbitrators exceeded their powers,” or if the award is “in manifest disregard of the law or of the terms of the parties’ relevant agreement.”
“The Second Circuit (Court of Appeals) has held that a ‘reasoned award’ requires something more than a line or two of unexplained conclusions,” the court noted, “but something less than full findings of fact and conclusions of law on each issue raised before the panel.” After reviewing the arbitrator’s decision, the court concluded that it did “not meet the standard for a reasoned award because it contain[ed] no rationale for rejecting [the buyer’s] claims.”
Specifically, the court noted that the arbitrator stated only in conclusory fashion that he “did not find support for [the buyer’s] claims.” But “[t]here [wa]s no reason given for this finding other than the negative credibility determination as to [the buyer’s] expert witness.” In sum, “[a]lthough the arbitrator was not obliged to discuss each piece of evidence presented by [the buyer], he [was required to] at least provide some rationale for the rejection of [the buyer’s] overall argument for [the seller’s] liability.”
The court concluded that “the arbitrator exceeded his authority in issuing an award that d[id] not meet the standard of a reasoned opinion as agreed to by the parties.” Although the buyer argued that the district court should vacate the arbitrator’s award under the Federal Arbitration Act, the district court observed that the remedy of vacatur must be strictly limited “in order to facilitate the purpose underlying arbitration: to provide parties with efficient dispute resolution, thereby obviating the need for protracted litigation.” Therefore, the court determined that “the proper remedy [wa]s to remand to the arbitrator for clarification of his findings.”
Supporting Awards with Reasoned Explanations
“There isn’t really a hard-and-fast definition of what a reasoned award is,” says Betsy A. Hellmann, New York, NY, cochair of the ABA Section of Litigation’s Alternative Dispute Resolution Committee. And this is “probably by design.”
“All of the circuits seem to be pretty much the same in that they all require some minimum level of reasoning, but how they express that standard can vary from circuit to circuit,” says Hellmann.
Attorneys should “be very careful” when drafting a contract, and “very specific about what you are looking for in an arbitration clause – you can’t always just rely on the boiler plate language,” says Karen Aldridge Crawford, Columbia, SC, cochair of the Section of Litigation’s Environmental & Energy Litigation Committee.
Specifically, says Crawford, it appears as though “the court is inferring that in this case, compliance with EPA and California regulations on emissions from these engines was perhaps the most important aspect of the contract.” And so, “you also have to be careful in laying out your minimum essential requirements for the product specifications, and you certainly want to make sure you provide for the selection of an arbitrator that understands the regulatory compliance scheme and how important it is,” she adds.
*Note: As of 11/9/2019, the appeal is still pending.
Anthony R. McClure is an associate editor for Litigation News.
Hashtags: #reasonedaward; #arbitration; #ADR
- Edward Lozowicki, “Second Circuit Reaffirms Manifest Disregard of Law as a Valid Ground for Vacature,” Alternative Dispute Resolution (July 27, 2016).
- Sara Kula, “A ‘Reasoned Award’ Requires That the Reasoning Be Expressed,” Alternative Dispute Resolution (Nov. 11, 2015).
- Manjit Gill, “How ‘Reasoned’ Must a ‘Reasoned Award’ Be?” Alternative Dispute Resolution (May 10, 2012).
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