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Court Defers to Arbitrator’s Interpretation of Contract and Law

Florence Montarmani

Court Defers to Arbitrator’s Interpretation of Contract and Law
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The Fifth Circuit has affirmed an arbitration award, deferring to the arbitrator’s interpretation of the parties’ agreement and applicable law. Kemper Corporate Servs. v. Computer Scis. Corp., 946 F.3d 817 (2020).

Kemper Corporate Services, Inc. (Kemper) hired Computer Sciences Corporation (CSC) to update its insurance software. The parties entered a multi-year contract (the agreement) and agreed that disputes relating to the agreement must be submitted to non-binding mediation and, if not resolved through mediation, then to binding arbitration.

After software problems and several failed attempts at mediation, Kemper filed a demand for arbitration with the American Arbitration Association (AAA) asserting that CSC had breached the agreement. After the hearing, the arbitrator ruled that CSC had breached the agreement and awarded Kemper damages. Kemper moved to confirm the award, and CSC moved to vacate it arguing that the arbitrator had violated the agreement by awarding Kemper damages. The district court rejected CSC’s damages arguments and confirmed the award.

On appeal, the Fifth Circuit noted that under the agreement the arbitrator has authority to award direct damages but not consequential damages. The court found that to properly decide what damages to award, the arbitrator “had to categorize the potential damages into the permitted and the prohibited categories.” The court found that the arbitrator did this and that the agreement expressly permitted him to interpret the agreement. Therefore, the court emphasized that the award would be subject to a very deferential review.

The court noted that, in the award, the arbitrator: (1) identified his task as interpreting the contract, (2) cited to text of the contract, and (3) framed his conclusions in terms of the contract’s meaning. The court also noted that the arbitrator’s 54-page award analyzed the damages sought by Kemper and explained why they were recoverable direct damages rather than consequential damages. In confirming the award, the court stressed that its job was not to review the merits of the arbitrator’s decision, but to determine if the arbitrator interpreted the contract in reaching the award. Here, the arbitrator clearly had done so. 

Practice Tip

This decision demonstrates the value of a reasoned award that permits a reviewing court to understand the basis for the arbitrator’s decision. Here, the award’s thoroughness enabled the court to understand the arbitrator’s thought process and conclude that he had not violated the parties’ contract but rather had interpreted it.