Vacating Arbitration Awards: Reasons In The Federal Arbitration Act Are The Only Way For Now - Part 1
The U.S. Court of Appeals for the 5th Circuit (hearing cases in Texas, Louisiana, and Mississippi) just issued a new arbitration decision re-affirming that the reasons for vacating an arbitration award in Section 10 of the Federal Arbitration Act (the "FAA") are the only reasons for vacating an arbitration award governed by the FAA. The case is Saipem America v. Wellington Underwriting Agencies Limited. Making the case a little more remarkable, retired U.S Supreme Court Justice Sandra Day O'Connor was one of the judges who heard and decided this case. (Even after they retire from the Supreme Court, justices still hear cases in lower federal courts).
Factual Backstory
The owner of an offshore oil drilling platform in Texas (the "owner") hired an international oil equipment installation and transport contractor (the "prime contractor") to move the platform to Israel and install it there. The prime contractor bought insurance from several insurers (collectively, the "insurers") to insure the load-out, transportation, and installation of the platform.
The prime contractor entered into a subcontract with Saipem America, Inc. (the "subcontractor") to act as the prime contractor's maritime warranty surveyor. And the owner also entered into a separate contract with the subcontractor. Under that contract the subcontractor acted as the owner's "certified verification agent" during transportation and installation of the platform.
The subcontract included the following arbitration provision:
Any dispute arising out of or in connection with this Subcontract which cannot be amicably settled shall be referred to arbitration in The Hague, The Netherlands, in accordance with the Rules of the International Chamber of Commerce currently in force. Any settlement agreement or arbitral award shall be final and binding upon Parties.The platform got damaged between Texas and Israel. The owner and prime contractor made insurance claims against several of the insurers. The insurers then looked for who might be responsible for the damage. They wanted to make subrogation claims to get back at least part of the money they just paid-out to the owner and prime contractor.
The insurers focused on a claim for negligent misrepresentation
against the subcontractor. They based their negligent
misrepresentation claim on a "certificate of approval" the
subcontractor had issued certifying that the platform could be safely
towed from Texas to Israel.Along with other claims, the insurers' negligent misrepresentation claims went to arbitration. The arbitrators found the subcontractor liable to the insurers for negligent misrepresentation. They awarded the insurers:
- $1,110,657 in damages
- $399,000 in attorneys fees and expenses
- $105,000 for costs of the arbitration.
Asking Judges to Vacate the Arbitration Award Disappointed with the results of the arbitration, the subcontractor asked Judge David Hittner of the United States District Court for the Southern District of Texas to vacate the arbitration award. The subcontractor argued that by deciding the negligent misrepresentation claim, the arbitrators had exceeded their powers. And because Section 10(a)(4) of the FAA says that a judge may vacate an arbitration award if the arbitrators exceed their powers, the subcontractor urged Judge Hittner to vacate the award. But Judge Hittner disagreed. Instead of vacating the arbitration award, he confirmed it. Disappointed again the subcontractor appealed to the 5th Circuit Court of Appeals.
Vacating Arbitration Awards Only Under the FAA
On appeal the subcontractor argued that negligent misrepresentation is outside the scope of the arbitration provision in the subcontract - negligent misrepresentation isn't a "dispute arising out of, or in connection with, the subcontract". So by deciding the negligent misrepresentation claim, the arbitrators exceeded their powers. So, under Section 10(a)(4) of the FAA, Judge Hittner should have vacated the arbitration award.
The 5th Circuit judges started by noting that after the Supreme Court's decision in Hall Street Associates L.L.C. v Mattel, Inc., the exclusive reasons for vacating an arbitration award are the reasons listed in Section 10 of the FAA. Here's a paraphrase of what those judges said:
The parties dispute whether the Supreme Court's recent decision in Hall Street Associates, L.L.C. v. Mattel, Inc. forecloses this court's review of the arbitration award on grounds outside Section 10 of the FAA. After oral argument in this case, other judges from this court addressed that question in another case - Citigroup Global Markets, Inc. v. Bacon.
In the Citgroup Global case our colleauges said that "manifest disregard of the law", as an independent, nonstatutory, ground for vacating an arbitration award must be "abandoned and rejected". They interpreted Hall Street as restricting the reasons for vacating an arbitration award exclusively to the reasons identified in Section 10 of the FAA. They held that Hall Street effectively overruled earlier 5th Circuit cases holding that reasons outside Section 10 of the FAA may support vacating an arbitration award.
Accordingly, we may vacate an arbitration award in this case only if one of the reasons identified in Section 10 of the FAA supports vacating the award.
Recognizing that arbitrators exceeding their powers is one of the reasons for vacating an arbitration award identified in Section 10 of the FAA, the subcontractor urged the 5th Circuit judges to reverse Judge Hittner and order him to vacate the arbitration award. But there was a catch.
Terms of Reference
Before the arbitration started, the parties (including the subcontractor) submitted to the arbitrators a document called the "Terms of Reference". The Terms of Reference:
Critically, the Terms of Reference also addressed the powers of the arbitrators:
- Summarized the parties' respective positions on the disputed issues
- Identified the relief each party was asking for
Analyzing and applying the Terms of Reference, the 5th Circuit judges in effect said:
The Arbitral Tribunal is to resolve, by a preponderance of the evidence all issues of fact and law that shall arise from the claims and pleadings as duly submitted by the parties, including, but not limited to, the following issues as well as any additional issues of fact or law which the Arbitral Tribunal, in its own discretion, may deem necessary to decide upon for the purpose of rendering any Arbitral Award....Once the parties have gone beyond their promise to arbitrate and have actually submitted an issue to an arbitrator, we must look to both their contract and to the submission of the issue to the arbitrator to determine the arbitrators' authority. So, the parties agreed that the arbitrators could decide any additional issues in their own discretion. In light of the parties' submissions and grant of broad authority to the arbitrators, we cannot find that the arbitrators exceeded their authority.By signing-on to the Terms of Reference, the subcontractor had removed restrictions on the arbitrators powers to decide extra-contractual disputes between the parties (like claims for negligent misrepresentation). Though the scope of the arbitrators' power was more limited under the subcontract's arbitration provision, the Terms of Reference essentially amended that arbitration provision, expanding the arbitrators' power by giving them the discretion to decide themselves what was within their power to decide.
For these reasons, the 5th Circuit judges affirmed:
- Judge Hittner's denial of the subcontractor's request to vacate the arbitration award.
- Judge Hittner's confirmation of the arbitration award
In the Next Post
In the next post on the Saipem decision we'll talk about some lessons of the Saipem case and how they could affect you.
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Is there precedent holding that an arbitrator that fails to obey the arbitral forum's rules acts in excess of her power, in derogation of the FAA?
Peter,
Good question! I assume you're asking about a situation like where an arbitrator violates the administrator's rules that apply to a case they're hearing - like the AAA's Commercial Arbitration Rules or Construction Industry Arbitration Rules? I haven't had to consider that yet. So I can't tell you one way or the other for sure.
My arbitration clauses usually do identify which service will administer the arbitration and which rules the arbitrator must employ. Not to set-up a later attempt to vacate or modify an award, but so each party knows in advance what the rules will apply if they aren't able to settle and they must arbitrate.
I also use it as an opportunity to carve out exceptions from the rules. For example, AAA Construction Industry Arbitration Rule (Regular Track) R-24 limits discovery. If I want to expand discovery rights, I'll add language that says they parties are entitle to discovery as allowed under the Federal Rules of Civil Procedure, especially Part V of those rules.
IVE LOST AN ARBITRATION AWARD DO TO CRIMINAL CHARGES I GOT THE CHARGES DROPPED WHAT DO YOU THINK MY CHANCES ARE OF GETTING AWARD VACATED.PLEASE SEND E-MAIL TO ADDRESS ABOVE THANK YOU.
@ James Gomez,
Your best chances will start with asking the lawyer who represented you in the arbitration. s/he's the most familiar with the facts and the law in the dispute. So s/he be in the best position to tell you whether dropping of charges will affect the whether the award in your arbitration should be vacated or modified.
In my arbitration, the arbitrator refused to hear testimony of my expert witness because he was not licensed. As far as I know, in Louisiana, there is nothing that says that an expert witness must be licensed. Granted he has to have experience in his field, namely construction cost estimation, which he did and he had prepared an extensive report using Exactimate but because he was not licensed presently either as a LA Contractor or a Licensed Public Adjuster, the arbitrator would not hear his testimony with regards to cost.
Would this be reason enough to have the Arbitration ruling vacated? In his reports were detailed costs as to what the remediation work for the lousy work the contractor did do will end up costing me. Since he would not hear the testimony, he could not consider the report and its data when formulating his ruling.