Courts’ Review of Arbitration Awards: What It Means for You

Several years ago, I was giving a CLE presentation on confirming and attacking arbitration awards in court. With me was in-house counsel for a prominent local corporation. When I got to the part about overturning arbitration awards in court, he piped up and said something like, “This is going to go on for a while. But the quick answer is: ‘You can’t.’” He oversaw lots of litigation and arbitration in his job, so he had surely had some experience with the issue.

That stole some of my thunder, but he was right. Except for the part where he wasn’t.

A recent case

A recent case illustrates that my friend was right in most cases. The case is Beumer Corp. v. ProEnergy Services, LLC, No. 17-2862 (8th Cir., August 9, 2018). The parties arbitrated a dispute under the arbitration clause in their contract. The contract had a damages cap, which said any damages of any kind awarded could not exceed the total to be paid under the contract.

The arbitrator awarded that amount to Beumer. But he also awarded it attorneys’ fees on top of that. He decided that the cap did not extend to attorney’s fees because attorneys’ fees weren’t legally considered damages.

ProEnergy sought to vacate the award of attorneys’ fee. It argued the arbitrator had exceeded his powers under the arbitration agreement, a ground for overturning an award under the Federal Arbitration Act. 9 U.S.C. § 10(a)(4). The district court confirmed the award and rejected the attack on the attorneys’ fees award. ProEnergy took the case to the Eighth Circuit.

The Eighth Circuit reminded everyone that “[an] arbitrator does not ‘exceed his powers’ by making an error of law or fact, even a serious one.” And “so long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, the award should be confirmed.” (Citing Medicine Shoppe Int’l, Inc. v. Turner Invs., Inc., 614 F.3d 485, 488 (8th Cir. 2010)).

But, argued ProEnergy, the contract required the arbitrator to “follow the laws of the state of Missouri,” and Missouri law considers attorneys fees to be damage. By disregarding the choice of law provision, ProEnergy said, the arbitrator exceeded his powers.

The Court found that Missouri law did not address whether fees were to be considered damages. So, the arbitrator relied on decisions from other states in reaching his conclusion. The Court said that’s just what it does when there isn’t any law on point from the state whose law controls. The Court then charitably noted that its review of law suggested the arbitrator was right in finding that attorneys’ fees are not considered damages, so the cap didn’t apply to them.

But, the Court continued, whether he got it right or wrong is “really beside the point.” “The parties bargained for the arbitrator’s decision; if the arbitrator got it wrong, then that was part of the bargain.” In other words, the arbitrator could have been dead wrong on the issue, but that would not be grounds to vacate the award.

So, in that sense, my friend at the CLE was right. It is very difficult to overturn an arbitration award on substantive grounds.

Other grounds for vacating awards

But there are other grounds to which an award is more susceptible to an attack. These include bias or corruption, exceeding authority, and no agreement to arbitrate.

One of the more promising grounds for overturning an award appears to be failure by an arbitrator to disclose relationships or interests that might cause a party to reasonably question an arbitrator’s ability to be impartial. That ground accounts for the sometime puzzling disclosures arbitrators make about any relationship with a party or their counsel’s firms you might imagine – things a judge would never disclose. Arbitrators tend to be very careful about disclosures – and sometimes over disclose – so they can avoid attacks on this ground. And still attacks are made on this basis, sometimes successfully, when matters are not disclosed.

Despite how the Beumer case turned out, exceeding authority can be a promising ground of attack. Often, the parties will seek to limit the arbitrator’s authority in their arbitration clause. As in Beumer, they may seek to limit the amount of damages awards. In other instances, parties may limit the arbitrator to deciding contractual issues, but foreclose consideration of statutory violations. Or they may forbid the arbitrator from issuing injunctions. Unfortunately, limitations on arbitrator authority can be ambiguous and may be subject to dispute. This can be a rich ground for dispute in the arbitration and in court after the award is made.

One other thing is worth noting when trying to limit arbitrator authority. Limiting the arbitrator’s authority over certain legal issues does not mean a party simply gives up their right to recover. It just means the arbitrator doesn’t have authority to decide the issue, but a court likely will. This can put the dispute in two different forums, depending what the issue is. This is not a good way to achieve cost saving through arbitration.
Another issue that frequently is fatal to an award — or even having an arbitration at all — is whether there was an agreement to arbitrate. This is most likely to be raised in consumer disputes, although it can also come up in a commercial context.

Arbitration clauses often show up in “click licenses” for contracts that are made online. Court have lately found some of the references to arbitration clauses – which may be buried in pages of terms that are found only by clicking on a link to the contract – to be too inconspicuous to create an agreement to arbitrate.

For commercial contracts, whether there is an agreement to arbitrate may turn on how the “battle of the forms” turns out under Section 2-207 of the Uniform Commercial Code. That can be a whole mini-case. This all provides plenty of room for argument at the arbitration and later in court as to whether the dispute should be arbitrated.

Where does this leave us?

What does all this teach us about arbitration? A few things.

Plan to win at the arbitration or provide for arbitral appeal

First, don’t expect to overturn the award on substantive legal grounds. Of course, that is hard enough to do with a trial court judgment, given the standard of review. But it is almost impossible for an arbitration award. For some, that is a deal-breaker and they won’t agree to arbitration clauses in their contracts. But it needn’t be.

In many cases, lack of appeal can be a real cost and time saver. It may not be ideal in any given case, but in the long run it may make financial sense to forego appellate review and save the money. If you are in that kind of arbitration, your approach to the case will be a little different than it might be in court. You don’t have to spend much time preserving your grounds for appeal on substantive law or fact issues. Instead, concentrate on winning at the arbitration. It’s usually your only shot at factual and legal issues.

If a party is dead-set on having appellate review, that can be done by contract. All major arbitration providers have provisions the parties can incorporate into their arbitration clause to allow review of an award by a panel of appellate arbitrators. The standard of review is the same or very similar to that on appeal of a court decision. But if you want to do that, be sure you put appellate arbitration review in the arbitration clause in the contract. The winning party won’t agree to enhanced review after an award is issued in its favor. You can find sample appellate review clauses to use on, for example, the AAA and JAMs websites.

Avoid grounds that can be used to overturn awards

It is unlikely an award will be overturned on substantive factual or legal grounds. But that shouldn’t lull you into complacency concerning the other grounds for overturning the award.

If you know of a relationship the arbitrator overlooked that could suggest bias or lack of impartiality, bring that to the case manager’s attention. That will then be brought to the opposing party’s attention to see if it causes concern. If they don’t object to the arbitrator’s continued service after receiving the information, they won’t be able to overturn the award based on non-disclosure.

Be sure the arbitration clause clearly defines what the arbitrator does and does not have power to do. Otherwise you may be litigating — maybe both in the arbitration and later in court – about whether the arbitrator had the power to do what he or she did. Litigation about arbitration robs arbitration of its ability to get disputes decided quickly and relatively inexpensively. And the result may be that a court vacates your favorable award.

Also, be careful when drafting contracts with arbitration clauses that the clause is not only clear, but also that a parties’ agreement to it is easy to demonstrate. Requiring a party to keep clicking and exploring to find a buried arbitration clause may convince a court there really was no agreement to arbitrate at all.