The Case of the Taciturn Arbitration Panel: Not Officially Defunct

Arbitration was conceived as a way to resolve disputes without all the legal rigamarole you see in courts. But courts often need to get involved in arbitration because arbitrators can only enter awards. It takes a court to turn an award into a judgment. 

Enter the law – and Latin

Once an arbitration matter gets to a court, legal principles take over. One of the more exotic- sounding of these is functus officio. Latin always makes things seem more arcane and legalistic. Functus officio means “discharge of duty.” In the arbitration context, it means the arbitrator has done his or her job and no longer has any authority over the parties.

That makes sense. Arbitrators derive their authority from the parties’ contract. Once they have done what the parties hired them to do, they aren’t empowered to make any further decisions or take any further action.

As we have seen in other articles, the scope of review of arbitration awards in court is narrow. Grounds for which a court can vacate an arbitration award are limited to things involving misconduct of the arbitrator like refusing to hear evidence or postpone a hearing despite a good reason to do so, a conflict of interest of the arbitrator, fraud, or failing to make a final definitive decision. Another ground is exceeding authority.

Because arbitration is designed to be fast, fair, and relatively inexpensive, courts do not review awards for errors in fact finding or errors of law. As noted in earlier articles, if parties want appellate-like review of an arbitration award, they need to agree to an arbitral appeal. And they had better do that before the award because the winning party is unlikely to agree to that after it gets its award.

Disappointed parties, of course, are often looking for ways to overturn arbitration awards in court. Given the limited review of arbitration awards in court, one ground they may raise is functus officio in addition to other grounds like exceeding authority. 

Which brings us to Nathan v. Fieger & Fieger, P.C., (31 F.4th 367 (6th Cir. 2022), a case that was passed along to me by a fellow arbitrator I have had the pleasure of serving with and teaching CLEs with.

The case

Craig Romanzi referred a personal injury case to the law firm that employed him, Fieger & Fieger. It settled for the case more almost $12 million after he left the firm.  About $3 ½ million of it was in fees.  As the originating attorney, he was entitled to one-third of the fees. But before he could collect the fees, his creditors forced him into a chapter 7 bankruptcy. The trustee, Mr. Nathan, commenced an adversary proceeding to obtain the amount owed the Firm owed to Mr. Romanzi for the bankruptcy estate. The parties agreed to submit the matter to arbitration and abide by a panel’s “brief reasoned decision.”

The panel decided two to three in favor of the trustee. But, as the Sixth Circuit noted, the decision “while certainly brief, was not reasoned to the Firm's satisfaction.” The district court remanded the case to the arbitrators for clarification rather than vacating the award as the Firm wanted. The panel asked the parties to submit proposed findings, which the Firm refused to do. The panel then entered a supplemental award with more explanation of its reasoning. The district court confirmed the award.

The appeal

The Firm appealed. It said, among other things, that the first award should have been vacated as exceeding the arbitrators’ authority, and that the award entered after remand was barred by the doctrine of functus officio.

Exceeding Authority?

The Firm’s “clearest argument” for vacating the award, according to the Sixth Circuit, was that the arbitrators exceeded their powers by delivering something other than a reasoned decision in the first place. As noted, exceeding powers is one of the grounds for vacating an arbitration award under the FAA. See 9 U.S.C. § 10(a)(4).

But the Sixth Circuit reasoned that the arbitrators didn’t exceed their powers. They had the authority to issue an award.  Instead, they did less than was required of them. That doesn’t quality under section 10(a)(4). The remedy for this shortcoming was to send the case back to the arbitrator to fix it. Which is what the district court did.

Functus officio?

And now we come to the challenges based on the doctrine of functus officio. The Sixth Circuit noted that a key exception to functus officio is the “clarification-completion exception.” If the parties' agreement imposes a “duty of explanation on the arbitrator,” then remand to the arbitrator or panel for clarification is the right way to proceed. That is what the district court did.

The Sixth Circuit had little trouble rejecting the Firm’s argument that the first award was so brief it couldn’t possibly be clarified. “[T]he mere fact that an arbitration decision is unambiguous in its result does not make its reasoning incapable of clarification,” said the Court.  Just as there is no doubt when an umpire calls a strike instead of a ball, the reason it was a called ball can be explained. Maybe it was just above the knees. Maybe it just grazed the edge of the plate. You have to ask the umpire for the reason. So too with the arbitrators.

The Sixth Circuit also rejected the Firm’s argument that the arbitrators violated functus officio by soliciting additional findings from the parties. Because the panel requested proposed findings – not to reconsider the merits, but to arrive at the parties’ bargained-for "brief reasoned decision” – the Sixth Circuit found the Firm’s functus officio argument fell apart.  The panel was allowed to solicit proposed findings from the parties to ensure fidelity to their arguments when explaining its decision.

Summing up

The Sixth Circuit summed up this way:

Arbitrators are no more infallible than judges. They make mistakes and overlook contingencies and leave much to implication and assumption—as the present case illustrates. . . .  But we will not punish the district court for criticizing the arbitrators’ taciturnity, nor the arbitrators for explaining themselves more fully on remand. When arbitrators fail to fulfill their duties of explanation as contracted for by the parties, the remedy recognized by this court is a remand to the same arbitrators for clarification —exactly what happened here.

So, legalistic as the whole thing sounds, in the end, the Court took a common-sense approach to the whole matter. If you want to know why the umpire called a ball or strike, ask. Not knowing why is no reason to replay the game.