The criticism of arbitration expressed in these articles is not new.  For years people (including I) have said that arbitration can be as expensive or more so than litigation.  People have repeatedly complained about how arbitration has become more like “arbigation,” and how Federal Arbitration Act satellite litigation has proliferated.  Or they criticize arbitrators for substituting rough justice for reasoned, legal analysis.  And so on. 

If you are a business person, or someone at a business whose responsibilities include drafting or approving contracts, you might throw up your hands and declare that your business will never, ever even think about agreeing to arbitrate.  But we think that you would be far better off giving more thought to what it is you desire from a system of dispute resolution, and how best to achieve your goals. 

The criticism expressed in the articles, and in the past, is generally valid, albeit misdirected.  It is directed at “arbitration,” as if arbitration was an institution unto itself, imposed on us by the legal system or perhaps by divine order.   

But, at least in B-2-B contracts negotiated at arms’-length, “arbitration” is not something imposed on the parties; it is something the parties impose on themselves.  We, the parties, are the architects of our own dispute resolution system.  If it turns out we designed or agreed to something reminiscent of Charles Dickens’  Bleak House, we should not blame the non-existent institution “arbitration.”  We should blame ourselves, or, more accurately, whomever drafted or approved the Dickensian arbitration agreement. 

The problems we sometimes associate with arbitration could be avoided if parties would give more thought to the type of dispute resolution they desire, and how any particular arbitration agreement — or agreement to administered arbitration under a set of arbitration provider rules — will likely be interpreted, and by whom.  Perhaps the best thing about arbitration is that parties have a lot of leeway not only to select the decisionmakers for their dispute, but also to design and structure the arbitration so that it suits their needs, and proceeds with as much or as little pre-hearing fanfare as the parties desire.  Within some basic limits, parties can structure their agreement as they see fit, and that can be something from which businesses can reap benefits. 

But many parties apparently are not aware of the extent to which arbitration can be tailored to fit particular situations, or simply do not consider the prospect of a future arbitration to be important enough to invest some modest time and effort into considering what is likely to transpire in the event of a dispute.  The problem is compounded by contract drafters, including attorneys, that simply do not have the requisite arbitration, litigation and arbitration-law experience to make informed judgments about whether the agreement they have drafted is likely to suit the parties’ dispute resolution needs.  I have been involved in a number of arbitrations that would have proceeded more expeditiously, efficiently and effectively had they been conducted pursuant to a well-drafted arbitration agreement, instead of one that was apparently selected without a lot of thought given to the type of proceeding the agreement authorized, and whether it was what the parties wanted.  We have all heard horror stories about arbitrations that would not have been so horrifying had the parties placed some limits on how the proceedings were to be conducted.  

The solution to the problem is relatively easy and not very costly.  Hire an arbitration lawyer with litigation, arbitration and arbitration-law experience to help you draft an effective arbitration agreeement that suits your needs and goals.  Depending on the scope of the project, only a few hours of the lawyer’s time may be needed.  And the return on the modest investment could be substantial in the event a dispute ever arises under the contract.

Your arbitration lawyer should initially focus on finding out from you what you desire from your dispute resolution system, and what it is about court adjudication you wish to avoid.  Depending on what your goals are, he or she may recommend that you opt for court adjudication and perhaps add choice-of-forum and choice-of-law clauses to your contract.  Or he or she may conclude that arbitration can further your goals, and help you draft an arbitration agreement designed to achieve them. 

So if you or your employer or business negotiates contracts with others, and you want more out of dispute resolution than ordinary court adjudication is likely to provide, hire an arbitration lawyer with litigation, arbitration and arbitration-law experience to help guide you along.  You probably won’t incur much in the way of legal fees, and you will be able to take better control of your own dispute-resolution destiny.

If you hold yourself out to be a commercial litigator who handles arbitration proceedings arising under the Federal Arbitration Act, then you need to know arbitration law cold (or co-counsel with someone who does).  If you do not, then you have no business representing clients in arbitration proceedings.

In one sense, arbitration law is to the lawyer handling an arbitration what civil procedure law is to the lawyer handling a litigation.  No lawyer cognizant of his or her ethical obligations and professional responsibility would represent a client in a litigation without a good, working knowledge of the applicable procedural code and cases construing it.  Doing so would be a recipe for professional disaster. 

Yet commercial litigators with no experience or expertise in arbitration law sometimes believe their knowledge of court procedure qualifies them to represent parties in arbitration proceedings.  Arbitration is more informal than litigation, so if you know how to litigate, you can certainly arbitrate, right?  Wrong.

Arbitration law is what ensures that arbitration agreements will be enforced, whether that means confirming or vacating an award, compelling arbitration, staying litigation, or what have you.  Without it, arbitration would be, for the most part, an empty gesture.  Parties would have to commence cumbersome plenary actions to enforce awards and obtain specific performance of arbitration agreements, arbitrators would lack subpoena power and breakdowns in the arbitrator selection process could not be remedied (or would be very difficult to remedy).   In short, arbitration would lose much of its appeal because it would be difficult and expensive to enforce, and some aspects of it might not be enforceable at all. 

Perhaps in a perfect world arbitration law would be spelled out for us in great detail in a user-friendly and comprehensive statute or administrative code, which would contain all or most of the answers to the multitude of enforcement-related questions that arise at various stages of arbitration proceedings.  But our world is far from perfect, and in many domestic cases our sole source of statutory guidance is contained in the first chapter of the Federal Arbitration Act, which contains only 16 provisions, 15 of which have been on the books without material revision since 1925.  In “non-domestic domestic cases” — you have to love that informative moniker – which involve, for example, arbitrations taking place in the United States between domestic and international parties, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and its enabling provisions set forth in Chapter 2 of the Federal Arbitration Act, usually come into play, but the Convention and its enabling legislation does not directly answer that many questions. 

So in our imperfect world, the answers must come from the courts.  That would all be well and good if we lived in a country with a single court system, but we do not.  We have a multi-circuit federal court system (over which the United States Supreme Court presides) and a multi-jurisdiction state court system (over which the Supreme Court has limited jurisdiction to hear certain types of appeals).  And the substantive provisions of the Federal Arbitration Act are applicable in, and construed by, both state and federal courts. 

Cases involving arbitration law are constantly being decided.  There are currently three-arbitration-law-related cases pending before the United States Supreme Court, and the Court usually decides at least one or two each term.   The federal district and circuit courts regularly churn out decisions on arbitration law, as do state trial, intermediate appellate and supreme courts. 

If state and federal court decisions from various jurisdictions and circuits were fairly uniform on Federal Arbitration Act issues, then perhaps things would be simpler.  But courts are split on a number of issues, and even in situations where different courts might reach the same result on a given set of facts, the rationale each court applies may be different, leading to different outcomes if the facts are changed slightly.   

Apparently someone somewhere decided that things were not quite complicated enough.  So it was necessary to interject some other variables:  horizontal (state-versus-state) and vertical (state versus federal) choice of law issues.  Not all arbitration proceedings are governed solely by the Federal Arbitration Act — it applies only to written arbitration agreements “in maritime transaction[s] or.  .  . contract[s] evidencing.  .  .  transaction[s] involving commerce.  .  .  .”  9 U.S.C. § 2.  When the Federal Arbitration Act does not apply, then the arbitration law of some state will generally apply.  Choice-of-law rules will determine which state’s law applies in a multi-jurisdictional case. 

Even when the Federal Arbitration Act applies, the parties may have agreed that state arbitration law applies, or at least there may be a substantial question whether state arbitration law applies.  Federal and state arbitration law may conflict, and it is necessary to determine which applies.  And sometimes there is a question whether the Federal Arbitration Act pre-empts state arbitration, or substantive contract, law.  In other cases there may be a question whether state arbitration law fills a gap in federal arbitration law. 

Arbitration-law-related issues can and do arise at all stages of an arbitration proceeding, and arbitration practitioners must keep in mind that litigation under the Federal Arbitration Act may be necessary to enforce a client’s rights or that such litigation may be brought by the other party.  In the beginning stages of an arbitration, for example, issues may arise as to what the arbitration was intended to cover.  A party may demand arbitration on a few claims, but there may be other actual or potential disputes which, if submitted, would fall within the scope of the arbitration agreement.  Depending on what those claims are, and other considerations, the party against whom arbitration is demanded will want to ensure that the arbitration does or does not encompass those claims.  That requires the party to carefully tailor its own submissions and, if necessary, to object to the other party submitting additional issues once the proceedings are underway. 

The party resisting an arbitration demand may have arguments that some or all of the issues that are the subject of the demand are outside the scope of the arbitration clause.  Those arguments must be carefully preserved, and sometimes it is necessary to seek an order staying the arbitration in whole or in part. 

The party seeking arbitration may need to compel arbitration if the other party is resisting arbitration.  That requires court intervention and both parties must be prepared to brief the applicable law and facts.  Or perhaps the arbitration clause is self-executing, allowing a party to appoint a defaulting party’s arbitrator and proceed ex parte.  In that case, the non-defaulting party may be unable to compel arbitration, but must take special care to ensure that the resulting default award is enforceable. 

Arbitrator selection is another area where arbitration-law issues arise.  It might be necessary to compel a party to participate in arbitration selection or request that a court appoint an arbitrator.  If, at some point in the proceedings, one of the arbitrators dies or resigns, a number of important issues must be addressed.  The process of arbitrator disclosure is yet another area where arbitration law must guide strategy.   

Confirming or vacating awards requires knowledge of arbitration law and careful attention to strategy long before an award is rendered.  There may be grounds for vacating an award, but those grounds generally must be preserved during the proceedings.  There are also important deadlines that must be met and those deadlines may be triggered with respect to certain interim final awards long before the arbitration proceeding itself is concluded.  

Once an award is issued issues may arise as to whether it is ambiguous or whether it may be modified by the arbitrators.  Or arbitrators may purport to retain jurisdiction when they are not entitled to do so.  Dealing with these issues requires careful attention to arbitration law.   

When Federal Arbitration Act litigation is necessary, counsel need to know how to address the various procedural issues that arise, including subject matter jurisdiction, service, personal jurisdiction, the necessity of treating the proceeding as a motion and a host of other matters.   And counsel must know the extent to which procedural rules are supplied by the Federal Arbitration Act itself, state arbitration law, the Federal Rules of Procedure or state procedural rules. 

This is just a broad overview:  There are literally dozens of issues that may arise, including ones implicating state general contract law, the Federal Arbitration Act itself, state arbitration law, choice-of-law rules, and federal preemption doctrine.  Handling arbitration-related litigation demands special expertise, just as handling the underlying arbitration demands such expertise.  Practitioners and clients that fail to pay careful attention to this ever-evolving area of the law do so at their peril.

Part III.A of the evident partiality segment of this series discussed the parties’ reasonable expectations of neutrality.  Today we consider how those expectations are enforced. 

“Evident partiality” challenges typically arise out of one of two scenarios.  First, there are “presumed bias” cases in which the arbitrator’s relationship to the parties or the controversy would lead a reasonable person to conclude that the arbitrator was biased, even though the challenger cannot prove actual bias.    Second, there are evident partiality challenges based on allegations of actual bias.  For example, suppose a neutral said on the record during the proceedings prior to deliberations:  ”Party A, frankly I have distrusted your company’s business motives for many years, but hearing your witnesses’ testimony has simply confirmed what I’ve suspected all along.”  While the chances of an arbitrator making such a statement (let alone on the record) are exceedingly slim to non-existent, it would provide the basis for an evident partiality challenge (which would probably succeed) based on proof of actual bias. 

The difference between “presumed” and “actual” bias is simply one of proof.  One is based on circumstantial evidence and the other on direct evidence.  Our focus will be on “presumed bias” cases, because they arise with greater frequency.  Actual bias is very difficult to prove, and if it or something approaching it can be established, then that proof would in any (or most any) event meet the standards necessary to establish evident partiality.   

Enforcement of the Parties’ Expectations of Neutrality Through the Disclosure Process

There are three procedural problems with presumed bias cases.  First, courts generally cannot entertain an evident partiality challenge until the arbitrators issue a final award and the challenging party makes a timely motion to vacate, and the Federal Arbitration Act does not expressly provide procedures designed to ensure the parties’ expectations of neutrality are protected during the arbitrator selection process or any other time prior to a final award.  Second, the selection process is the juncture at which the parties’ expectations of neutrality are most vulnerable to frustration and the period during which the parties are best positioned to protect those expectations.  Third, the arbitrators themselves have the most ready access to the information the parties need to protect their expectations of neutrality. 

To protect the parties’ expectations of neutrality during the selection process, the United States Supreme Court imposed the now-familiar requirement that arbitrators disclose at the outset of the proceedings non-trivial conflicts of interest (such as ongoing business relationships with one of the parties) and any other relevant information bearing on the arbitrator’s ability to meet the parties’ expectations of neutrality.   See Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968).  At least two circuits have added to that disclosure requirement an affirmative duty on the part of a neutral arbitrator to investigate when there is reason to believe a nontrivial conflict might exist.  See Applied Materials Indus. Corp. v. Ovalar Makine Ticaret ve Sanayi, A.S., 492 F.3d 132, 138 (2d Cir. 2007) (2d Cir. 2007); New Regency Productions,  Inc. v. Nippon Herald Films, 501 F.3d 1101, 1111 (9th Cir. 2007). 

A neutral arbitrator’s failure to disclose a conflict of interest of which he or she is deemed to have knowledge can result in vacatur of an award on evident partiality grounds without any showing that the arbitrator was actually biased or that the award resulted from bias.  Indeed, as the Seventh Circuit observed, if an arbitrator unduly frustrates a party’s access to information pertinent to whether he or she has the requisite degree of neutrality, there may be grounds for vacatur based not only on evident partiality, but also on the arbitrator exceeding his or her powers: “[f]ailure to comply with a[n] [express or implied] contractual requirement designed to facilitate the search for an acceptable neutral might imply that the neutral exceeded his authority, spoiling the award under 9 U.S.C. § 10(a)(4).”  Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 623 (7th Cir. 2002), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004).   

The flip side of the disclosure rule is that it provides an opportunity for the parties to vet and waive at the outset conflicts of interest that might otherwise provide the basis for a losing party to challenge the award.  If the arbitrator discloses a potential conflict, and a party fails to object, that party usually waives its right to challenge a later award based on the disclosed conflict.  See, e.g., Kiernan v. Piper Jaffray Cos. 137 F.3d 588, 593-94 (8th Cir. 1998); Cook Indus. v. Itoh & Co., 449 F.2d 106, 107-08 (2d Cir. 1971), cert. denied, 405 U.S. 921 (1972).   

Early vetting coupled with the waiver rule reduces the risk that time and expense will be invested in a proceeding that yields an award subject to vacatur.   Before the parties know the outcome of the arbitration, they are more likely to consider a potential conflict to be trivial and waive it.  But if undisclosed and not discovered until after an award has been issued, the losing party may understandably perceive the potential conflict to be more serious than it was, and move to vacate the award.  The motion may not be successful, but it may not be utterly frivolous either, and the parties and the court will end up incurring time and money costs. 

Disclosure by Appointed Arbitrators

At least in reinsurance arbitrations, appointed arbitrators are generally expected to disclose their relationships with the parties even though they are usually expected to be, at least to some degree, partial to the appointing party.  Whether or not these disclosures are required by Commonwealth Coatings is an open question and at least one circuit has suggested the answer is “no.”  See Winfrey v. Simmons Foods, Inc., 495 F.3d 549, 552 (8^th Cir. 2007). 

Because the parties’ expectations of party-appointed arbitrator neutrality are not very high (absent contract language or agreed arbitration rules to the contrary), party-appointed arbitrator disclosures  will ordinarily not yield anything to support a successful evident partiality challenge.  And a  party-appointed arbitrator’s nondisclosures will generally not deprive the other party of information relevant to arbitrator selection, since appointed arbitrators are unilaterally and privately selected by the appointing party, and the other party generally has no say in matter as long as the arbitrator is otherwise qualified to serve. 

But at least one important purpose is arguably served by party-arbitrator disclosure.  The information the appointed-arbitrators disclose may be useful to their colleagues – especially the neutral – in determining what to make of the positions taken by the arbitrators in deliberations.  A failure to disclose that information might, in appropriate circumstances, establish that the arbitrator exceeded his powers under Section 10(a)(4) of the FAA.  Cf. Sphere Drake, 307 F.3d at 623 (“We have not been given any reason to think that umpire Huggins wanted more information from [party-appointed arbitrator] Jacks in order to know what to make of Jacks’ arguments during deliberations.”); Winfrey, 495 F.3d at 552 (“Simmons presents no evidence indicating that Butler’s partiality deceived or misled the other two arbitrators.”). 

Asserting Evident Partiality

In presumed bias cases there are typically two scenarios that give rise to a motion to vacate.  First, an arbitrator may disclose a conflict of interest that one of the parties considers indicative of evident partiality.  Assuming that a party timely objects to the conflict, the arbitrator does not voluntarily step down, the arbitrators make an award adverse to the objecting party, and the party timely moves to vacate, then the objecting party can legitimately challenge the award on evident partiality grounds.   

Second, an arbitrator may fail to disclose an actual or potential conflict of interest, which is subsequently discovered by one of the parties who promptly objects.  That party may also legitimately move to vacate the award based on evident partiality grounds.     

Establishing Evident Partiality:  Applicable Standards

Whether the case involves disclosure or nondisclosure, the potential conflict and its surrounding circumstances must be assessed to determine whether the award should be vacated.  Defining a workable standard to assess evident partiality challenges is difficult, and perhaps impossible.  The circuits have formulated various “tests” running the gamut from “a reasonable person, considering all the circumstances, would have to conclude” the arbitrator was partial, to a standard which, for all intents and purposes, permits vacatur where the alleged conflict creates an “appearance of bias.”  Compare Schmitz v. Zilveti,  20 F.3d 1043, 1047-48 (9^th Cir. 1994) (adopting “reasonable impression of partiality” test which it construed as functional equivalent of “appearance of bias”) with Ovalar,  492 F.3d at 137-38 (“[A]rbitrator is disqualified only when a reasonable person, considering all of the circumstances, would have to conclude that an arbitrator was partial to one side;” test satisfied where the “arbitrator knows of a material relationship with a party and fails to disclose it.”); see also Philip J. Loree Jr. & Costas Frangeskides,  Arbitration Practice and Procedure in U.S. and U.K. Reinsurance Disputes: Is the Grass any Greener on the Other Side of the Pond?, AIRROC Matters, Vol. 4 No. 1, at 24, 42-43 n.21-22 (Spring 2008) (Part 1) (citing cases) (copy available here). 

None of these “tests” is a consistently useful indicator of the outcome of a given case.  Reasonable people applying the tests may reach different conclusions based on the same facts, and outcomes may be influenced by fact-dependant policy considerations.  The relative strictness or laxity of a test, however, may indicate how predisposed a circuit might be toward granting relief on evident partiality grounds. 

But irrespective of how each test may be worded, whether the parties’ expectations of neutrality have been thwarted is a significant, underlying, and sometimes unspoken, consideration.  For example, as discussed in Part III.A, when the parties use tripartite arbitration without agreeing on whether, and if so, to what extent, the party-appointed must be neutral, disinterested or independent, then a court will likely conclude that the parties expected the party-appointed arbitrators to be non-neutral and (a) conclude vacatur is inappropriate even if the arbitrator would be deemed evidently partial were he or she a neutral; (b) require the challenging party to show prejudice resulting from the evident partiality; or (c) figure into the evident partiality calculus the parties’ diminished expectations of partiality.  (See Part III.A., here, and cases cited.) 

One important caveat is that a conflict remains a conflict whether or not it is disclosed, and irrespective of what the arbitrator’s subjective state of mind might be.  Suppose a neutral arbitrator owned a 25% equity interest in one of the parties, a closed corporation.  The neutral discloses the conflict and says his ownership will not affect his ability to act as a neutral.  And suppose that the neutral firmly believes what he says despite his rather significant financial interest in the matter over which he is asked to preside.  One of the parties objects, the panel rules against the objecting party, and – although no one can prove or disprove it – the umpire acts completely impartially and gives the losing party the benefit of every doubt.   Under these facts the party challenging the award would have a strong (some might say surefire) motion to vacate under the law of every (or virtually every) circuit. 

Conversely, failure to disclose a potential conflict does not provide a basis for an evident partiality challenge unless the potential conflict turns out to be an actual conflict or something awfully close to one.  We hedge here because there may be relationships between an arbitrator and a party that are material to the evident partiality calculus, but which, in and of themselves, may not qualify as actual conflicts.  The United States Court of Appeals for the Second Circuit indicated that the test for evident partiality can be satisfied where the arbitrator “knows of a material relationship with a party and fails to disclose it,” because “[a] reasonable person would have to conclude that an arbitrator who failed to disclose under such circumstances was partial to one side.”  See Ovalar, 492 F.3d at 137-38.  That suggests to us that the Second Circuit (and perhaps other circuits) will place some weight on the circumstances surrounding the non-disclosure itself in determining whether, based on all of the circumstances, the test for evident partiality is satisfied.

We hope we have provided you with some useful, general information concerning evident partiality.  In Part IV. of this series we address Federal Arbitration Act Section 10(a)(3), which authorizes vacatur where a party was prejudiced by an arbitrator’s procedural misconduct.

In this Part III of our Nuts & Bolts feature on vacating arbitration awards (Parts I and II  here and here) we consider the second statutory ground for vacating an award under the Federal Arbitration Act:  “where there was evident partiality…in the arbitrators…” 9 U.S.C. 10(a)(2).  What constitutes “evident partiality” or arbitral bias has been the subject of numerous judicial decisions setting forth various standards and applying them to a wide range of fact patterns.  The decisions are not easy to reconcile (some may, indeed, be irreconciliable) and generally the standards are of limited utility in practice.  Matters are complicated by judicially-created rules concerning disclosure of potential conflicts of interest and the consequences that may or may not flow from a breach of those rules.  To say “evident partiality” is an elusive subject understates the case.       

 But “evident partiality” may be easier to grasp if we focus not on abstract standards or ethics, but on the parties’ reasonable expectations of neutrality in the circumstances.  Surprisingly, many courts address the subject of “evident partiality” without expressly discussing this important consideration, even when it appears to have been a significant part of the decision-making calculus.  Others have expressly used the parties’ agreement and attendant expectations of neutrality as a guidepost. 

 Understanding the parties’ reasonable expectations of partiality is only half the battle.  One must also understand the related topic of how those expectations are enforced through judicially-created rules governing disclosure and waiver of conflicts of interest, and the relevance of those rules to a motion to vacate an award under Federal Arbitration Act Section 10(a)(2).   

In this Part III.A. our focus is on the parties’ reasonable expectations of neutrality.  Part III.B. will cover the enforcement of those expectations.   

The Parties’ Reasonable Expectations of Neutrality

The principal purpose of the Federal Arbitration Act is to enforce arbitration agreements as written.  See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947 (1995).  Parties are largely free to structure their arbitration agreements as they see fit, and that freedom extends to selecting the decision makers, establishing their qualifications, and agreeing on how impartial they should be.  See Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 679 (7th Cir.), cert. denied, 464 U.S. 1009 (1983) (Posner, J.) (“parties … choose their method of dispute resolution, and can ask no more impartiality than inherent in the method they have chosen.”) (citation omitted). 

While the Federal Arbitration Act deems “evident partiality” a ground for vacating an award, the Act does not define the term or establish a baseline standard of impartiality that must be met by every arbitrator.  This contrasts starkly with the English Arbitration Act 1996, which imposes on all arbitrators effectively the same standards of impartiality applicable to English judges.  See, generally, Arbitration Act 1996 § 33(1).    

What constitutes “evident partiality” is  assessed according to a sliding scale of sorts, depending on the parties’ agreement and the surrounding circumstances.  For example, parties may agree to use only neutral arbitrators or a combination of non-neutral and neutral arbitrators.  Or other qualifications may be imposed, such as a requirement that the arbitrators be “disinterested” in the outcome and not be under the “control” of one of the parties. 

Where the parties intend one or more of the arbitrators should be neutral, then that desire for neutrality should be enforced.  In the absence of express qualifications attempting to define the degree of neutrality required, the degree of neutrality will be determined by what the parties would reasonably expect in light of the realities of the marketplace.  

Where the parties’ agreement authorizes non-neutral arbitrators, courts either find that the parties have waived by consent the “evident partiality” ground for vacatur, or impose a more rigorous test for demonstrating evident partiality than that applicable to a neutral arbitrator.  For example, the court might require the challenger to show that bias “prejudicially affected the award” or simply figure into the mix the parties’ diminished expectations of neutrality.  See, generally, Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 620 (7th Cir. 2002), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004) (“evident partiality” ground can be waived by consent); Winfrey v. Simmons Foods, Inc., 495 F.3d 549, 552 (8th Cir. 2007) (requiring a showing of prejudice); Nationwide Ins. Co. v. Home Ins. Co., 429 F.3d 640, 645-46 & 648-49 (6^th Cir. 2005), reh’g en banc denied  Feb. 16, 2006 (figuring into the mix the parties’ diminished expectations of impartiality). 

Tripartite Arbitration:  Party-Appointed Arbitrators  

In industry arbitration – including reinsurance arbitration – whether or not the arbitration is tri-partite or before a single arbitrator may inform the parties’ expectations of partiality.  If a single arbitrator is used, then the presumption is the parties intended the arbitrator to be a neutral, albeit one not subject to the rigorous standards of neutrality applicable to federal judges (more on that later).  

But typically arbitration agreements in reinsurance contracts and other industry arbitration agreements call for tripartite panels.  In reinsurance arbitrations, each party typically appoints an arbitrator and the party-appointed arbitrators attempt to agree on an umpire or select one by lot drawing, coin toss, Dow Jones pick or like tie-breaking procedure.  Unless the arbitration agreement provides otherwise, courts generally presume that the parties intended their appointed arbitrators to act as advocates of a sort: 

 [I]n the main party-appointed arbitrators are supposed to be advocates. In labor arbitration a union may name as its arbitrator the business manager of the local union, and the employer its vice-president for labor relations.  Yet no one believes that the predictable loyalty of these designees spoils the award. (Emphasis in original; citations omitted).

 Sphere Drake, 307 F.3d at 620.   

The New York Public Personnel Blog (Public Employment Law Press) recently reported on a rather extreme example of this principle in a case governed by New York State arbitration law, which authorizes vacatur for evident partiality of an arbitrator “appointed as a neutral.”  According to the post, a New York intermediate appellate court held that evident partiality was not established even where a party-appointed arbitrator testified in favor of the appointing party’s position at the arbitration hearing.   The court said that New York’s arbitration law did not authorize vacatur based on a party-appointed arbitrator’s evident partiality and party-appointed arbitrators may, in any event, be partial.  (Post here) 

The theory behind the tripartite structure is that it provides the best of two worlds: (a) two experienced and knowledgeable industry professionals, each of whom acts as an advocate of sorts on behalf of its appointing party; and (b) an equally experienced and knowledgeable umpire, who either casts the tie-breaking vote or brokers a consensus.  The reinsurance industry’s general acceptance of an advocacy role for party-appointed arbitrators is evidenced by the common practice of panels (usually with the parties’ consent) authorizing ex parte contact between party-appointed arbitrators and their appointing parties. 

Although courts will (absent contract language to the contrary) ordinarily assume that the parties intended party-appointed arbitrators to play an advocacy role, in the reinsurance industry there is a fair amount of disagreement concerning the degree of partiality permissible.  For example, there are some who believe that robust advocacy is appropriate, while others believe the party-appointed arbitrator should strive to give the appointing party the benefit of the doubt, but ultimately decide the matter according to the evidence and applicable law, custom and practice.  Others may have different views.  

For its part, the ARIAS-US Code of Conduct, Canon II, commentary, urges party-appointed arbitrators “to act in good faith with integrity and fairness,” “not allow their appointment to influence their decision on any matter before them,” and “make all decisions justly.”  The ARIAS-US commentary, however, is not binding on the parties (unless they so agree) and there is disagreement within the industry as to whether the standards embraced by Canon II’s commentary should be followed in practice. 

The upshot is that the line between the acceptable and unacceptable is both difficult to draw and blurry.  Checks on rampant partisanship are not imposed by the courts but by economic considerations:  Party-appointed arbitrators that overstep what other panel members perceive to be proper ethical boundaries risk diminished credibility, influence, and effectiveness, which in turn, may result in fewer appointments.  

The use of partisan arbitrators, which continues in reinsurance industry arbitration, appears to have fallen out of favor in less specialized forms of commercial arbitration.  Rule 17 of the American Arbitration Association’s Commercial Arbitration Rules reverses the presumption that party-appointed arbitrators should be non-neutral.  Rule 17 says “Any arbitrator shall be impartial and independent and shall perform his or her duties with diligence and in good faith, and shall be subject to disqualification for:”  

(i) partiality or lack of independence,

(ii) inability or refusal to perform his or her duties with diligence and in good faith, and

(iii) any grounds for disqualification provided by applicable law.

Rule 17 further provides that “The parties may agree in writing.  .  .  that arbitrators directly appointed by a party pursuant to Section R-12 shall be nonneutral, in which case such arbitrators need not be impartial or independent and shall not be subject to disqualification for partiality or lack of independence.”   The AAA rules vest in the AAA the power to “determine whether the arbitrator should be disqualified under the grounds set out above, and shall inform the parties of its decision, which decision shall be conclusive.” 

Tripartite Arbitration:  Umpires or Neutral Arbitrators

Umpires and neutrals are held to higher standards of impartiality.  Parties expect them to be fair, objective, open-minded in deliberations and not predisposed to rule in favor of either party before hearing the evidence.  They are supposed to be impartial, but are nevertheless not held to the same rigorous, statutory standards of impartiality applicable to United States federal judges.  See Sphere Drake, 307 F.3d at 621; Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83 (2d Cir. 1984); see, generally, 28 U.S.C. § 455 (disqualification standards for federal judges). 

 By not requiring neutrals to comply with judicial standards of partiality courts balance the parties’ expectations with the realities of the marketplace.  Particularly in industry arbitration, sought-after arbitrators often have many years of industry experience, which may inform their perspectives on issues important to the industry.  Intra-industry issues can pit one segment of the industry against another, and a qualified neutral may have experience in one or both of these segments.  Some degree of institutional predisposition comes with the territory, and does not necessarily disqualify the neutral.  And as industry insiders, arbitrators may know the lawyers and the parties socially and professionally, but those relationships generally do not disqualify the arbitrator from service.  These practical realities demand what Judge Posner aptly termed a “tradeoff between impartiality and expertise” – the parties bargained for dispute resolution by an industry expert and the benefit of that expertise carries with it the burdens of greater entanglement with the parties, the industry and the issues.  Indeed, if courts required the industry arbitrators — or even commercial arbitrators without an industry-specific focus — to shed or be free from this proverbial baggage, then qualified umpire candidates would be hard to come by.  See Leatherby,  714 F.2d at 679 (“people who arbitrate do so because they prefer a tribunal knowledgeable about the subject matter of their dispute to a generalist court with its austere impartiality but limited knowledge of the subject matter.”) 

Stay tuned for Part III.B, which will focus on how courts enforce the parties’ expectations of neutrality through the disclosure and vetting process and Federal Arbitration Act Section 10(a)(2).

Section 10(a)(1) is an excellent expression of how Section 10 is designed to provide relief in situations where putting a court’s  imprimatur on an award would deprive one of the parties of the benefit of its freely-bargained-for arbitration agreement.   It says that corruption, fraud, or undue means in the procurement of an award, whether perpetrated by the arbitrators or a party, spoils the award (assuming the aggrieved party timely moves to vacate).  There is nothing particularly controversial about that; we suspect few would contend that parties who agree to arbitrate impliedly consent to arbitration resulting in an award procured through outright chicanery.    

The burden for obtaining relief under Section 10(a)(1) is heavy.  Fraud and corruption are serious allegations, to say the least.  And “undue means” has been construed to be a bird of the same feather:  Like fraud and corruption it requires “proof of intentional misconduct” or “bad faith,” and “connotes behavior that is immoral if not illegal. . . .”  See, e.g., PaineWebber Group, Inc. v. Zinsmeyer Trusts P’ship,  187 F.3d 988, 991 (8th Cir. 1999) (quotations and citations omitted).   Given the gravity of all of this, three requirements must generally be satisfied to make out a claim under Section 10(a)(1):  “(1) clear and convincing evidence of fraud [, corruption or undue means][;] (2) that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration[;] and (3) that due diligence would not have prompted the discovery of the fraud [corruption or undue means] during or prior to the arbitration.”   Int’l Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); see, e.g., Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 ( 11th Cir .1988).

Section 10(a)(1) says that the “award” must be “procured” by the fraud, corruption or undue means, and that suggests a causal nexus between the proscribed conduct and the award.  While the conduct must “materially relate to an issue in the arbitration,” must it also be outcome determinative?  In other words, must the party seeking relief show that the award would have been different but for alleged fraud, corruption or undue means, or is it enough to show that it tainted the proceedings simply because it related materially to one of the issues at stake? 

The circuits are split on this point.  Some courts require the challenger to show that the corruption, fraud or undue means “caused the award to be given.”  See, e.g.,  A.G. Edwards & Sons, Inc. v. McCullough, 967 F.2d 1401, 1403 (9^th Cir. 1992).  Others say that the challenger is not required to “establish that the result of the proceedings would have been different had the fraud [, corruption, or undue means]  not occurred.”  See, e.g., Bonar, 835 F.2d at 1383.   

Section 10(a)(1) is probably the least commonly invoked ground for vacating an arbitration award.  That said, it provides an important safety valve to address rare, but extremely important cases where an award is the product of  corruption, perjured testimony or other egregious misconduct, and where the challenger was unable to address the problem before the arbitrators. 

The next installment of this series shall address a more commonly invoked ground for vacatur:  evident partiality.

An arbitration award is effectively a contract resulting from a contract.  Two parties agree to appoint arbitrators, submit their dispute to arbitration and abide by the award.  The parties ordinarily consent to entry of judgment on the award, and it can be confirmed under Section 9 of the Federal Arbitration Act (or a state law equivalent when the Federal Arbitration Act doesn’t apply).  Alternatively it may be enforced through the plenary and summary  procedures applicable to ordinary contracts (subject to any special rules governing arbitration awards).  

So what happens when things go awry — or at least seem to have gone awry — and the arbitration award is or appears to be fundamentally unfair, divorced from the contract or the result of fraud, bias, or some form of prejudicial misconduct on the part of the arbitrators?  Section 10 of the Federal Arbitration Act provides a safety net in the form of a motion or petition  to vacate the award.  (State arbitration statutes and law applicable in actions to enforce arbitration awards generally provide similar recourse, but our focus here is on the Federal Arbitration Act.)

The United States Supreme Court recently declared that Section 10(a) of the Federal Arbitration Act sets forth the exclusive grounds for vacating a commercial  arbitration award (we are not concerned here with awards under 5 U.S.C. § 590, which are governed by 9 U.S.C. § 10(b)).  See Hall Street Assoc. v. Mattel, Inc., 128 S. Ct. 1396, 1404 (2008).  And make no mistake, these grounds are exceedingly narrow; section 10 of the Federal Arbitration Act authorizes vacatur only where: 

1.  The award was procured by corruption, fraud, or undue means;

2.  [T]here was evident partiality or corruption in the arbitrators, or either of them;

3.  [T]he arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

4.  [T]he arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10(a). 

While the principal purpose of the Federal Arbitration Act is to enforce the parties agreement as written, see, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947 (1995), we see the flip side of that purpose expressed in Section 10(a).  Section 10(a) addresses situations where  putting a court’s  imprimatur on an award would deprive one of the parties of the benefits of its freely-bargained-for arbitration agreement.  Judge Posner put it well when he said:

It is tempting to think that courts are engaged in judicial review of arbitration awards under the Federal Arbitration Act, but they are not. When parties agree to arbitrate their disputes they opt out of the court system, and when one of them challenges the resulting arbitration award he perforce does so not on the ground that the arbitrators made a mistake but that they violated the agreement to arbitrate, as by corruption, evident partiality, exceeding their powers, etc. – conduct to which the parties did not consent when they included an arbitration clause in their contract. That is why in the typical arbitration . . . the issue for the court is not whether the contract interpretation is incorrect or even wacky but whether the arbitrators had failed to interpret the contract at all, for only then were they exceeding the authority granted to them by the contract’s arbitration clause.

Wise v. Wachovia Sec., LLC, 450 F.3d 265, 269 (7th Cir.) (citations omitted), cert. denied, 549 U.S. 1047 (2006).

As we shall discuss in detail in subsequent posts, each of the grounds specified in Section 10(a) implicates whether the arbitration award deprived the party of the benefit of its arbitration agreement.   Indeed, the first question a party should consider before investing time and expense in a motion or petition to vacate is whether it has reasonable grounds for asserting that the award effectively violated the agreement to arbitrate.  If the answer is “yes,” and the alleged violation falls within the scope of Section 10(a), then the party may have a good faith basis for vacating the award. 

In subsequent parts of this post we shall take a closer look at each of the grounds for vacating an award….

On November 2, 2009 Kyriaki Karadelis of the U.K.-based trade publication Global Arbitration Review (“GAR”)  (website here) wrote what I thought was a concise and insightful article on the case.  And we would have said that even if she had not quoted some of our comments in her article!  But she did, and we’re flattered by that. 

With Global Arbitration Review’s permission, and with the required copyright disclaimer, we have posted the article as a “Slide Share Presentation” in my LinkedIn profile, which you can view by clicking here.  Also posted there (again with GAR’s permission and the required disclaimer) is a Global Arbitration Review Article on the United States Court of Appeals for the Second Circuit’s decision in  ReliaStar Life Ins. Co. v. EMC National Life Co., ___ F.3d ___, ___ (2009) (Raggi, J.) (blogged here and here), in which the United States Court of Appeals for the Second Circuit held that an arbitration panel was authorized to award under the bad faith exception to the American Rule attorney and arbitrator fees to a ceding company in a case where the parties had agreed that “[e]ach party shall bear the expense of its own arbitrator.  .  .  and related outside attorneys’ fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator.”  We reported on GAR’s article concerning ReliaStar case here, which also quotes some of our comments on that case. 

We ask our readership to remember that GAR is a subscription-only publication and that it has copyrights in these posted materials.  GAR has authorized us to post them online and distribute them for marketing purposes, but that authorization does not extend to others not similarly situated.  Please do the right thing and respect GAR’s copyrights – GAR has to make a living just like the rest of us!     

The power of arbitrators appointed to resolve a particular dispute or disputes is defined by the submission, not the arbitration agreement. The scope of the agreement to arbitrate tells us only what must be submitted to arbitration. It is the submission itself that “serves not only to define, but to circumscribe the authority of the arbitrators.” Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987) (here).   

As the United States Court of Appeals for the Fifth Circuit explained, a predispute arbitration agreement generally is “not self-executing” — “[b]efore arbitration can … proceed, it is necessary for the parties to supplement the agreement to arbitrate by defining the issue to be submitted to the arbitrator and by explicitly giving him the authority to act.”  Piggly Wiggly Operators’ Warehouse Inc v. Piggly Wiggly Operators’ Warehouse Independent Truck Drivers Union, 611 F2d 580 (5th Cir. 1980) (here).  The disputes presented to the panel for resolution without objection constitute the submission, which may be embodied in a formal submission agreement or determined from the arbitration demand in conjunction with the arguments and contentions made by the parties during the proceeding.

The submission is effectively a delegation of authority to one or more particular arbitrators to resolve one or more particular issues.  And once arbitrators have ruled on those issues, their authority is exhausted; they have no authority to hear any further disputes between the parties unless the parties delegate to them that further authority. See, generally, U.S. v. American Soc’y of Composers, Authors and Publishers, 32 F.3d 727, 732-33 (2d Cir. 1994) (here); Ottley, 819 F.2d at 376.

The scope of the delegated authority may be broader or narrower than the scope of the arbitration agreement, or it may be coextensive with it. The parties may, for example, agree to arbitrate all disputes between them, but if they empanel arbitrators to resolve only a subset of those disputes, then the arbitrators’ authority is limited to that subset of disputes. And parties that have agreed to arbitrate only a subset of potential disputes can nevertheless submit other disputes to the arbitrators, which will have the authority to resolve them. See, generally, Ottley, 819 F.2d at 376; see also Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 157 F.3d 174, 177 (2d Cir. 1998) (here); Trade & Transport, Inc. v. Natural Petroleum Charterers Inc., 931 F.2d 191, 195 (2d Cir. 1991) (here).

For example, in the reinsurance context, a dispute may arise over a claim or series of claims, a party may demand arbitration of those claims, and a panel may be appointed to resolve the dispute.  Midstream in the proceeding disputes may arise over different claims.  The empanelled arbitrators have the authority to resolve those disputes only if the parties agree to submit them to the panel (they may be impliedly submitted if one party asserts them in the arbitration and the other party contests them without a reservation of rights).  

Those additional claims – not the subject of the original demand for arbitration – must, of course be arbitrated if they fall within the scope of the arbitration clause.  But the empanelled arbitrators cannot force the parties to submit them in the ongoing proceeding.  A new arbitration must be commenced, perhaps with new panel members. 

Issues concerning what was submitted to the arbitrators can also arise in other contexts.  One example is what happened in KX Reinsurance Co. v. General Reinsurance Corp., 08 Civ. 7807 (SAS), 2008 WL 4904882 (S.D.N.Y. Nov. 18, 2008) (Scheindlin, J.), where the Court held that the panel exceeded its authority when, after resolving all the issues the parties submitted, the panel nevertheless retained jurisdiction to hear future disputes between the parties. You can read more about that case here.

As is true with most rules, there is an exception.  Some arbitration agreements are self-executing in that they provide that the parties are to submit all disputes to a particular arbitrator or permanent arbitration panel.  Under such a self-executing arbitration agreement, the permanent arbitrator or panel generally has the authority to resolve additional disputes arising in the course of the proceedings, or to retain jurisdiction to hear future disputes, as long as the arbitration clause requires the parties to submit those disputes.   

In view of how the submission limits the authority of the empanelled arbitrators, parties need to give careful thought to the scope of the demand for arbitration, and the relief requested.  Sometimes a proverbial ounce of prevention is worth a pound of cure.

Today we briefly review the limitation periods applicable to applications to vacate, modify, correct and confirm arbitration awards.  Our discussion is limited to domestic awards falling solely under Chapter 1 of the Federal Arbitration Act and is not intended to be exhaustive.  In a future Nuts & Bolts feature we will discuss the rules applicable to nondomestic awards falling under Chapters 2 and 3 of the Federal Arbitration Act.   Our discussion is also limited to the rules that apply in federal courts within the United States Court of Appeals for the Second Circuit in diversity cases where the Federal Arbitration Act governs arbitration matters and New York law governs all other matters.   The rules may be interpreted differently by other circuits and, even within the Second Circuit, outcomes may vary depending on which state’s law applies.      

Limitation periods under the Federal Arbitration Act and New York’s arbitration statute are construed quite strictly and practitioners should carefully abide by them.  Sometimes it is unclear whether a limitation period has accrued or been tolled.  In that event practitioners should err on the side of caution.  If there is a question whether the period for filing an application has accrued, assume that it has, and file and serve your papers within the shortest allotted period.  If there is a question whether the period has been tolled, assume that it has not, and do whatever it takes to toll it. 

Limitation Periods for Motions to Vacate, Modify or Correct Awards

FAA Section 12 provides that “[n]otice of a motion to vacate, modify, or correct an award must be served within three months after the award is filed or delivered.”  Section 12′s New York counterpart provides that “[a]n application to vacate or modify an award may be made by a party within ninety days after its delivery to him.”  See New York Civ. Prac. L & R. § 7511(a).  Because the FAA Section 12 governs only service, not filing, and because the three-month period set forth in FAA Section 12 is frequently longer than the 90 day period set forth in Section 7511(a), practitioners have to take care to comply with both deadlines.  See, generally, Hakala v. J.P. Morgan Sec., Inc., 186 Fed. Appx. 131, 133, 2006 WL 1788962 (2d Cir. 2006) (not selected for publication), cert. denied, 128 S. Ct. 126 (2007); Hakala v. Deutsche Bank AG, 343 F.3d 111, 113-114 (2d Cir. 2003) (question whether Section 7511(a)’s 90 day limitations period tolled in diversity case).    

To make a timely application to vacate, modify or correct an award, one needs to know the date from which the clock begins to run.  Section 7511(a)’s limitation period accrues as of the “delivery” date of the award, and FAA Section 12′s limitation period accrues on the date the “award is filed or delivered.”  But what constitutes “delivery” may not be clear where there is a time lapse between the date the award is dispatched and the date it is received, as is the case when an award is dispatched by mail or overnight delivery rather than by personal or electronic delivery.  The New York Court of Appeals (New York’s highest court) has not definitively addressed the question, but a federal court would likely find that, under New York law, the date of delivery is the date of actual or constructive receipt.  See Lowe v. Erie Ins. Co., 56 A.D.3d 130, 132-34 (4^th Dep’t 2008) (collecting New York
cases).  The Second Circuit has not definitively addressed the question of what constitutes “filing” and “delivery” for the purposes of FAA Section 12, but there is some federal authority suggesting that the date of actual or constructive receipt controls.  See Sargent v. Paine Webber Jackson & Curtis, Inc., 882 F.2d 529, 531 (D.C. Cir. 1989), cert. denied, 494 U.S. 1028 (1990); Possehl, Inc. v. Shanghai Hia Xing Shipping, 2001 WL 214234, at *3 (S.D.N.Y. Mar. 1, 2001). 

The parties may agree that “delivery” means something other than actual or constructive receipt.  For example, if the parties agree that the American Arbitration Association’s Commercial Rules will govern the arbitration, then an award dispatched by mail will be deemed to be delivered when placed in the mail:   

Parties shall accept as notice and delivery of the award the placing of the award or a true copy thereof in the mail addressed to the parties or their representatives at the last known addresses, personal or electronic service of the award, or the filing of the award in any other manner that is permitted by law.

See AAA Commercial Rule 45 (here); Webster v. A.T. Kearney, Inc., 507 F.3d 568, 573-74 (7^th Cir. 2007).   

Having ascertained the starting date, the 90 day and three-month periods can be calculated.  For rules governing the calculation of these periods, practitioners should consult N.Y. Gen. Constr. Law §§ 20, 25-a, & 30; and Fed. R. Civ. P. 6. 

There is one other important rule practitioners should keep in mind when contemplating a motion to vacate, modify or correct an award in federal court.  As a practical matter, the only defenses that can be raised in opposition to a motion to confirm a domestic award are those set forth in Section 10, which deals with vacating awards, and Section 11, which deals with modifying and correcting awards.  The three-month and 90 day time limits for vacating, modifying or correcting an award apply even if the grounds provided in those statutes are raised as defenses to a motion to confirm.  See Florasynth, Inc. v. Pickholz, 750 F.2d 171, 175 (2d Cir. 1984).  Thus, if a party moves to confirm four months after delivery or filing of the award, and the other party has not timely moved to vacate, modify or correct the award, then all Section 10 and 11 defenses are time barred.   

Motions to Confirm

Under both the Federal Arbitration Act and the New York Civil Practice Law and Rules, a party has one year in which to apply to the court for an order confirming an award.  See 9 U.S.C. § 9; New York Civ. Prac. L. & R. 7510;  Photopaint Tech., LLC v. Smartlens Corp, 335 F.3d 152, 158 (2d Cir. 2003).  The time to move to confirm under FAA Section 9 runs from the date the “award is made”, whereas the time to move to confirm under New York’s arbitration statute runs from the date the award is “delivered.  .  .  .”  That means the limitation period under the FAA may accrue earlier than New York’s limitation period in cases where time elapses between the date the award was made and the date it was received.  Since FAA Section 9, unlike FAA Section 12, effectively provides that both service and filing must be accomplished within the limitation period, Section 9′s limitation period governs in most cases falling under Chapter 1.  See 9 U.S.C. § 9 (providing party may “apply” for confirmation within the one-year limitations period). 

A motion to confirm is not the only remedy for enforcing an arbitration award.  An award can, in theory, be enforced in an action on the award, which is based on contract.  But New York law does not provide a person missing FAA § 9′s deadline with much or any breathing room.  Although New York’s contract statute of limitations is six years, the statute of limitations for an action upon an arbitration award is one year.  Compare New York Civ. Prac. L. & R. § 213(2) with New York Civ. Prac. L. & R. § 215(5).   If time elapses between the date the award was “made” and the date it was “delivered”, a petitioner might have an alternative remedy in state court under New York’s arbitration law or in federal court based on an action upon the award.  A court, however, might find that the accural date under Section 215(5) runs from the date the award was “made” rather than from the date it was delivered, in which case the alternative remedy of an action on the award would be time barred.  Consideration of this matter is beyond the scope of this post.  

We will look at the limitation periods applicable to nondomestic awards in a subsequent post, so stay tuned.  .  .  .

Definition of Final Award

While arbitration agreements come in various forms, a typical agreement contemplates that the parties will submit to arbitration any dispute falling within its scope, appoint a panel to resolve the dispute, hold a hearing, and issue a final and binding award adjudicating the dispute.  To be final, such an award “must resolve all the issues submitted to arbitration, and. . . it must resolve them definitively enough so that the rights and obligations of the two parties, with respect to the issues submitted, do not stand in need of further adjudication.”  Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 157 F.3d 174, 176 (2d Cir. 1998) (emphasis in original). 

If party A demands arbitration against party B on claim X, the expectation is that the arbitrators, perhaps after some discovery, will hold a hearing and issue a single award resolving the controversy.   If the award fully adjudicates claim X, then it is final.  But if it resolves some, but not all, of the submitted issues concerning claim X, and as a result, the parties’ rights and obligations as respects claim X remain unsettled, then it is not final, unless, as discussed further below,  the parties agree or consent to the arbitrators rendering such an award.    

Interim Awards and Partial Awards

Not all arbitrations, of course, are as simple and straightforward as the example above.  Sometimes the arbitrators will issue interim or partial awards.  Sometimes these awards are final, and sometimes not.  An interim award is an interim final award  if it fully adjudicates a submitted, independent claim.  Suppose A has two claims — X and Y — against B, and before the hearing, the arbitrators issue an award granting summary judgment to B on claim X, but not adjudicating claim Y.  Even though the parties did not agree that the arbitrators would issue an award fully resolving only one of the claims, a court would consider the award to be an interim final award.        

But what happens if the arbitrators issue a partial award that does not resolve any of the parties’ claims, but definitively resolves one or more of the issues pertinent to those claims?  Suppose the arbitrators declare that they will resolve claims X and Y in two phases, the first of which (Phase I) will deal with liability, and the second (Phase II) with damages.  The arbitrators issue a Phase I award definitively resolving the issue of liability for claims X and Y, but no other issues.  Is the Phase I award final? 

Like so many other questions under the FAA, the answer lies in what the parties agreed.  Since  the parties did not agree that the arbitrators would issue partial final awards, and since the awards do not qualify as interim final awards, the Phase I award is not a final award, at least until the Panel issues its Phase II award, and the awards, taken together, definitively resolve the controversy.   If, however, parties A and B requested the Panel to issue a partial final award for each Phase (or otherwise consented to that procedure), then the Phase I award would be final.   

Now that we have briefly reviewed the general rules of finality, let’s look at why it matters.  There are seven key reasons, although this list is not exhaustive: 

1. An award must be final before a court can confirm it.
2. An award must also be final before a court can vacate it, unless the arbitrators intended the award to be final, and a party seeks to vacate it on the ground that the arbitrators “so imperfectly executed” their powers that “a mutual, final, and definite award upon the subject matter submitted was not made.”  9 U.S.C. § 10(a)(4).  
3. Once an award is final, the three-month and one-year limitation periods for vacating and confirming the award begin to run.  The limitation period for a motion to vacate on the grounds mentioned in 2., above, presumably begins to run upon the issuance and delivery of an award which the arbitrators intend to be final.  (In a future post we shall discuss FAA limitation periods in more detail.) 
4. Once an award is final, the functus officio doctrine prevents arbitrators from modifying, clarifying or otherwise revisiting the subject matter resolved in the final award.  There are exceptions to the rule where the award is ambiguous, exhibits a clear error on its face (usually a mathematical one), or does not fully adjudicate submitted issues.  (We shall discuss the functus officio in more detail in a future post.) 
5. If the award is a final award as respects all issues and claims submitted to arbitration, then the arbitrators’ authority is exhausted and they have no further authority to resolve any other issues, unless the parties otherwise agree.
6. If the award is an interim final award, or a partial final award, the arbitrator’s remaining authority is limited to the issues and claims that were submitted to arbitration, but which remain unresolved, unless the parties agree to submit additional issues or claims to the arbitrators.   
7. If the arbitrators issue a partial final award or an interim final award and, subsequent to the award a member of the panel dies, then the award remains final and binding on the parties.  In that case, a substitute arbitrator is appointed and the reconstituted panel resolves the remaining issues and claims.  (In a future post we shall discuss in more detail the consequences that may follow death of an arbitrator.)   

Authority and Recommended Reading:

Colonial Penn Ins. Co. v. Omaha Indemnity Co., 943 F.2d 327 (3rd Cir.1991)
Hyle v. Doctor’s Assoc., Inc., 198 F.3d 368 (2d Cir. 1999)
Kerr-McGee Refining Corp. v. M/T Triumph, 924 F.2d 467 (2d Cir. 1991)
Metallgesellschaft A.G. v. M/V Capitan Constante, 790 F.2d 280 (2d Cir. 1986)
Michaels v. Mariforum Shipping, S.A., 624 F.2d 411 (2d Cir. 1980)
Ottley v. Schwartzberg, 819 F.2d 373 (2d Cir. 1987)
Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 157 F.3d 174 (2d Cir. 1998)
Trade & Transport, Inc. v. Natural Petroleum Charterers, Inc., 931 F.2d 191 (2d Cir. 1991)
U.S. v. American Soc’y of Composers, Authors and Publishers, 32 F.3d 727 (2d Cir. 1994)
Zeiler v. Deitsch, 500 F.3d 157 (2d Cir. 2007)