In our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we discussed UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), which granted partial vacatur of an arbitration award because it was based on a “nonfact.” Our October 18, 2024 post, Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part I), identified five questions relating to UpHealth, which were designed to shed further light on the case and the vacatur standard on which the Court relied.
We answered the first three of the five in our October 18 and 21, 2024, posts:
- What is the difference, if any, between a “clear mistake of historical fact” and a “conceded nonfact?”
- What is or should be required to establish a “clear mistake of historical fact” or a “conceded nonfact?”
- Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?
This post—which assumes familiarity with our October 7, 18, and 21, 2024 posts—answers the fourth question: “Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?”
We think the answer is no, unless the standard is construed to authorize vacatur in one of the two alternate situations only. First, where: (a) the parties clearly and unmistakably agree to the existence or nonexistence of a material fact, whether by stipulation or otherwise; (b) the arbitrator makes an award that clearly and unmistakably contravenes, or is otherwise inconsistent with, that agreement; and (c) the arbitrator does not even arguably interpret or apply the parties’ agreement about the existence or nonexistence of the material fact.
Second, and alternatively, where: (a) there is not even a barely colorable basis to conclude that the arbitrator’s material, mistaken finding of fact was based on ambiguous or disputed evidence; and (b) in making his or her award the arbitrator strongly relied on the clearly mistaken finding of fact. Of these two scenarios, we believe the first comports more closely with the FAA than the second.
The UpHealth Appeals to the Seventh Circuit
One brief update before we proceed: On October 24, 2024, UpHealth, not surprisingly, filed a notice of appeal from the order vacating the award. On November 6, 2024, Damodaran filed a notice of cross-appeal, appealing the district court’s order to the extent that that it remanded UpHealth’s claims against him to the arbitration panel, rather than terminating them.
Discussion: UpHealth
Assuming that the UpHealth District Correctly Applied the Clear Mistake of Historical Fact or Conceded Nonfact Standard, does it Comport with the FAA?
Our October 7, 18, and 21, 2024, posts pointed out a number of reasons why the clear mistake of historical fact or conceded nonfact standard, particularly as applied by UpHealth, violates, or may violate, the FAA. First, the FAA does not authorize courts to review an arbitrators’ findings of fact, no matter how “silly” or “improvident.” See, e.g., Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509-10, 511 (2001). The Second Circuit and certain other courts have rejected “manifest disregard of the facts” as a basis for vacating an arbitration award, see, e.g., Wallace v. Buttar, 378 F.3d 182, 191-93 (2d Cir. 2004) (discussing Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2d Cir. 1998)), and the Seventh Circuit (with a couple of narrow exceptions discussed in our October 7, 2024, post) has rejected even manifest disregard of the law as a ground for overturning an award. Affymax, Inc. v. Ortho-McNeil-Janssen Pharms., Inc., 660 F.3d 281, 284 (7th Cir. 2011) (citing George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir.2001)).
As we saw with respect to the UpHealth court’s application of the standard, when a Court purports to determine whether an arbitrator’s finding of fact is a clear mistake of historical fact—i.e., a fact finding that is contradicted by unambiguous or undisputed evidence to the contrary—the Court is required to review the arbitrator’s fact finding, and may inadvertently second-guess the arbitrator on a matter that is supposed to be within his or her discretionary ambit.
That is how the UpHealth court, in the author’s opinion, erred in applying the standard. (See October 21, 2024, post.) The Court made a determination about the ambiguity of evidence and its disputed or undisputed nature through the same lens as it would have made those determinations in cases that do not involve arbitration. (See October 21, 2024, post.)
Second, to the extent that the clear mistake of historical fact or conceded nonfact standard focuses on whether the arbitrator made a clear mistake of fact, and not on whether the arbitrator did or didn’t do his or her job by at least arguably interpreting the parties’ agreement or concessions about the facts, then it is not aligned with the only form of outcome review (other than public policy review) that has been authorized by the U.S. Supreme Court: manifest disregard of the agreement. See Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671-72, 676-77 (2010).
The principal purpose of the FAA, and certainly that animating FAA review of arbitration awards, is to enforce the parties’ agreement to arbitrate. Stolt-Nielsen, 559 U.S. at 682-83; Wise v. Wachovia Securities, LLC, 450 F. 3d 265, 269 (7th Cir. 2006). As the Seventh Circuit has aptly put it:
[T]he question for decision by a federal court asked to set aside an arbitration award . . . is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract. If they did, their interpretation is conclusive. By making a contract with an arbitration clause the parties agree to be bound by the arbitrators’ interpretation of the contract. A party can complain if the arbitrators don’t interpret the contract—that is, if they disregard the contract and implement their own notions of what is reasonable or fair. A party can complain if the arbitrators’ decision is infected by fraud or other corruption, or if it orders an illegal act. But a party will not be heard to complain merely because the arbitrators’ interpretation is a misinterpretation. Granted, the grosser the apparent misinterpretation, the likelier it is that the arbitrators weren’t interpreting the contract at all. But once the court is satisfied that they were interpreting the contract, judicial review is at an end, provided there is no fraud or corruption and the arbitrators haven’t ordered anyone to do an illegal act.
Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194-95 (7th Cir. 1987) (citations omitted) (Posner, J.); see, e.g., American Zurich Ins. Co. v. Sun Holdings, Inc., 103 F.4th 475, 477-78 (7th Cir. 2024) (Easterbrook, J.) (quoting Hill, 814 F.2d at 1194-95; citing Garvey, 532 U.S. at 509-10); Oxford, 569 U.S. at 571-73.
The same should be true of the clear mistake of historical fact or conceded nonfact standard. If there is to be vacatur of an award based on a mistake of historical fact or conceded nonfact it should be because the arbitrator did not do his or her job by at least arguably interpreting and applying the parties’ agreement or concessions concerning the facts.
In situations where the parties have agreed to, or conceded, facts that clearly evidence a clear mistake of historical fact, then that resolves both the problem associated with Courts purporting to review the arbitrators’ evidentiary findings as well as the problem associated with the vacatur standard of review not being grounded in the enforcement of the parties’ agreement. No judicial review of the sufficiency or existence of evidence supporting a fact finding is necessary or warranted when the issues are whether the parties agreed to that finding of fact and whether the arbitrators even arguably interpreted that agreement.
Those issues concern whether the arbitrators’ award is at least arguably an interpretation of the parties’ agreement, limiting judicial review to the scope approved by the U.S. Supreme Court: did the arbitrators at least arguably interpret the parties’ agreement? See Oxford, 569 U.S. at 566-70.
Stolt-Nielsen lends support to the argument that the standard should be limited to situations where the historical fact or nonfact was the subject of party agreement or concession. The U.S. Supreme Court there determined that the arbitrators exceeded their powers by not giving effect to the parties’ stipulation that their agreement was silent on the issue of class arbitration. Instead of determining what default rule governs consent to class arbitration when the parties’ agreement is silent on that score, the arbitrators ruled that extracontractual considerations of public policy required class arbitration. See Stolt-Nielsen, 559 U.S. at 671-72, 676-77. (See October 18, 2024, post.)
Third, the way the UpHealth Court construed and applied the standard effectively allows the court, applying a de novo standard of review, to determine whether the facts establishing the mistake were unambiguous and undisputed. That is troublesome for essentially the same reasons: it invites judicial review of arbitral fact finding rather than limited judicial review of whether the parties agreed or conceded the existence of facts contrary to those found by the arbitrator and, if so, whether the arbitrator at least arguably did his or her job by interpreting and applying that agreement or concession.
Two Proposals for Aligning the Mistake of Historical Fact or Conceded Nonfact Standard with the FAA
There are at least two alternative ways that the historical fact/conceded nonfact standard can be modified so that it can be applied in a way that at least arguably comports with the FAA. The first of these could not have been applied to the UpHealth facts, while the second of these could have been applied to those facts, but its proper application to those facts would, we think, result in a different outcome in UpHealth: denial of Damodaran’s motion to vacate. Of the two, we think the first is more closely aligned with the FAA than the second.
Proposal 1: The Facts Showing the Mistake Must be Agreed or Conceded
The first proposal fully addresses each of the weaknesses inherent in UpHealth’s interpretation and application. It would authorize vacatur for clear mistake of fact or conceded nonfact only where: (a) the parties clearly and unmistakably agree to the existence or nonexistence of a material fact, whether by stipulation or otherwise; (b) the arbitrator makes an award that clearly and unmistakably contravenes, or is otherwise inconsistent with, that agreement; and (c) the arbitrator does not even arguably interpret or apply the parties’ agreement about the existence or nonexistence of the material fact.
This proposed standard removes the Court entirely from evaluating, even in a very deferential fashion, the basis for the arbitral fact finding at issue. It requires the court to determine, by clear and unmistakable evidence, that: (a) the parties have reached an agreement or concession about the existence or nonexistence of the fact claimed to be the subject of the arbitrator’s alleged, clear mistake, and (b) the award contravenes, or is otherwise inconsistent with, that agreement or concession. It then, as a safeguard, and consistent with the manifest disregard of the agreement standard, requires the Court to determine whether the arbitrator even arguably interpreted or construed the agreement or concession concerning the existence or nonexistence of the fact the challenging party claims the arbitrator mistook.
The standard therefore confines judicial review to the parties’ agreement and accords the same deference to interpretation and application of the agreement that courts faithfully following the manifest disregard of the agreement standard accord to arguable interpretations or applications of the parties’ agreement by the arbitrator.
It would, however, have had no application to the facts in UpHealth. In UpHealth, the parties did not agree to or concede the existence or nonexistence of any of the facts the challenging party claimed were the subject of the arbitrator’s alleged mistake. Therefore, a Court employing such a standard would conclude that there was no basis to vacate the UpHealth award based on an alleged mistake of historical fact or conceded nonfact.
Proposal 2: No Barely Colorable Basis to Conclude that the Arbitrator’s Clearly Mistaken Finding of Fact was Based on Ambiguous or Undisputed Evidence
Proposal 2 is slightly more forgiving than Proposal 1 because it permits some extremely deferential review of the question whether the arbitrator’s fact finding was contradicted by, or otherwise inconsistent with, unambiguous or undisputed evidence to the contrary. While it could have been applied to the facts of UpHealth, the outcome it would yield would have been denial of the motion to vacate. (See October 21, 2024 post.)
Proposal 2 would allow vacatur where: (a) there is not even a barely colorable basis to conclude that the arbitrator’s material, mistaken finding of fact was based on ambiguous or undisputed evidence; and (b) in making his or her award the arbitrator strongly relied on the clearly mistaken finding of fact. It therefore limits any review of the arbitrator’s fact finding to that necessary to determine whether there was even a barely colorable basis to conclude that the arbitrator based the mistaken finding fact on ambiguous or undisputed evidence. If there is a barely colorable basis on which to conclude that the arbitrator’s mistaken fact finding was based on ambiguous or undisputed evidence, then vacatur is not permitted. Like UpHealth’s articulation of the standard, it requires that the arbitrator strongly relied on the clearly mistaken finding of fact.
Proper application of Proposal 2 to the UpHealth facts would, the author believes, lead to denial of Damodaran’s motion to vacate. Even though the UpHealth Court concluded that there was no basis in the record for the Damodaran finding, the author believes that there was a barely colorable basis on which to conclude that the Damodaran finding was supported by ambiguous or disputed evidence.
As explained in the October 21, 2024 post, the arbitrators did not pull their finding about Damodaran out of a proverbial hat. As the Court explained, the arbitrators “based [their] findings on ‘[a witness’s] evidence that at [the] EGM the minority shareholders voted against the Claimant’s designees being appointed to the Board.’” Slip op. at 21 (quoting Award at ¶¶ 360-61). That witness, the Court said, “did not identify which minority shareholders were present. . . and noted that the vote was limited to ‘Glocal Healthcare shareholders in attendance’” at the meeting. Slip op. at 21 (quoting Dkt. 48-1, Ex. 2 at ¶ 121).
The witness further testified that the minority shareholders voted against the appointment of the designees and the minority shareholders in attendance voted. Damodaran was a minority shareholder. There was therefore at least an arguable or barely colorable basis for the arbitrators to have drawn the inference that Damodaran was among the minority shareholders who were present and voted.
The Court’s conclusion that it could “only surmise from the record that the Tribunal assumed Damodaran was present with the rest of the Respondents at the EGM without ever receiving evidence that he was in fact present[,]” slip op. at 21, would have been warranted and meaningful if the FAA required arbitrators to have direct and conclusive evidence to support each fact finding in their awards. But arbitration awards are not subject to that kind of exacting, rigorous standard of review.
The Court did not believe the evidence was sufficient here because: (a) the witness did not identify the minority shareholders that were present; and (b) the evidence left open the possibility that not all minority shareholders were present and voted. While the evidence on Damodaran was arguably equivocal, the arbitrators nevertheless drew the inference that Damodaran was present.
Arbitrators limitless (or nearly limitless) leeway in terms of their fact-finding ability, and who knows what other sources of information the arbitrators gleaned from the hearings that led them to draw the inference that Damodaran was present and voted at the meeting against the appointment of the designees. Under the circumstances, there was at least a barely colorable or arguable basis for the arbitrators to draw the inference that Damodaran was present and voted at the meeting against the appointment.
The evidence was therefore ambiguous in the sense that there was at least a barely colorable basis for interpreting it more than one way, and one of those ways was to conclude Damodaran was present at the meeting and voted against the appointment of designees. The arbitrators’ Damodaran fact finding was therefore not a clear mistake of historical fact or a conceded nonfact.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.
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