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.” We promised to take a closer, analytical look at UpHealth and its “clear mistake of historical fact or conceded nonfact” vacatur standard, and, in 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 that help shed further light on the case and the arbitration award vacatur standard on which it relied:
- 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?
- Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?
- If there is a Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?
That October 18, 2024 post went on to address questions 1 and 2. This Part II address the third question: “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?” The author thinks the answer is “yes.” One or more subsequent posts will answer questions 4 and 5.
Discussion
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?
The UpHealth Court’s application of the “mistake of historical fact” or “conceded nonfact” standard raises serious questions about whether the Court substituted its judgment for that of the arbitrators. On balance, the author thinks it did for the reasons set forth below (which presume familiarity with our October 7, 2024, and our October 18, 2024, posts).
There are at least three flaws in the Court’s analysis:
- Although the Court held that the its Decision was based on a nonfact, the nonfact was not a conceded nonfact;
- The UpHealth Court improperly evaluated the sufficiency of the evidence to support the arbitrators’ finding that Damodaran was present and voted at the meeting against the appointment of UpHealth’s designees;
- The Court failed to use the highly deferential, manifest disregard standard of review to determine whether the arbitrators’ Damodaran fact finding was based on ambiguous or disputed evidence (and thus not on a clear mistake of historical fact).
The Decision was Based on a Nonfact but it was not a “Conceded” or Agreed Nonfact
The “clear historical fact or conceded nonfact” standard permits vacatur based on a nonfact only where a party concedes, or the parties agree, the non-existence of the material fact on which the arbitrator relied. But no nonfact was conceded or agreed in UpHealth.
The Court said it was vacating the award because it was based on a nonfact—it did not say that the nonfact was “conceded.” See UpHealth, slip op. at 22. The nonfact was that Damodaran was present, and voted at, an emergency shareholder’s meeding, the purpose of which was to facilitate the appointment of UpHealth’s designees to Glocal’s board of directors, and thus, UpHealth’s acquisition of Glocal pursuant to the purchase agreement.
The Court did not point to any agreement between the parties concerning, or concessions about, Damodaran’s presence at or actions during the emergency board meeting, let alone any agreements or concessions establishing that Damodaran was not present at the meeting and did not vote at the meeting, whether by proxy or otherwise. UpHealth conceded that it did not allege that Damodaran attended the meeting and voted (in person or by proxy) against UpHealth’s designees but explained that it did not claim that Damodaran was absent from the meeting or did not vote for the UpHealth designees. See slip op. at 21 & 22. UpHealth further explained that, before the award was made, none of the parties claimed Damodaran did not attend the meeting.
The UpHealth Court Improperly Evaluated the Sufficiency of the Evidence to Support the Arbitrators’ Finding that Damodaran was Present and Voted at the Meeting Against the Appointment of UpHealth’s Designees
The Court engaged in a review of the sufficiency of the evidence supporting a fact finding made by the arbitrators. That violates established arbitration law rules and principles, including ones embodied in U.S. Supreme Court and Seventh Circuit precedent, which prohibit such review. See, e.g., Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509-10, 511 (2001) (“When an arbitrator resolves disputes regarding the application of a contract, and no dishonesty is alleged, the arbitrator’s “improvident, even silly, factfinding” does not provide a basis for a reviewing court to refuse to enforce the award. . . . [and] established law ordinarily precludes a court from resolving the merits of the parties’ dispute on the basis of its own factual determinations, no matter how erroneous the arbitrator’s decision.”) (quoting Paperworkers v. Misco, Inc., 484 U.S. 29, 36, 39 (1987)); Eljer Mfg., Inc. v. Kowin Development Corp., 14 F.3d 1250, 1254, 1256 (7th Cir. 1994) (“Errors in the arbitrator’s . . . findings of fact do not merit reversal under this standard. . . .Nor does an insufficiency of evidence supporting the decision permit us to disturb the arbitrator’s order. . . . A question as to the sufficiency of the evidence before the arbitrator simply does not trigger the review powers of this court.”)
The arbitrators, in an award consisting of several hundred numbered paragraphs, found as a matter of fact that Damodaran voted against the appointment and therefore violated the terms of the Stock Purchase Agreement and that Damodaran was liable as a result:
While the Tribunal accepts that [Damodaran] had not actively participated in [Glocal’s] affairs, the breach in question under the present claim pertains significantly to the actions taken at the [Emergency General Meeting] to prevent [UpHealth] from appointing designees to the Board. In this regard, the Tribunal notes that. . . [Damodaran], together with Respondent Nos. 2-4 and 6 voted against the said appointment, in plain contravention of the terms of the SPA. As such Damodaran must bear the consequences for his breach and is liable for the sum apportioned above.
Slip op. at 21 (quoting Award at ¶ 390 (some parenthetical material in original)).
On the face of the award this fact finding does not appear to be a clear mistake, nor does there appear to be any clear mistake associated with the resulting conclusion of law. And as we said, the Court pointed to no evidence that the parties agreed to or conceded any fact or facts contravening or otherwise negating the Damodaran fact finding. Applying this fact finding to the Stock Purchase Agreement, the Panel concluded that Damodaran was liable for breach of that Agreement, and in making that legal conclusion, the arbitrators at least arguably interpreted and applied the Agreement. See Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013).
To support its decision rejecting the arbitrators’ factual finding based on clear mistake, and vacating the award, the Court looked beyond the four corners of the Award and reviewed the sufficiency of the evidence supporting the arbitrators’ fact finding. According to the Court, 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).
From this the Court concluded that the arbitrators’ finding— that Damodaran “‘voted to prevent [UpHealth] from appointing designees to the Board[,]’” slip op. at 21 (quoting Award at ¶ 390)—was “not a mere ‘conclusion[] based on disputed or ambiguous evidence[,]’” slip op. at 21 (quoting Mollison-Turner, 2002 WL 1046704 at *3), and thus was a clear mistake of fact. The record, the Court said, contained no evidence “on which the Tribunal relied to make [that] finding[,]” and “[t]he Court” 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.
In response to the argument that there was no evidence that Damodaran did not attend the meeting and vote against the UpHealth designees, the Court explained that Damodaran’s silence during the arbitration on this point was not an admission that he attended and voted. For even were the arbitration a litigation, and Damodaran had defaulted, he would not be deemed to admit an allegation that was not made against him. See slip op. at 22.
Damodaran could not, the Court said, be expected “to deny and defend himself against allegations that were never made.” Slip op. at 22. “The key point[,]” said the Court, “is that there was no allegation or evidence in the record that Damodaran attended or voted at the EGM[,]” and “[t]he Court thus finds that the Tribunal based its decision as to Damodaran on a non-fact.” Slip op. at 22.
To conclude that the award was based on a clear mistake of historical fact or a nonfact, the Court determined that there was “no evidence” to support a finding of fact that the arbitrators made. It did so by ascertaining that there was no evidence to support that finding of fact. It had no authority to do that, just as it would have had no authority to vacate an award on the grounds that there was no legal support for one of the arbitrators’ key legal conclusions.
We explained that there was, for a short-lived period, some authority in the Second Circuit supporting review of arbitration awards for “manifest disregard of the facts”. (See October 7, 2024, post.) The Second Circuit subsequently said that manifest disregard of the facts is not a valid basis for vacating an arbitration award. See 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)).
But even if “manifest disregard of the facts” were a valid basis for vacating an award, the standard could not have been legitimately applied to justify vacatur of the award against Damodaran. According to the Court in UpHealth, the parties never expressly argued that Damodaran was or was not present at the meeting and did or did not vote at the meeting. There was therefore no pertinent fact for the Court to manifestly disregard.
What the Court said in effect is that the arbitrators’ finding that Damodaran was present and voted at the meeting was supported by insufficient evidence or no evidence at all. But those matters are outside the Court’s authority to determine and nothing in Section 10(a) of the Federal Arbitration Act authorizes judicial review to determine whether an arbitrator’s factual or legal findings are supported by sufficient evidence. See 9 U.S.C. §§ 10 & 11; Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 586 (2008) (“[T]he [FAA’s] text compels a reading of the §§ 10 and 11 categories as exclusive”).
It may seem harsh to say the Court had no authority to review for lack of sufficiency of the evidence, or for any evidence at all, the Damodaran finding of fact, but the problem is that saying the Court had that authority would potentially open up to full blown review all of the arbitrators’ fact findings, or at least all of their material fact findings. To paraphrase the U.S. Supreme Court, that would “open[] the door to the full-bore . . . evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process and bring arbitration theory to grief in post-arbitration process.” Hall St., 552 U.S. at 588 (quotations and citations omitted; cleaned up).
The Court Failed to use the Highly Deferential, Manifest Disregard Standard of Review to Determine Whether the Arbitrators’ Damodaran Fact Finding was Based on Ambiguous or Disputed Evidence (and thus not on a Clear Mistake of Historical Fact)
Even assuming that the Court was authorized to determine whether there was any basis for the arbitrator’s fact finding concerning Damodaran’s meeting attendance and voting, the evidentiary record did not conclusively and irrefutably establish that there was no basis for the arbitrators to have concluded that the evidence in support of the Damodaran fact finding was ambiguous or disputed. The Court said that the deference to be accorded arbitral fact finding “is appropriately applied to an arbitrator’s conclusions based on disputed or ambiguous evidence, as opposed to [a clear mistake of]. . . historical fact.” UpHealth, slip op. at 19 (quotation and citation omitted). The Court concluded that the arbitrator’s fact finding was “based on disputed or ambiguous evidence[,]” but in making that determination the Court apparently assessed whether the evidence was “disputed or ambiguous” through the same lens it would have used to make that determination in a case not involving the review of an arbitration award. It did not accord the same level of deference to the arbitrator as it would were it deciding whether an award was in manifest disregard of the parties’ agreement or in manifest disregard of the law.
As discussed in detail in our October 18, 2024, post, a critical consideration in determining whether the evidence was unambiguous or undisputed is the degree of deference to be accorded to the arbitrators. To apply correctly the “clear mistake of fact or conceded nonfact” standard, the Court should, the author believes, have satisfied itself that there was no even barely colorable basis in the record to conclude that the alleged mistake of fact was based on ambiguous or disputed evidence. If the fact finding was even arguably based an arbitrator’s interpretation or assessment of ambiguous or disputed evidence, or if it was based on an inference that arguably might be drawn from ambiguous or disputed evidence, then the court should have concluded that the finding of fact was not one of clear historical fact, and thus not one that could justify vacatur of the award under the “clear mistake of historical fact” standard.
In applying FAA, manifest disregard outcome review standards, courts ask whether because of manifest disregard of the agreement or of the law, there is “not even a barely colorable basis” for the award, including whether the arbitrators arguably interpreted the contract or the law. (See October 18, 2024, post.) While the UpHealth Court concluded that there was no basis in the record for the Damodaran finding, the author believes that there was at least an arguable or barely colorable basis to conclude that the evidence on which it was based was ambiguous or disputed.
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 as should be painfully evident by now, 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 are not bound by the rules of evidence and can legitimately rely on many sources for their findings. See, e.g., Bernhardt v. Polygraphic Co., 350 U.S. 198, 203 n.4 (1956) (“Arbitrators are not bound by the rules of evidence[ and] [t]hey may draw on their personal knowledge in making an award.”) (citations omitted); Wise v. Wachovia Sec., LLC, 450 F.3d 265, 268, 269 (7th Cir. 2006).
Perhaps a technical application of the preponderance of evidence rule might, in the litigation (not arbitration) context, have led at least some courts to conclude that there was a failure of proof on the issue of Damodaran’s attendance and voting—equivocal evidence suggests a 50% evidentiary probability, not the 51% probability required to establish a fact by the preponderance of evidence.
But this was arbitration, the arbitrators have 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.
The next installment of this post will address one or both of the remaining questions posed in our October 18, 2024, post:
- Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?
- If there is a Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?
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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Tags: 10(a)(4), Agreed, Arguably, Authority, Barely Colorable, Bernhardt, Buttar, Clear Mistake, Conceded, Damodaran, Eljer, Evidence, Exceed, Exceed Powers, Exceeding Powers, FAA, Federal Arbitration Act, Garvey, Glocal, Hall Street, Halligan, Kowin, Manifest Disregard, Mattel, Misco, non-fact, nonfact, Northern District of Illinois, Oxford, Piper, Polygraphic, Second Circuit, Seventh Circuit, Sufficiency, Sutter, UpHealth, Vacate, Wachovia, Wallace, Wise
