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 promised some further analysis of UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), the principal case discussed in that post, which held warranted partial vacatur of an award because the award was based in part on a “nonfact.” In this and at least one other post, let’s take a closer, analytical look at UpHealth’s “clear mistake of historical fact or conceded nonfact” vacatur standard, consider whether UpHealth comports with the Federal Arbitration Act (“FAA”), and take an informed guess about how the U.S. Court of Appeals for the Seventh Circuit might decide the case if there is an appeal.
We’ll focus on the following questions and our answers will presume familiarity with the October 7, 2024, UpHealth post, here:
- 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?
This Part I addresses questions 1 and 2. One or more subsequent posts will address questions 3 through 5.
Discussion
What is the Difference, if any, between a “Clear Mistake of Historical Fact” and a “Conceded Nonfact?”
The standard adopted in UpHealth—which was derived from Electronics Corp. of Am. v. International Union of Elec., Radio and Mach. Workers, 492 F.2d 1255 (1st Cir. 1974); National Post Office, Mailhandlers, Watchmen, Messengers & Grp. Leaders Div, Laborers Int’l Union of N. Am., AFL-CIO v. United States Postal Serv., 751 F.2d 834, 843 (6th Cir. 1985) (Stewart, Associate Justice (ret.), sitting by designation), and Mollison-Turner v. Lynch Auto Grp., No. 01 6340, 2002 WL 1046704, at *3 (N.D. Ill. May 23, 2002)—authorizes vacatur of awards based on: (a) a “clear mistake of historical fact” or (b) a “conceded nonfact.” Both of these bases for vacating an award may, at least to some, suggest a fairly broad authorization to vacate awards that is not already encompassed within the manifest disregard of the agreement (a/k/a “essence of the agreement”) standard. That is especially so of vacatur based on a “clear mistake of historical fact.”
What Constitutes a Clear Mistake of Historical Fact?
Looked at in isolation, a “clear mistake of historical fact” could encompass any factual mistake committed by an arbitrator, as long as the mistake was “clear” and had to do with “historical” fact. Many potential factual mistakes could fairly be considered “clear,” especially with the 20-20 hindsight which informs even the very limited review to which an arbitration award is subject.
The adjective “historical” does little to identify the kind of factual mistake that might authorize vacatur. Facts relating to the merits of disputes are, as a general rule, “historical.” The same could be said of the facts concerning the procedural history of a dispute decided in or by arbitration.
At least without more meaningful guardrails, the term “clear mistake of historical fact” would, if used as a basis for vacatur of an arbitration award, appear to violate the rule—followed by the U.S. Supreme Court and many other courts—that an arbitrator’s fact findings are not subject to review, no matter how grossly erroneous, “improvident,” “silly” or in disregard of the evidence. See 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, fact finding” 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’ disputes 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).
Limitations on what Might Constitute a Clear Mistake of Historical Fact: A Clear Historical Fact Must be Supported by Unambiguous or Undisputed Evidence
To be sure, the Court in UpHealth, relying on prior decisions, supplied a limiting principle governing what constitutes a “clear mistake of historical fact.” Acknowledging that “a factual error, no matter how gross,” will not justify vacatur, the Court said that its “deference is not unlimited, and “‘is appropriately applied to an arbitrator’s conclusions based on disputed or ambiguous evidence, as opposed to clear mistakes based on historical fact.’” Id. (citing Mollison-Turner v. Lynch Auto Grp., No. 01 6340, 2002 WL 1046704, at *3 (N.D. Ill. May 23, 2002) (other citations and quotation omitted)). Putting it another way, the Court explained that “‘where the record that was before the arbitrator demonstrates an unambiguous and undisputed mistake of fact and the record demonstrates strong reliance on that mistake by the arbitrator in making his award, it can fairly be said that the arbitrator “exceeded [his or her] powers, or so imperfectly executed them” that vacation may be proper.’” UpHealth, slip op. at 19 (quoting National Post Office, 751 F.2d at 843 (citation omitted)).
Devil in the Details: How Courts Should Decide whether the Record Demonstrates an Unambiguous and Undisputed Mistake of Fact?
At first glace, at least, the unambiguous and undisputed limiting principle appears helpful, but as we’ll see when, in the next post in this series, we analyze UpHealth’s application of the vacatur standard, a critical consideration is the degree of deference a Court accords an arbitrator’s fact finding when the Court determines whether the record demonstrates an unambiguous and undisputed mistake of fact.
The presence or absence of ambiguity, and even the extent to which a factual finding is disputed, is often in the eye of the beholder. In making the determination that the record evidences an unambiguous and undisputed mistake of fact, the Court should not assess the unambiguous and undisputed nature of the mistake through the same lens it would use to make that assessment in a case not involving the review of an arbitration award.
To ensure that the clear mistake of historical fact standard does not become a license for courts to second-guess arbitral fact finding—which the U.S. Supreme Court has wisely held to be beyond the scope of judicial review even when that fact finding is “silly” or “improvident”—a reviewing court must, we think, accord the same level of deference to the arbitrators ‘s fact finding as it does when it decides whether an award was in manifest disregard of the parties’ agreement or in manifest disregard of the law.
In applying FAA, manifest disregard outcome review standards, courts ask whether, as a result of the alleged manifest disregard of the agreement or of the law, there is not even a “barely colorable justification” for the award. Schwartz v. Merrill Lynch & Co., Inc., 665 F. 3d 444, 452 (2d Cir. 2011); T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 339 (2d Cir. 2010) (emphasis deleted; citation and quotation omitted).
Courts do not simply ask whether the award contravenes a clear and unambiguous contract provision—they ask whether the arbitrators even arguably interpreted the contract. See, e.g., 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). If the arbitrators are deemed to be arguably interpreting the contract, then there is, by definition, at least a barely colorable basis for award. See Schwartz, 665 F. 3d at 452. And that remains so even if a court interpreting the same contract in a litigation not involving arbitration would likely find the contract to be unambiguous and reach a different result than the arbitrators reached.
To ensure that the Court is giving the deference due arbitration awards, it must, we think, satisfy itself that there is no even barely colorable basis in the record to conclude that the alleged mistake of fact was based on ambiguous or disputed evidence. Put differently, 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 conclude that the finding of fact is not one of clear historical fact, and thus not one that would justify vacatur of the award under the “clear mistake of historical fact” standard.
To be Cognizable for Vacatur Purposes, Should Clear Mistakes of Historical Facts be Limited to Clear Mistakes of Conceded Historical Fact?
UpHealth’s, and prior cases’ clarification of the more limited scope of the kind of “clear mistake of historical fact” that might justify vacatur is helpful, but nevertheless leaves open questions. To say a “clear mistake of conceded historical fact” justifies vacatur if strongly relied upon by the arbitrators means that an arbitrator would violate the parties’ clear agreement—which is established by their submission to arbitration, stipulation, or predispute arbitration agreement itself—by not giving effect to the conceded fact or by finding a fact inconsistent with the conceded fact. That, in turn, would mean that the arbitrators’ clear mistake of conceded historical fact would likely constitute manifest disregard of the parties’ agreement. See Stolt-Nielsen, 559 U.S. at 671-72, 676-77. (See, e.g., October 7, 2024 post, here.)
That outcome follows from Stolt-Nielsen. There the U.S. Supreme Court 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, and, instead of proceeding to determine what default rule applied to determine whether the parties consented to class arbitration in circumstances where their agreement was concededly silent on the subject, the arbitrators ruled that extracontractual considerations of public policy required the class-arbitration opponents to submit to class arbitration. Stolt-Nielsen, 559 U.S. at 671-72, 676-77.
But the clear mistake of historical fact vacatur standard espoused by UpHealth is not necessarily limited to conceded or agreed facts. As we’ll see in the next part of this post, UpHealth did not interpret the standard to be limited to conceded historical fact (or for that matter, to a conceded nonfact).
The standard would presumably permit vacatur of an award where the parties agreed a certain fact existed; the arbitrator mistakenly based his or her ruling on a conflicting fact, or mistakenly did not give effect to the agreed fact; and the arbitrator’s award strongly relied on that mistake. But, as is evident from our discussion above, it would also permit vacatur where the facts demonstrating the clear mistake, even though not the subject of an agreement or stipulation, were nevertheless unambiguous and undisputed. And while we think that, to comport with the FAA, courts must use the deferential standards applicable to manifest disregard cases, UpHealth did not so hold.
The statement that vacatur may be based on a “conceded nonfact,” is less controversial—at least to the extent that a “conceded nonfact” refers to the absence of a fact, or the existence of a fact clearly contrary to another fact, in circumstances where the parties have actually or effectively agreed to the existence or nonexistence of that fact. Where that is so, and the award relies strongly on the fact or nonexistence of fact, then vacatur should be appropriate under the manifest disregard of the agreement standard.
What is or Should be Required to Establish a “Clear Mistake of Historical Fact” or a “Conceded Nonfact”?
What should be required to establish a clear mistake of historical fact or a conceded nonfact cognizable under Section 10(a)(4) follows from our answer—set forth above—to the first question. To show a clear mistake of historical fact, we believe the challenger must demonstrate either: (a) the mistaken fact is clearly contrary to the facts conceded or agreed to by the parties during the arbitration; or (b) the facts showing the allegedly clear mistake were unambiguous and undisputed—so much so that there was not even a barely colorable basis on which the arbitrators could have concluded that those facts were ambiguous or disputed. If the mistaken fact was one that was even arguably based on the arbitrators’ interpretation of the evidence, or on an inference that the arbitrators arguably could have drawn from that evidence, then there would be at least a barely colorable basis for the arbitrators to have concluded that the allegedly mistaken fact was supported by ambiguous or disputed evidence. Even if the record demonstrates that there was no even barely colorable basis for the arbitrators to have concluded that the alleged mistake was based on ambiguous or disputed evidence, vacatur would still not be appropriate unless the arbitrators strongly relied on the clear mistake of fact.
Essentially the same showing should be required to establish a “conceded nonfact.” Both parties must have conceded or otherwise agreed that the award was based on a nonfact or agreed that the arbitrator did not give effect to the parties agreement that a fact on which the arbitrator’s award strongly relied was not a fact. In the absence of party agreement or concession concerning the alleged nonfact, then the test to determine whether there was a clear mistake of historical fact would apply.
The next installment of this series will address question 3: 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?
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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