Introduction: Remedial Powers of Arbitrators under the Federal Arbitration Act
The third issue the Armstrong Panel addressed was: “What jurisdiction, if any, does this Tribunal have to award sanctions?” This was a question of the Panel’s remedial authority — assuming the Panel had the authority to decide the dispute, what remedies were the arbitrators authorized to award?
The Panel determined that Armstrong had committed fraud and testified falsely, and had by those unlawful means procured the Settlement Agreement and Consent Award. All else equal, had the Armstrong Parties testified truthfully, and been prepared to do so from the outset of the dispute, then presumably the Armstrong Parties: (a) would not have claimed the $7.5 million in prize money; or (b) would have submitted to arbitration the question whether the Armstrong Parties’ use of performance enhancing drugs barred them from recovering the prize money under their contracts with the SCA Parties. If the Armstrong Parties chose option (a) above, then the SCA Parties would not have incurred any time or money costs dealing with the Armstrong Parties’ Claims. Had the Armstrong Parties chosen option (b), then the SCA Parties’ time and money costs would likely have been pretty modest, and in any event, nowhere near what they turned out to be.
Given that the Panel identified a breach of duty that caused harm, the next question from the standpoint of the merits was: what (if anything) should be the remedy? The SCA parties apparently argued that the Panel should grant a sanctions remedy, which the Panel apparently viewed as serving both deterrent and compensatory purposes.
Where, as here, an arbitration panel that has the authority to resolve a dispute is considering what relief (if any) it should award to the prevailing party, that raises a remedial authority question: what remedies have the parties authorized the Panel to award? Under a broad arbitration agreement, remedial authority questions are typically not controversial, for parties ordinarily tend to seek standard remedies: damages, declaratory relief or traditional forms of equitable relief (such as rescission or reformation). One party asks for the relief in its submission in the arbitrators and the other party doesn’t object because there is no reason to do so.
But where other non-standard forms of relief are requested—and particularly where the parties’ contract express a clear intent to limit remedial powers—then remedial authority can become more controversial.
The Armstrong Arbitration involved a claim for sanctions arising in unusual circumstances. While the parties’ contracts did not purport to limit the Panel’s remedial authority, the Armstrong Parties challenged the Panel’s authority to award sanctions and the Panel addressed that challenge in a reasoned award.
This segment of our Armstrong-Award Anatomy series focuses exclusively on whether the Panel had the authority to make an award of sanctions. It reviews the general rules concerning arbitrator remedial authority, considers the standard of review that a court reviewing the award will presumably apply if the Armstrong Parties contest the Panel’s remedial authority in court, discusses the Panel’s analysis and conclusions concerning sanctions and explains why we think it unlikely that a court will find that the Panel exceeded its authority by making an award of sanctions.
Our next Armstrong Arbitration Award Anatomy segment will address the related—but analytically distinct—issue whether the Panel had the authority to make a $10,000,000.00 sanctions award in the circumstances.
General Rules Governing Arbitrator Remedial Authority
As a general rule, where the parties have agreed to require each other to submit to arbitration a broad range of a disputes that might arise out of or relate to their legal relationship, the law presumes they intended to confer equally broad remedial powers on the arbitrators. See, e.g., ReliaStar Life Ins. Co. v. EMC Nat’l Life Co., 564 F.3d 81, 86-87 (2d Cir. 2009) (citing cases). Sometimes, arbitration-provider rules—such as Rule 47 of the American Arbitration Association Commercial Rules (formerly Rule 43)—expressly confer broad remedial authority on arbitrators. Rule 47, for example, states:
R-47. Scope of Award
(a) The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.
. . . .
(c) In the final award, the arbitrator shall assess the fees, expenses, and compensation provided in Sections R-53, R-54, and R-55. The arbitrator may apportion such fees, expenses, and compensation among the parties in such amounts as the arbitrator determines is appropriate.
(d) The award of the arbitrator(s) may include:
i. interest at such rate and from such date as the arbitrator(s) may deem appropriate; and
ii. an award of attorneys’ fees if all parties have requested such an award or it is authorized by law or their arbitration agreement.
In addition, Rule 58 expressly authorizes arbitrators to impose sanctions:
R-58. Sanctions
(a) The arbitrator may, upon a party’s request, order appropriate sanctions where a party fails to comply with its obligations under these rules or with an order of the arbitrator. In the event that the arbitrator enters a sanction that limits any party’s participation in the arbitration or results in an adverse determination of an issue or issues, the arbitrator shall explain that order in writing and shall require the submission of evidence and legal argument prior to making of an award. The arbitrator may not enter a default award as a sanction.
(b) The arbitrator must provide a party that is subject to a sanction request with the opportunity to respond prior to making any determination regarding the sanctions application.
The Armstrong Arbitrators’ Remedial Authority
The parties’ contracts in the Armstrong arbitration neither authorized nor prohibited sanctions, nor did they incorporate by reference any arbitration rules Even without express provisions conferring upon them remedial powers, arbitrators acting under the authority of a broad arbitration agreement are generally considered authorized to have remedial powers at least coextensive with that of a similarly situated court and may even be authorized to grant remedies that courts would not grant. See, e.g., Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255, 262 (2d Cir. 2003); Sperry Int’l Trade, Inc. v. Government of Israel, 689 F.2d 301, 306 (1982) (New York arbitration law). For example, federal courts do not have the inherent (i.e., non-statutory) authority to require a litigant to post security to secure a party’s claim, but arbitrators can do so, provided there is some arguable contractual basis for a security award. Compare Grupo Mexicano de Dessarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 333 (1999) (“Because such a remedy was historically unavailable from a court of equity, we hold that the District Court had no authority to issue a preliminary injunction preventing petitioners from disposing of their assets pending adjudication of respondents’ contract claim for money damages.”) with Mutual Marine Office, 344 F.3d at 261-62 (arbitration panel had authority to order pre-award security where reinsurance contracts contemplated the posting of letters of credit for securing loss reserves).
The rule that broad remedial power is implied by a broad arbitration agreement makes practical sense. If parties agree to submit to final and binding arbitration all disputes arising out of or relating to their agreement, but say nothing about what remedies the arbitrators may or may not award, then it is reasonable to assume that the parties intended to empower the arbitrators to have at least the powers that a court might have to award remedies, provided the award does not affect the rights of non-parties to the contract. It seems unreasonable to assume that the parties intended to delegate to arbitrators authority to resolve in final and binding fashion a broad range of disputes, but only in certain way—e.g., by awarding or refusing to award damages. Were that the parties’ intention, then presumably they would have expressed it clearly in their agreement.
Arbitrators’ Remedial Authority: Standard of Judicial Review
The U.S. Court of Appeals for the Second Circuit recently explained in the recent Benihana case (discussed here) that the standard of review for determining whether a contract authorizes or prohibits sanctions is the highly deferential Oxford/Stolt-Nielsen standard under which an arbitrator’s authority to grant a particular remedy is presumptively valid unless the challenging party demonstrates that the arbitrator’s decision to award the remedy was not even arguably based on an interpretation of the parties’ agreement. See Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068-70 (2013).
Under that standard, even if it might otherwise appear to a court that there was no basis in the contract for a particular remedy, and even if that conclusion was correct as a matter of law, the arbitrators “may well explain their reasoning in a manner that will persuade the court that [the remedy] is in fact permissible.” Benihana, Inc. v. Benihana of Tokyo, LLC, ___ F.3d ___, No. 14-841, slip op. at 35-36 (2d Cir. April 28, 2015). In other words, the question is not whether the arbitrators correctly interpreted the contract, but whether they interpreted it at all. See Oxford, 131 S. Ct. at 2070-71.
Did the Armstrong Arbitrators at Least Arguably have the Authority to Make the $10,000,000.00 Sanctions Award against Lance Armstrong?
A court faithful to the Federal Arbitration Act would be hard-pressed to find that the Armstrong Panel exceeded its powers by awarding sanctions against the Armstrong Parties. The Panel interpreted the contract and applicable law to authorize them, drawing factual, contractual and legal support from a number of sources.
The Majority acknowledged that “the authority of arbitrators to award monetary sanctions is not universally accepted[,]” and that “[t]he Dissent eloquently explains why Senator Lyon is not alone in asserting that arbitrators lack such authority[.]” (Award at 13.) But, explained the Panel, “Tribunals have assessed or transferred the allocation of arbitration fees, administrative fees and costs upon arbitral miscreants, assessed attorney’s fees upon disruptive parties and even threatened to or actually drawn ‘adverse inferences’ against parties refusing to produce evidence thereby effectively penalizing and sanctioning parties in arbitrations before them.” (Id.)
The Panel said it was “satisfied” that it had not only the “jurisdiction and authority,” but “the duty to award sanctions against Claimants for the egregious breach of their contractual obligations to SCA, their obligations to this Tribunal and their calculated affront to the integrity of the arbitration process which Claimants themselves initiated.” (Award at 13-14.)
The Panel explained that it “believes that the conduct at issue is subject to the power of this Panel to remedy or punish because it was part of the arbitral proceedings, occurred in the presence of the Panel and was directly related to the issues submitted to the Panel for determination.” Citing Reliastar, the Panel said there was “ample authority that arbitrators have inherent power to remedy such conduct.” (Award at 14.)
While the Panel might have left it at that, it concluded that “we must analyze this issue [concerning their remedial authority to award sanctions] and explain our conclusions.” (Award at 14.) The Panel cited three reasons why it believed a fulsome discussion and analysis was necessary:
- While “[t]he jurisdiction of governmental adjudicatory bodies to manage and control the process and the parties before them is unquestioned[,]” “Arbitration Tribunals are different” because “they draw their authority and jurisdiction from the contractual agreements of the parties.” (Award at 14.)
- Texas and federal case law “offers little guidance concerning the basis for any jurisdiction or authority of arbitration tribunals to entertain or award sanctions[,]” and “[s]uch authority as exists is often based upon the rules of an administering agency [e.g.,, an arbitration provider], however obtuse and unclear.” (Award at 14.)
- The Panel did “not have the luxury of resort” to such authority because the “arbitration is purely ad hoc or ‘non-administered[,]’ and thus not subject to provider or other agency rules.” (Award at 14.)
Implied Covenant of Cooperation
The Armstrong Parties’ principal objection to the Panel’s power to award sanctions was that “Texas does not accept or follow the contract doctrine of ‘good faith and fair dealing'” (Award at 14-15 (quoting English v. Fischer, 660 S.W.2d 521, 522 (Tex. 1983)).) The Panel acknowledged the accuracy of that general statement but explained that “Texas, and other jurisdictions, recognize and accept the more limited subsidiary concept of an implied covenant that parties must not ‘frustrate or impede’ any other parties’ performance of their contract.” (Award at 15.) And even though implied covenants are “disfavored in Texas law”,” they are “appropriate where necessary to effectuate the parties’ intentions where the obligation is ‘so clearly within the contemplation of the parties that they deemed it unnecessary to express it.'” (Award at 15 (quoting Bank One, Tex., N.A. v. Stewart, 967 S.W.2d 419, 434 (Tex. App. 14th Dist. 1998) (pet. denied)(quotation omitted)). Thus, the Panel “conclude[d] that the obligations of parties to be truthful, to not commit perjury and to not intentionally submit fraudulent evidence in arbitrations of their disputes arising from their agreements are precisely such implied covenants and obligations.” (Award at 15.)
The “parties’ duty to cooperate,” said the Panel, “is implied in every contract in which cooperation is necessary for performance of the contract.” (Award at 15 (emphasis added).) This duty, “where applicable,” requires parties “not [to] hinder, prevent, or interfere with another party’s ability to perform its duties under the contract. ” ((Award at 15 (citations omitted)). The Panel also explained that the U.S. Court of Appeals for the Fifth Circuit and the Dallas Court of Appeals so interpret Texas law. (See Award at 15 (citations and quotations omitted)).
Did the Parties’ Agreements Feature an Implied Covenant of Cooperation?
The Armstrong Panel found support for an implied covenant of cooperation in Texas common law, which, said the Panel, has “recognized” “for over 160 years[]” that “[b]reach of a party’s contractual duty to honor an agreement for use of a dispute resolution process or arbitration. . . impose[s] liability and damages” on the breaching party. (Award at 16 (citing Owens v. Withee, 3 Tex. 161 (1848); Brown v. Eubank, 443 S.W.2d 386 (Tex. Civ. App. — Dallas 1969, no writ); and Standard Fire Ins. Co. v. Fraiman, 588 S.W.2d 68 (Tex. App. 14th Dist. 1979)).)
The duty of cooperation the Panel identified as inherent in dispute resolution contracts under Texas law provided one basis for the Panel’s award of sanctions by supporting its findings that the Armstrong Parties’ “actions improperly prevented SCA from performing its duties under the parties’ contracts and the agreements to arbitrate[,]” and “”further intentionally breached their obligations to arbitrate their disputes with SCA.” (Award at 16.)
Multilateral, Interdependent and Interrelated Implied Covenants of Cooperation
But the Panel also found “that [the Armstrong Parties]. . . intentionally prevented this arbitration Tribunal from properly discharging the contractual duties it was obligated to perform for the benefit of all of the parties by knowingly presenting perjury and fraudulent evidence.” (Award at 17.) To support that finding, the Panel had to interpret the parties’ contracts and applicable law to determine whether the duty ran solely between the parties, or also to the panel because the panel was expected to discharge fairly, efficiently and properly the authority the parties mutually delegated or promised to delegate to them, and if one party frustrated or interfered with the performance the Panel owed the parties, then that would likely impair the other parties’ contractual right to the Panel’s performance of its obligations.
The Panel handled this potentially complex issue very deftly, using an analytic framework similar to the one we generally use to address similar or related issues. The Panel explained that a “thorough analysis of arbitration reveals the reality is that every contract with an arbitration clause is a primary contract containing within it multiple subsidiary agreements imposing additional sets of obligations upon the parties and arbitrator(s).” (Award at 16.) The first set, explained the Panel, is “the agreement of the parties to arbitrate with their counterparty[,]” the breach of which “can lead to damages[]” under the Texas common-law rule discussed above. (See Award at 16.)
The second set consists of “agreements between the parties and the arbitrator(s) to participate in any arbitration according to any agreed rules, to comply with validly issued awards and to pay the arbitrators for their services.” (Award at 16-17.) “Those obligations of the parties are[,]” said the Panel, “reciprocated by the arbitrators’ agreeing to dedicate sufficient time and judgment to resolving the parties’ dispute according to their agreement consistent with the designated law.” (Award at 17.) The Armstrong Parties’ perjury and fraud “prevented the Tribunal from performing those obligations which were owed to all of the parties participating in the arbitration.” (Award at 17; emphasis added)
The upshot of all this is that the Panel unquestionably interpreted the contract and the law when it determined that it had the authority to award sanctions. While the Panel need not have reached the correct conclusion about its sanctions power, its analysis and conclusion accords with the Federal Arbitration Act, making it all the less likely that any court will ever second-guess it.
The next segment of our Armstrong-Award Anatomy will address Panel issue No. 4: “If sanctions are appropriate, what sanctions should this Arbitration Tribunal award?”
Photo Acknowledgements:
All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to images 1 and 3 through 8 (counting from top to bottom). Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.
Tags: AAA, AAA Commercial Rule 47, AAA Commercial Rule 58, AAA Commercial Rules, American Arbitration Association, Arbitral Power, Arbitrator Remedial Powers, Armstrong Arbitration Award, Banco de Seguros del Estado v. Mutual Marine Office, Benihana Inc. v. Benihana of Tokyo, Exceeding Authority, Grupo Mexicano, Implied Covenant of Cooperation, Implied Covenant of Good Faith and Fair Dealing, Lance Armstrong, Limits on Arbitrator Power, Oxford Health Plans LLC v. Sutter, ReliaStar Life Ins. Co. v. EMC National Life Co., Relief, Remedial Authority of Arbitrators, Remedies, Sanctions, Sperry Int'l Trade, Texas Law
