In George Watts & Son v. Tiffany & Co., 248 F.3d 577 (7th Cir. 2001), then Circuit Judge (now Chief Judge) Frank H. Easterbrook of the United States Court of Appeals for the Seventh Circuit said: “What the parties may do, the arbitrator as their mutual agent may do.” 248 F.3d at 581. Chief Judge Easterbrook made this statement in the course of defining the “manifest disregard” standard of review. Applying his “agency model,” he concluded that “the ‘manifest disregard’ principle is limited to two possibilities: an arbitral order requiring the parties to violate the law. . . , and an arbitral order that does not adhere to the legal principles specified by contract, and hence unenforceable under § 10(a)(4).” Id.
Chief Judge Easterbrook’s “agency” model of arbitral authority is instructive. Just as agents derive their authority by the consent of the principal (subject to the rules of apparent and implied authority), arbitrators derive their authority from the parties via the arbitration agreement and the submission. Subject to any restrictions in the arbitration agreement, the arbitrators’ powers to resolve a dispute under a broad arbitration agreement are arguably co-extensive with those of the parties that appointed them.
But the model is not perfect. First, unlike agents, arbitrators are not subject to the control of their principals and owe them no fiduciary duties. Second, analogizing arbitrators as agents of the parties in the way Chief Judge Easterbrook does effectively empowers arbitrators not only to decide cases, but to negotiate settlements that the parties could have entered into. It therefore does not require arbitrators to even arguably interpret the contract or apply the law: As long as the arbitrators do not require the parties to violate the law, and as long as the arbitrators are at least arguably faithful to the parties’ expressed choice-of-law, if any, they can reach whatever decision they wish, whether by application of facts to legal norms or by a compromise settlement that may or may not be rooted in the parties’ agreement. That arguably does not comport with the parties’ presumed, legitimate expectations. For the arbitrator’s job is to decide cases; settlement is a matter for the parties, and should be subject to the parties’ control.
University of Chicago Law School Professor Tom Ginsburg has written an excellent white paper that argues that the deferential standard of review espoused by Watts and other courts does not necessarily make arbitration an attractive substitute for litigation. See Tom Ginsburg, John M. Olin Law & Economics Working Paper No. 502 (2d Series), The Arbitrator as Agent: Why Deferential Review Is Not Always Pro-Arbitration (Dec. 2009) (copy available here). He argues that a more searching standard of review would make the market for arbitrators more transparent, and thus more effective. He advocates using Chief Judge Easterbrook’s agency model as an analytical framework for allowing parties to choose whether they prefer a very deferential standard of review, like that prescribed in Watts; something akin to de novo review, like that available in litigation; or something in between the two. Professor Ginsburg is in the process of publishing in the University of Chicago Law Review an article based on his white paper. Continue Reading »
