One of arbitration’s supposed virtues is that it’s fast and simple – streamlined, as many courts are fond of saying.  As a consequence, arbitral awards generally do not need to be supported by any reasoning or rationale.  Unless the parties have requested a specific form of award, an arbitrator may issue an award that does nothing more than announce a result – declare the winner and the loser. See Cat Chater LLC v. Schurtenberger,646 F.3d 836, 844 (11thCir. 2011).

Sometimes that’s just not good enough for parties, however.  So, it’s becoming more and more common for them to contract around this default, requiring arbitrators to issue more detailed awards. (A number of international institutional rules of arbitration include requirements that arbitrators issue “reasoned” awards.  Thus, parties who incorporate these rules by reference are implicitly opting for this reasoned award requirement.  See, e.g., LCIA Arbitration Rules Art. 26.2 (“The Arbitral Tribunal shall make any award in writing and, unless all parties agree in writing otherwise, shall state the reasons upon which such award is based.”); ICC Arbitration Rules Art. 32(2) (“The award shall state the reasons upon which it is based.”); SIAC Arbitration Rule 32.4 (“The Award shall be in writing and shall state the reasons upon which it is based unless the parties have agreed that no reasons are to be given.”)

In a very rough sense, awards can fall into three broad categories: simple awards that are merely announcements of the conclusion of the arbitrators without any support; reasoned awards, which are something more than “a line or two of unexplained conclusions, but something less than full findings of fact and conclusions of law on each issue raised before the panel,”Leeward Const. Co., Ltd. v. Am. Univ. of Antigua-College of Medicine, 826 F.3d 634, 640 (2d Cir. 2016); and awards that set out full findings of fact and conclusions of law.  (See also Liz’s brief discussion of Leeward here.)

The middle category can create problems, though.  Just how much reasoning is enough reasoning?  And what happens if an award isn’t sufficiently reasoned?

A recent decision, Smarter Tools, Inc. v. Chongquing Senci Import & Export Trade Co., Ltd., from the Southern District of New York, sheds some light on these questions.  The basic dispute involved a dispute over the sale of generators.  The seller claimed over $3 million was owed to it for deliveries, and the buyer counterclaimed for liability for fines it had to pay because the generators were not compliant with certain regulatory requirements and the seller failed to deliver a number of generators it promised to deliver.  Additionally, the buyer sought damages for lost profits and damage to its goodwill.

It’s worth noting that this was an international sales transaction, and thus the arbitration was governed by the AAA’s The International Centre for Dispute Resolution (ICDR) rules.  More importantly, the parties specifically required, in their arbitral agreement, that the arbitrator issue a “reasoned” award.

The final award was six pages long, most of which set out basic facts about the dispute and recognized a stipulation between the parties that the buyer owed $2.4 million, after credits, for delivered generators.  With respect to buyer’s counterclaims, the arbitrator made a credibility determination about a key witness for the buyer and then simply concluded that the buyer’s claims against the seller were denied.

The court didn’t like this.  It said that the award was not sufficiently reasoned because “it contain[ed] no rationale for rejecting [buyer’s] claims.”  While the credibility determination was a partial rationale, it was not, in the court’s view, sufficient to address all of the buyer’s counterclaims.  As a result, the court concluded that the arbitrator had exceeded his powers under FAA § 10.

This portion of the opinion is noteworthy because it suggests that a “reasoned” award requires at least some sort of explanation to support each and every necessary conclusion in the award.  The court conceded that the arbitrator’s credibility finding was some reasoning, but it failed to account for each of the counterclaims.

Perhaps the more noteworthy part of the case, however, has to do with the remedy the court granted. Rather than vacating the award, the court “remanded” it to the arbitrator for “clarification.”  The grounds for “remanded” an award are extremely limited under the FAA, but that didn’t seem to deter the court.

I think that this issue is well worth thinking about more, so look for an upcoming primer post to discuss the circumstances when the proper remedy for an unenforceable award is remand rather than vacatur.

 

While state courts have been busy articulating novel interpretations of arbitration law this summer, federal courts seem intent on getting back to basics.  In recent weeks, federal appellate courts have reminded parties who has the burden of proving an agreement to arbitrate, what should happen to the case when arbitration gets compelled, how parties waive their right to arbitration, and what is a “reasoned award.”

Burden of Proof

The Eleventh Circuit took the opportunity to clarify that when the plaintiff denies the existence of an arbitration agreement, state contract law determines who has the burden of proving the existence of the agreement.  (Distancing itself from its own 1993 precedent.)  In this case, Georgia law applied, and it provided that the defendant seeking to enforce the alleged arbitration agreement bears the burden of proving a valid arbitration agreement exists.  Because the defendant credit card issuer had no proof that the plaintiff agreed to any terms at all when she completed her on-line application, and could not prove that it sent a Welcome Kit containing the arbitration agreement at issue, or even establish which cardholder agreement it sent to plaintiff, the appellate court affirmed the district court’s denial of the motion to compel arbitration.  Furthermore, having presented “woefully inadequate” proof with its motion, defendant was not entitled to try and prove the existence of an arbitration agreement at a later trial.  Bazemore v. Jefferson Capital Systems, LLC, 2016 WL 3608961 (11th Cir. July 5, 2016).

Just Stay

In the course of a “summary order” affirming the district court’s grant of a motion to compel arbitration, the Second Circuit took time to issue a reminder to lower courts.  In that Circuit, the language of Section 3 is read quite literally.  Section 3 says when there is an applicable arbitration agreement  the court “shall on application of one of the parties stay the trial…”.  Even if all claims are referred to arbitration, courts are not to dismiss an action if any party seeks a stay instead.   To dismiss in that instance is an abuse of discretion.    Virk v. Maple-Gate Anesthesiologists, PC, 2016 WL 3583248 (2d Cir. July 1, 2016).

Don’t Waffle, Or You’ll Waive

Everyone knows you can waive your right to arbitrate, right?  But sometimes you need a good example of someone doing that, so that you can see exactly what to avoid.  Martin v. Yasuda, 2016 WL 3924381  (9th Cir. July 21, 2016) can provide that example.  Here the putative class of students at a private cosmetology school had all signed an enrollment agreement calling for arbitration.  Yet in response to the students’ Fair Labor Standards Act (FLSA) case, the school moved to dismiss for a substantive failure to state a claim.  When they were not completely successful, they filed an answer in which arbitration was one of 43 affirmative defenses.  Finally, after engaging in some discovery, the defendant moved to compel arbitration, 17 months after the start of the case.  Both the district court and the appellate court found the defendant had waived its right to arbitrate.  (Key factors: defendant had told court it was not likely to enforce arbitration agreement and had forced court to decide motion on merits.)  The court also confirmed that whether a party has waived its right to arbitrate by its litigation conduct is an issue for determination by the courts, not arbitrators.

Within Reason

In arbitration, parties can usually choose among three levels of award: simple award, reasoned award, or findings of fact and conclusions of law.  But, the lines delineating those three levels are awfully fuzzy and undefined.  Why does that matter?  Because a party who contracted for “findings of fact” might be able to vacate its award if the arbitrator issued only a “reasoned award.”  In the spirit of helpfulness, the Second Circuit defined a “reasoned award” in Leeward Construction Co. v. American Univ. of Antigua-College of Medicine, 2016 WL 3457266 (2d Cir. June 24, 2016).  They held “that a reasoned award is something more than a line or two of unexplained conclusions, but something less than full findings of fact and conclusions of law on each issue raised before the panel.  A reasoned award sets forth the basic reasoning of the arbitral panel on the central issue or issues raised before it.  It need not delve into every argument made by the parties.”

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