Pick up any textbook or treatise on arbitration law, and you’ll find the same thing in the chapter on enforcing arbitral awards: courts cannot conduct a merits review of awards. Courts, in other words, do not second guess the conclusions of the arbitrators about law or facts.
Or at least they’re not supposed to do so.
Still, losing parties often try to convince a reviewing court that the arbitrator “exceeded her powers.” These sorts of excess of authority arguments have become quite common.
That’s exactly the sort of argument at issue in a hot-off-the-presses Tenth Circuit case, MEMC II, LLC v. Cannon Storage Sys., Inc., No. 18-6079, 2019 WL 549633 (10th Cir. Feb. 12, 2019).
In the case, the parties entered into a standard form construction contract, containing an arbitration clause. Cannon was supposed to build a commercial storage facility for MEMC. A dispute arose because Cannon decided that it needed to make some changes to the structural plans. When MEMC discovered this, it refused to continue to pay Cannon. Cannon then initiated arbitration to recover the payments.
MEMC defended by saying that Cannon had committed a material breach. It maintained that, under applicable Texas law, Cannon’s unilateral decision to depart from the specifications constituted a per se material breach discharging it from its duty to pay under the contract. The arbitrator listened to the arguments at a three-day hearing, reviewed over 100 exhibits, and concluded that MEMC had breached by failing to pay Cannon. She also found that Cannon had breached by not getting approval for several of the changes it made, but that the cost of remediating Cannon’s breaches had not be sufficiently proven by MEMC. Accordingly, she awarded $143,608 in damages to Cannon and nothing to MEMC.
MEMC challenged the award on the basis of excess of authority. The argument was essentially that “the arbitrator was required to apply the law and by awarding damages when the law would not allow for recovery of damages, the arbitrator exceeded her authority.”
The Tenth Circuit took the opportunity to give us all an Arbitration 101 lesson. Citing another Tenth Circuit case from last year – which indicates that parties may not be learning the lesson – the Court said, “[E]rrors in either the arbitrator’s factual findings or his interpretation of the law (unless that interpretation shows a manifest disregard of controlling law) do not justify review or reversal on the merits of the controversy.” (quoting Dish Network L.L.C. v. Ray, 900 F.3d 1240, 1243 (10th Cir. 2018)).
[F]ederal courts strongly defer to an arbitrator’s decisions. Because of this, “a party seeking relief under § 10(a)(4) bears a heavy burden.” [Oxford Health Plans LLC, 569 U.S. 564, 564 (2013) (quotations omitted).] “[C]onvincing a court of an arbitrator’s error—even his grave error—is not enough” to warrant vacatur under § 10(a)(4). Id. at 572. “Because the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s view of its (de)merits.” [citations omitted]