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The Michigan Court of Appeals held that a trial court improperly reviewed the legal basis for an arbitration panel’s award by requiring the panel to provide lengthy reasoning for its decision, resulting in “unnecessarily protracted litigation.” Instead, the Court held that an arbitration award premised on a rational interpretation of the underlying agreement must be confirmed.
In Dietrich R. Bergmann Living Trust v. Pilot Corp., No. 260665, 2006 WL 2739325 (Mich. Ct. App. Sept. 26, 2006), the parties arbitrated a dispute over the alleged breach of a real estate lease. The arbitration panel awarded Bergmann damages for an insurance claim and ordered Pilot to undertake certain risk reduction measures.
The trial court examined the award and determined that the award must be inconsistent with the terms of the lease because Bergmann was awarded damages but no costs. The lease required Pilot to pay Bergmann’s enforcement costs if Pilot defaulted under the lease. Since the court found it “obvious” that Pilot defaulted, the trial court remanded the case to the panel to provide specific rulings on this issue.
The panel provided specific rulings and explained that it had not found a breach of the lease at all. The damages were merely reimbursement for Bergmann’s purchase of an insurance binder, which did not result from any breach. Similarly, the risk reduction measures were not necessitated by a breach of the lease.
On appeal, the Court recited the principle that arbitration awards are to be reviewed narrowly, and a court “may not hunt for errors in an arbitrator’s explanation of how it determined who is liable under the arbitrated contract.” Instead of ordering the arbitrators to expand the record, the trial court should have just reviewed the award.
The trial court found the award “unconscionable” since it differed from its interpretation of the lease. But as the Court explained, disagreement with an arbitrators’ decision is not grounds for vacating the award. Instead, the arbitrators’ award must be upheld if the interpretation underlying the award is rationally related to the agreement.
The Federal Arbitration Act and related state arbitration acts provide a properly narrow scope of review. This scope is widened if the parties require the arbitrators to follow the law and they exceed their power and fail to do so and only marginally by some jurisdictions’ adoption of the rule that an award may be vacated for manifest disregard of the law. Generally, the court oversteps those bounds when it pries behind the award in an effort to second-guess the arbitrator’s reasoning. See also McCarthy v. Citigroup Global Markets Inc., No. 06-1001, 2006 WL 2673424 (1st Cir. Sept. 19, 2006).
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