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The Southern District of New York held that an arbitration panel exceeded its powers by awarding arbitrator fees and attorney fees in contravention of the parties' agreement that each party would bear its own fees. Accordingly, the Court vacated the fee portion of the arbitration award.
In Reliastar Life Insurance Co. of New York v. EMC Nat. Life Insurance Co., No. 06 Civ. 10186, 2007 WL 466607 (S.D.N.Y. Feb. 13, 2007), Reliastar and EMC entered into coinsurance agreements that contained an arbitration clause with the following provision: "Each party shall bear the expense of its own arbitrator . . . and related outside attorneys' fees."
When the parties arbitrated a dispute over EMC's coinsurance obligations, the arbitrators awarded attorney fees and arbitrator fees to Reliastar based on their finding that EMC's conduct lacked good faith.
Reliastar sought confirmation of the award, while EMC argued that the fee award should be vacated because the arbitrators exceeded their powers by awarding attorney fees and arbitrator fees.
In ruling on EMC's motion to vacate, the Court explained that arbitrators exceed their powers whenever they resolve an issue that the parties' arbitration agreement does not authorize them to resolve. Applying that principle, the Court held that the arbitrators exceeded their powers by issuing the fee award because the parties' agreement was "clear as a bell" in providing that each party would bear its own attorney fees and arbitrator fees.
Instead of vacating the award in its entirety, the Court vacated only the fee portion of the award. If this partial vacatur is construed as modifying the award, there must be some other basis for the Court's ruling because the Federal Arbitration Act (FAA) does not permit a court to modify an award on the ground that the arbitrators exceeded their powers. See Carroll v. Ferro, 633 S.E.2d 708 (N.C. Ct. App. 2006) (explaining that an arbitrator exceeding his powers is a basis for vacating an award, not modifying it).
There may be another basis. Specifically, the fee portion of the award may be grounds for modifying the award because the FAA permits modification if "the arbitrators have awarded upon a matter not submitted to them." 9 U.S.C.A. 11(b); see also Rule 20C of the National Arbitration Forum Code of Procedure (providing that arbitrators "do not have the power to decide matters not properly submitted").
This case is analogous to Gueyffier v. Ann Summers, Ltd., 50 Cal.Rptr.3d 294 (Cal. Ct. App. 2006), review granted, 2007 WL 403639 (Cal. Jan. 17, 2007), in which the court held that an arbitrator exceeded his powers by excusing noncompliance with a notice and cure requirement in contravention of the parties' agreement that the requirement was a "material term" that could "not be modified or changed by any arbitrator."
In addition to placing specific limitations on an arbitrator's authority, parties can place a general limitation on the arbitrator's authority by agreeing that the arbitrator must follow the law. Compare Rule 20D of the National Arbitration Forum Code of Procedure (providing that "[a]n Arbitrator shall follow the applicable substantive law") with Rule 43(a) of the Commercial Arbitration Rules of the American Arbitration Association (providing that "[t]he arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties").
By requiring the arbitrator to follow the law, parties can ensure that an award is well-reasoned and legally sound or else subject to vacatur on the ground that the arbitrator exceeded their powers. This requirement is imperative because any decision maker is capable of misapplying the law.
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