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In upholding an arbitration award totaling nearly $5 million, the South Dakota Supreme Court held that the arbitrator did not exceed his powers by awarding damages for wrongful termination of a distribution agreement because the agreement's damages limitation was susceptible to a narrow interpretation that would permit the damages award.
In Spiska Engineering, Inc. v. SPM Thermo-Shield, Inc., No. 24229, 2007 WL 949777 (S.D. Mar. 28, 2007), Spiska and Thermo-Shield entered into a distribution agreement that provided for arbitration in accordance with the rules of the American Arbitration Association (AAA).
When Thermo-Shield terminated the distribution agreement, Spiska filed an arbitration claim with AAA. The arbitrator issued a summary award finding Thermo-Shield liable for wrongful termination and awarding Spiska $4,999,257.
Thermo-Shield filed a motion to vacate the award, arguing that the arbitrator exceeded his powers by awarding damages. Specifically, Thermo-Shield argued that the distribution agreement precluded the damages award because paragraph 10 of the agreement provided that neither party would be liable for damages "[o]n termination" of the agreement.
The trial court denied the motion to vacate, reasoning that the damages limitation in paragraph 10 was inapplicable where the termination was wrongful. The trial court's narrow interpretation of paragraph 10 was premised on paragraph 8 of the distribution agreement, which provided that either party could terminate the agreement "upon a material breach by the other party."
Since an arbitrator cannot disregard the plain language of an agreement, the question on appeal was whether the terms of the distribution agreement were susceptible to the arbitrator's interpretation. More precisely, the interpretation at issue was that articulated by the trial court because the arbitrator did not issue a reasoned award.
While suggesting that the arbitrator's presumptive interpretation of paragraph 10 was "a misinterpretation," the Court nevertheless upheld the award because it could not say "with positive assurance" that paragraph 10 was not susceptible to the narrow interpretation articulated by the trial court.
The Court relied the notion of "contextual meaning" in upholding the award. Specifically, the Court explained that an interpretation of the agreement whereby "the termination referenced in paragraph ten referred to the termination allowed in paragraph eight is not an interpretation that so directly contradicts the plain meaning of the parties' agreement that it effectively rewrites it."
As the Court noted, under the AAA Commercial Arbitration Rules, "arbitrators are under no obligation to set out the reasons for their awards unless a reasoned award is agreed to between the parties before selection of an arbitrator, or after selection when the arbitrator consents to give a reasoned award." See Rule 42 of the AAA Commercial Arbitration Rules.
The National Arbitration Forum Code of Procedure takes a slightly different approach. Under Rule 37H of the FORUM Code of Procedure, parties may agree to a reasoned award, and either party may request a reasoned award within ten days of arbitrator selection.
These two approaches differ in two important respects. First, the FORUM Code of Procedure allows either party to request a reasoned award whereas the AAA rules leave it entirely to the arbitrator's discretion in the absence of a party agreement. Second, under the FORUM Code of Procedure, the selection of an arbitrator does not truncate the parties' control over the form of the award.
The provision in the FORUM Code of Procedure allowing either party to request a reasoned award functions as a safeguard of arbitrator neutrality. See, e.g., Marsh v. First USA Bank, N.A., 103 F.Supp.2d 909, 925 (N.D. Tex. 2000) (noting that the FORUM Code of Procedure safeguards fairness by allowing parties to "request a written opinion of the arbitrator's ruling"). The provision allows parties to request a reasoned award after arbitrator selection because parties cannot gauge any concerns over arbitrator neutrality until they know the identity of the arbitrator.
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