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The Illinois Court of Appeals held that a three-member arbitration panel exceeded their authority by awarding damages for termination of contract where there was no dispute that the party terminating the contract complied with a provision allowing termination on 30-days notice.
In First Merit Realty Services, Inc. v. Amberly Square Apartments, L.P., No. 1-05-3556, 2007 WL 1376227 (Ill. App. Ct. May 10, 2007), First Merit Realty (FMR) managed rental properties for Amberly Square Apartments and several other entities (collectively, the Owners). The management agreement contained an arbitration clause that named the American Arbitration Association (AAA) as the administrator.
When the Owners sent a letter terminating the agreement, FMR filed an arbitration claim with AAA. Following a nine-day hearing, the three-member arbitration panel issued an unreasoned award in favor of FMR.
The Owners filed a motion to vacate the award, arguing that the arbitrators exceeded their authority by awarding damages to FMR. The trial court denied the motion.
On appeal, the Owners argued that the arbitrators exceeded their authority by awarding damages to FMR because the agreement contained a provision allowing termination on 30-days notice. In opposing this argument, FMR relied heavily on Rule 43(a) of the AAA Commercial Arbitration Rules, which permits an arbitrator to “grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties . . . .”
The Court held that the arbitrators exceeded their authority by awarding damages to FMR because the Owners “clearly complied” with the provision allowing termination on 30-days notice. More specifically, the Court found that the arbitrators exceeded their authority by “clearly ignor[ing] the explicit language” of the agreement.
In support of the award, FMR argued that arbitrators reformed the written contract to conform to an oral agreement between the parties. The Court rejected this argument because FMR cited no cases supporting an arbitrator’s authority to reform a written contract but instead cited cases in which the court reformed a written contract.
The Court’s analysis of the reformation issue was somewhat scarce. First, the Court offered no rationale for a rule that courts, but not arbitrators, are authorized to reform a written contract. Second, the Court failed to consider whether a rule denying reformation authority to arbitrators would run afoul of the Federal Arbitration Act. Cf. Wisconsin Auto Title Loans, Inc. v. Jones, 696 N.W.2d 214, 220 n. 3 (Wis. Ct. App. 2005), aff'd, 714 N.W.2d 155 (Wis. 2006) (noting “[t]he argument might be made that the legislature has run afoul of the Federal Arbitration Act by exempting a certain class of cases from arbitration”).
Rule 43(a) of the AAA Commercial Arbitration Rules, the rule cited by FMR in support of the award, gives arbitrators broad authority to fashion a remedy and thus embodies the traditional notion of arbitration whereby “arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono (according to what is just and good).” Moncharsh v. Heily & Blase, 832 P.2d 899, 904 (Cal. 1992) (quoting Muldrow v. Norris, 2 Cal. 74, 77 (1852)).
The National Arbitration Forum Code of Procedure dispenses with this questionable notion of arbitration – that is very difficult to uniformly enforce – in favor of an arbitration model that is faithful to the rule of law. Rule 20(D) of the Code of Procedure implements this model by requiring arbitrators to follow the applicable substantive law. Under this model, parties can enjoy the efficiencies of arbitration but still be assured that their conduct will be gauged according to the law and not the whims of the arbitrator.
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