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2nd Circuit: Arbitrators Can Upset Agreements on Payment of Expenses in the Event of Bad Faith
New York Law Journal
April 14, 2009
An arbitration agreement where both parties consent to pay the expenses of their own arbitrator and attorneys does not bar the award of such expenses as a sanction for failing to arbitrate in good faith, a split panel of the 2nd U.S. Circuit Court of Appeals ruled last week.
The 2-1 panel said a "general statement" of intent to shoulder costs in an arbitration agreement does not bar such an award. The ruling reversed a lower court judge and ordered the reinstatement of an arbitration panel's sanction.
The decision, ReliaStar Life Insurance Company of New York v. EMC National Life Company (pdf), 07-0828-cv, was made by Judge Reena Raggi and, sitting by designation, Eastern District Judge David G. Trager. Judge Rosemary Pooler dissented.
EMC National Life Company, also known as National Travelers Life Co., and ReliaStar Life Insurance Company of New York entered into two coinsurance agreements in 1997 that stated "Each party shall bear the expenses of its own arbitrator ... and related outside attorneys' fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator."
When disputes arose, the parties went to arbitration in 2006. The arbitration panel entered an interim award in August 2006, finding the coinsurance agreements remained in force and instructing National Travelers to pay ReliaStar $21 million. It also directed both sides to meet to resume their relationship under the co-insurance agreements and, without explanation, said it would award attorney's and arbitrator's fees and costs.
When the final award was issued in October 2006, the panel said the conduct of National Travelers in the arbitration was "lacking in good faith." It awarded ReliaStar attorney's and arbitrator's fees of $3.2 million and costs of $692,000 plus interest.
ReliaStar petitioned in the Southern District of New York to confirm the award, and National Travelers filed a counter-petition solely on the part of the sanction imposed by the panel.
U.S. District Judge Lewis A. Kaplan ruled for National Travelers on the fees, but otherwise confirmed the award.
At the circuit, Raggi wrote for the majority in examining a court's power to vacate an arbitral award under the Federal Arbitration Act, 9 U.S.C. §10(a)(4).
She said the circuit was considering "only whether, in light of the parties' agreement to arbitrate, the arbitrators were authorized to sanction bad faith conduct by awarding attorney's and arbitrator's fees."
The court was not examining "whether the arbitrators correctly identified bad faith conduct or whether the amount was an appropriate sanction for that conduct," she said.
Raggi and Trager found that the parties' "broad agreement to arbitrate" gave the arbitrators the inherent "equitable authority" to sanction bad-faith conduct.
The court ruled that the "arbitrator's identification of bad faith gives rise to an exception to the general applicable American Rule that each party bears its own attorneys' fees."
The panel also said it would take "a more explicit statement" than the one on fees in the agreements to "override the bad-faith exception to the American Rule" and preclude the arbitrators from awarding fees.
In dissent, Pooler said the circuit had yet to decide this issue. She said the majority disregarded the general principle that should have governed the decision: that an arbitral award should be vacated only where it "plainly contradicts an express and unambiguous term of the contract."
Here, Pooler said, "the contract between ReliaStar and EMC divested the arbitral panel of any authority to make an award of attorney's fees."
Pieter Van Tol of Lovells represented ReliaStar.
John M. Nonna of Dewey & LeBoeuf represented EMC National Life.
"The majority opinion is troubling because it seems to indicate that arbitrators can ignore the parties' agreement to restrict their authority and I believe the dissent is very well reasoned and points out the problems with the majority," said Nonna.
