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Contract can permit court review of awards.

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CPR Institute for Dispute Resolution
Vol. 14, No. 3 March 1996
Contract Can Permit Court Review of Awards
By William J. Nissen
Courts generally do not review arbitration awardsfor errors of law. But the 5th
Circuit recently did just that, and reversed a panel’spunitive damages award.
Why did the court undertake this legal
review? The parties had provided for it
in their arbitration agreement.
The case stemmed from a contract
dispute between Gateway Technologies
and MCI Telecommunications.Gateway,
a subcontractor to MCI, had agreed to
design and install a telephone system on
lines that MCI would supply. Under the
contract, the partieswould negotiate disputes in good faith, and if that failed,
submit them to binding arbitration. “Errors of law shall be subject to appeal,”
the contract said.
After Gateway installed the system,
MCI claimed that it was not operating
properly, and terminated the contract.
In arbitration, Gateway argued that MCI
breached its contractual duty to negotiate in good faith. The arbitrator agreed,
WilliamJ Nissen is a partner with Sidley &
Austin in Chicago.
awarding Gateway $664,800 in attorneys’
fees, plus $2 million in punitive damages.
A federal district court for the Northern
District of Texas confirmed the award.
On appeal, the 5th Circuit noted that
court review of an arbitration award is
usually “extraordinarily narrow.” However, the parties had agreed that errors
of law would be subject to appeal.
Based on its review of the arbitrator’s
decision, the 5th Circuit affirmed the
attorney’s fee portion of the award. MCI
had argued that attorneys’ fees could not
be awarded as damages, but the court
rejected that argument. Since MCI had
not made this objection to the arbitrators, the company waived the right to
raise it on appeal, the court said.
The court reversed the punitive damages award, however. Under Virginia law,
which applied in this case, punitive damages could be awarded only for an intentional tort-not for a breach ofcontract.
In this case, the record supported a
breach of contract claim, at most.
Without an agreement permittingjudicial review of errors of law. the court’s
role would have been much more limited. A mere error of law would not have
been enough to vacate an award.
Although a number courts have held
that they may overturn an arbitration
award if it is “in manifest disregard of
the law,”they rarely do so. The standard
is very difficult to satisfy, and most arbitration awardsdo not contain arbitrators’
legal reasoning, making it virtually impossible for a court to find manifest disregard of the law.
Parties who wish to have their awards
reviewed for errors of law should expressly provide for that in their agreements. In addition, during the
arbitration proceeding they should:
build a record, just as they would in a
court proceeding; and ask arbitrators to
provide a written decision, giving reasons for their award. That way, if an a p
peal results, the court will have
everything it needs to review the arbitrators’ award for errors of law.
Gateway Technologies u. MCI Telecommunications, Nos. 931101,9410787 (5th Cir.
Sept. 27,1995).
11th Cir. Won’t Vacate Award for Partiality
By Jarril F. Kaplan
An undisclosed procedural dispute between an arbitrator and the law firm for
one party did not warrant setting aside
the arbitration award. That was the central holding of the 11th Circuit U.S.
Court of Appeals in Lijecare International
u. CD Medical, 68 F.3d 429,1995 U.S. App.
LEXIS 30390 (Nov. 7,1995).
The case involved CD Medical, a
manufacturer of medical equipment,
and Lifecare International, one of CD
Medical’s independent sales representatives. Lifecare claimed breach of contract and tortious interference by CD
Medical, and the parties submitted the
claims to arbitration before a threemember panel.
During a break in the hearings, one
of arbitrators, Craig Stein, described how
an opposing counsel of his had once refused to reschedule a summary judgJarril E: Kaplan is Of Counsel to Snell L3
Wilmerin Phoenix, and a m b e r o f thefirm’s
ADR Committee.
ment hearing so that Mr. Stein could
travel abroad. Mr. Stein called the conduct unprofessional and said it warranted disciplinary action.
By coincidence, the opposing counsel he referred to was a lawyer from
White & Case, the same firm that represented CD Medical in the arbitration.
This fact surfaced late in the game-after the arbitrators informed the parties
that they intended to rule in Lifecare’s
favor. CD Medical sought to disqualify
Mr. Stein, but the American Arbitration
Association refused.
Mr. Stein and another arbitrator then
held a hearing on damages. Without
opinion, they awarded Lifecare more
than $15 million. SubsequentlyCD Medical discovered that, before Mr. Stein became of counsel to his current firm, the
company had two contacts with it. Mr.
Stein hadn’t disclosed those contacts.
Were any of these details enough to
warrant vacating the award?No, said the
U.S. District Court for the Southern Dis
trict of Florida, confirming the award.
The 11th Circuit affirmed. In its decision, the court looked at two possible
grounds for vacating awards:under the
Federal Arbitration Act, for “evident
partiality or corruption in the arbitrators,” or when the award is arbitrary and
“Evidentimpartiality”must be direct,
definite and capable of demonstration,
rather than remote, uncertain and
speculative, the court said. In the case
at hand, Mr. Stein should have disclosed
the scheduling dispute, but any bias or
partiality was speculative.
As for the second standard, the court
said an award is arbitrary and capricious
“onlyif‘ a ground for the arbitrator’s decision cannot be inferred from the facts.
It is axiomatic that awards are presump
tively correct, arbitrators are not required to explain them and arbitrators’
silence cannot be used to vacate awards.
The court applied the “arbitrary and capricious” test and found that there was
a rational basis for the award.
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