by James M. Gaitis
According to the Heisenberg Uncertainty Principle, (1) the position and momentum of an object cannot simultaneously be precisely known and (2) even more tantalizing, the more precisely one property (whether position or momentum) can be measured, the less precisely can the other. For those that seek overall clarity as to what is going on at the particle and wave level of physics (and perhaps in their everyday lives), the Uncertainly Principle ensures ambiguity at best.
And so it is as well with American arbitration law and, most importantly, American arbitration vacatur law and the ever-endearing question regarding when arbitral awards may be vacated on the grounds of arbitrator acts “in excess of arbitral authority” or in “manifest disregard of the law.” Every time the position and momentum of the law begin finally to appear to be fixed and resolved by one or more judicial decisions, a new measurement (usually in the form of yet another judicial decision) shows how inaccurate and far off our expectations and understanding really were.
Enter into the cosmos of arbitration law and theory the recent, “Not for Publication” decision of the Federal Court of Appeals for the Third Circuit in PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 2010 WL 4409655 (3rd Cir., Nov. 8, 2010). PMA Capital serves as the most recent proof that the Arbitration Uncertainty Principle is alive and well, but only because the Third Circuit arguably succeeded in a brief, two-page decision to bring the possibility of rational measurement back into the calculus. For PMA Capital is more consistent with traditional arbitration law concepts and principles, and thereby more precise in its measurement of how arbitration law and practice should work, than the many errant and wayward decisions that have preceded it in recent years.
Some of us who, from time to time, delve into the archived depths of traditional arbitration law cannot help but wonder why it is that American courts have long forgotten the meaning and existence of the time-honored distinction between “restricted” and “unrestricted” arbitration submissions. At one time, that distinction was of paramount importance in determining whether a court could properly vacate an arbitration award for legal error or, in some instances, even for errors in the application of controlling facts. In “unrestricted submissions” the parties granted the arbitrator authority to decide the issues based on principles of equity and fairness rather than on the application of a particular law; the arbitrators in essence were free to act ex aequo et bono. In contrast, in “restricted submissions” the parties generally required that the arbitrator’s decision be based on the application of a particular jurisdictional law or principle. The lucid and thorough discussion of these principles in Justice Story’s 1814 opinion in Kleine v. Catara, 14 F. Cas. 732 (C.C.D. Mass. 1814) shows, however, that even when an arbitrator was vested with broader authority under an unrestricted submission, that authority was not absolutely unfettered. Instead, as Justice Story noted, once an arbitrator elected to apply a particular law in a case governed by an unrestricted submission, the ensuing award nonetheless was subject to vacatur when the arbitrator was “mistake[n]” as to the correct application of that law. In other words, by entering into an unrestricted submission parties did not agree that arbitral mistakes would be utterly insulated from vacatur proceedings. Some semblance of rationality must still prevail.
These same principles came to bear in PMA Capital. The arbitration provision contained within the parties’ reinsurance contract in PMA Capital in essence was an unrestricted submission. The provision directed the arbitrators to
interpret this Agreement as an honorable engagement and not merely as a legal obligation. They are relieved of all judicial informalities and may abstain from following the strict rules of law. They will make their award with a view to effecting the general purpose of the Agreement in a reasonable manner rather than in accordance with the literal interpretation of the language.
PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 659 F.Supp.2d 631, 636 (E.D.Penn 2009). The reinsurance contract, itself, contained a deficit carry forward provision that the arbitrators apparently deemed to be inequitable or unfair. And the arbitrators thus issued an award that effectively wrote the provision out of the contract.
After discussing the niceties of manifest disregard of the law and acts in excess of arbitral authority, the district court vacated the award on the ground that “the award was not rationally derived from the parties’ submissions” and the Third Circuit Court of Appeals agreed, approving the district court’s conclusion that “No court has held that such a clause gives arbitrators the right to re-write the contract they are charged with interpretation,” especially when the contract itself requires the enforcement of the very contractual provision the arbitrator chose to ignore “by ordering unrequested relief and rewriting material terms of the contract they purported to implement.” The Third Circuit thus noted: “That the honorable engagement clause permitted the arbitrators to stray from judicial informalities did not give them authority to re-invent the contract before them, or to order relief no one requested.” 2010 WL 4409655 at *2.
The determinative principle that an arbitrator’s decision must be “within the submission” is a time-honored concept found in some of the most frequently cited cases, one such case being Burchell v. Marsh, 58 U.S. (17 How.) 344, 349050 (1854), which is often wrongly cited for a quite contrary proposition. Most importantly, it was this principle that drove the United States Supreme Court to famously observe in Wilko v. Swan, that “[i]n unrestricted submission . . . the interpretations of the law by the arbitrators in contrast with manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation.” 346 U.S. 427, 436 (1953). In making this observation (which has a far more subtle meaning than is now attributed to it), the Wilko Court not only expressly relied on the Kleine and Burchell decisions mentioned above but, also, on a variety of other cases (some quite famous in their time, some more obscure), all of which stand for the proposition that when arbitrators are either obligated to apply a particular law under a restricted submission, or attempt to apply a particular law under an unrestricted submission, the resulting award is subject to vacatur when the arbitrator plainly or grossly or manifestly errors in his/her application of the law.
The modern day uncertainty that prevails with regard to the original meaning and application of these related vacatur principles—manifest disregard of the law and acts in excess of arbitral authority—has been bred out of an inexplicable ability to mis-measure the current status and momentum of the law. The history of the last fifty years of arbitration jurisprudence, and particularly that jurisprudence relating to vacatur standards, is plagued by one court misreading a prior decision only to have its decision misread by others. The plain and simple fact is that the legislative history of the Federal Arbitration Act clearly shows that the enactment of the FAA so many years ago was not meant to undermine the very principles stated in Kleine and Burchell and in other, even more noteworthy cases. And that is why the Wilko Court said just was it said and why the true meaning of the majority’s opinion was even openly verified by Justice Frankfurter in dissent. The unpublished opinion by the United States Court of Appeals in PMA Capital provides a modicum of relief from the careening momentum of post-Wilko decisions that excoriate parties who complain about arbitral decisions that vary unreasonably from the parties’ contractual expectations. Would that there be more certainty on this topic in the years to come, lest the Arbitration Uncertainty Principle forever require that all will forever remain unpredictable in the little legal universe in which we play and work.
For more of my thoughts on this topic, see James M. Gaitis, Unraveling the Mystery of Wilko v. Swan, 7 Pepperdine Dispute Res. L. J. 1-63 (2007).
James M. Gaitis is the former Director of the International Dispute Management Programme at the Centre for Energy, Petroleum & Mineral Law & Policy, University of Dundee, Scotland, where he remains a member of the Global Faculty. He is the Editor-in-Chief of the second edition of The College of Commercial Arbitrators Guide to Best Practices in Commercial Arbitration (J. Gaitis, C. von Kann, R. Wachsmuth forthcoming Fall 2010) and the author of numerous law review articles on the topic of arbitration, several of which have been repeatedly cited to the United States Supreme Court and lower state and federal appellate courts. Over the past twenty years he has served on a diverse array of arbitration rosters, including as a Fellow of the College of Commercial Arbitrators, a Fellow of the Chartered Institute of Arbitrators, and as a panelist on the AAA Complex Case Panel and the Energy/Oil & Gas Panels of the AAA and CPR. He received his BA from the University of Notre Dame and his JD from the College of Law at the University of Iowa where he was an editor of the Iowa Law Review. He is also the author of two published novels. He may be reached via email at: email@example.com.