Parties and their counsel are reminded that in arbitration under the Federal Arbitration Act, it might be even more important for them to “prove up” their cases than it is in court litigation. This is because, if an arbitrator were to make a mistake in an award, the party harmed would likely have little or no recourse, as discussed below.
AAA Commercial Rule R‑50 precludes an arbitrator from “redetermin[ing] the merits of any claim already decided.” This is the AAA’s codification of the longstanding doctrine of functus officio.
Moreover, under the Supreme Court’s current interpretation of the Federal Arbitration Act, a reviewing court is virtually powerless to overturn or modify an award, absent the very-limited circumstances described in sections 10 and 11 of that Act. See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).
In the specific context of a dispute over contract interpretation, the Court said that “convincing a court of an arbitrator's error — even his grave error — is not enough. So long as the arbitrator was arguably construing the contract … a court may not correct his mistakes. ... The potential for those mistakes is the price of agreeing to arbitration.” Oxford Health Plans LLC v. Sutter, 569 U.S. ___, 133 S. Ct. 2064, 2070 (emphasis added, citations and internal quotation marks omitted).
The Court has also noted that “[t]he absence of multilayered review [of an arbitration award] makes it more likely that errors will go uncorrected.” AT&T Mobility v. Concepcion, 563 U.S. 321, ___, 131 S. Ct. 1740, 1752 (2011) (emphasis added).
All this makes it especially important for an arbitrator to take pains to confirm that each party seeking relief has not merely claimed, but has sufficiently demonstrated, that it was entitled to such relief, including competent evidence of the specific amounts of damages, attorneys’ fees, expenses, or other monetary award that it seeks. (For this purpose, “relief” includes affirmative defenses.)
For an arbitrator to do otherwise would risk undermining confidence in the arbitration process as a speedy and low-cost way of resolving disputes. That in turn would go against Congress’s intent, in enacting the Federal Arbitration Act, of implementing “a liberal federal policy favoring arbitration agreements … to achieve streamlined proceedings and expeditious results ….” AT&T Mobility, 131 S. Ct. at 1749.
To be sure, strict rules of evidence do not apply in arbitration; under AAA Commercial Rule R‑34(a), "[c]onformity to legal rules of evidence shall not be necessary."
Even so, it is still each claimant’s job not merely to assert, but to show, that it is entitled to the specific relief it seeks. This requirement is reflected in other AAA Commercial Rules:
Rule R-32 directs that “[t]he claimant shall present evidence to support its claim” (emphasis added).
Likewise, Rule R‑31 provides in part that, even in the extreme case where a respondent fails even to show up, the claimant must still put on evidence; that rule states that “[t]he arbitrator shall require the party who is present to submit such evidence as the arbitrator may require for the making of an award” (emphasis added).
An arbitrator does have some flexibility under AAA Commercial Rule R‑47(a). That rule states that “[t]he arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties ….”
Such flexibility, though, cannot take the place of each claimant’s coming forward with evidence that furnishes sufficient support for the specific relief sought.
The arbitrator may make a partial award on partial findings
COMMENT: This section is closely modeled on Fed. R. Civ. P. 52. Note that an award on partial findings is not a summary-judgment award, as discussed in the advisory committee’s notes on the 1991 amendment to the Federal Rules.
If a party has been fully heard on an issue, and the arbitrator finds against the party on that issue, then the arbitrator may enter a partial final award against the party on any claim or defense that, under the controlling law, can be maintained or defeated only with a finding in favor of the party on that issue.
The arbitrator may, in the discretion of the arbitrator, decline to render any award on any claim or defense until the close of the evidence.
The arbitrator may orally state the reason or reasons for entering an award on the claim or defense on the record after the party has been fully heard.
The arbitrator is to state, in the written award, the reason or reasons for the award on the claim or defense, which in the discretion of the arbitrator may be amplified or refined from those stated orally on the record (if any).
In view of the essentially non-appealable nature of arbitration (as discussed above), the arbitrator may circulate a draft award to counsel for suggestions to correct any perceived misunderstandings, misstatements, or omissions.
Alternatively, the award itself may state that it will become final at a stated time unless it is withdrawn or modified.
In either case:
A party may make written suggestions for correction, with a copy to all other parties.
Upon written request by a party, the arbitrator will convene a conference call at which counsel can address specific issues.
COMMENT: This idea adapts a practice of some California judges, who issue tentative rulings in advance of motion hearings, which is also suggested in MCL 11.32 at 44.
Circulation of a draft or not-yet-final award can be useful because:
1. In many arbitrations, the right of appeal is extremely limited. Having the arbitrator circulate a "draft" award might well be the parties' only shot at correcting (what they regarded as) errors in the award. See, e.g., Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396 (2008), in which the Supreme Court ruled that an appeal of an award rendered under the Federal Arbitration Act could be appealed only on the specific grounds stated in 9 U.S.C. § 10. (Some states’ laws permit enhanced appeal if agreed by the parties.)
2. Many arbitrators are justifiably reluctant to base an award on information not obtained at the hearing. If an arbitrator wanted to do so, circulating a draft award would be one way to comply with the law in some states requiring that the arbitrator disclose the information to all parties and give them an opportunity to meet it. See, e.g., Cal. Code Civ. P. 1282.2(g).
3. Once a final award is issued, under the doctrine of functus officio, the arbitrator will likely have little or no power to alter the award. See, e.g., Bosack v. Soward, 586 F.3d 1096, 1103 (9th Cir. 2009), where the court noted that the doctrine "forbids an arbitrator to redetermine an issue which he has already decided" (internal quotation marks and citation omitted). The Eighth and Ninth Circuits have held, however, that an award not expressly stated to be final is not subject to functus officio. See id. at 1103 (citing and following Eighth Circuit decision).
Specified disputes will be decided by “baseball arbitration”
(delete if not agreed)
The parties have agreed that disputes about the amount of damages and other numerical issues are to be decided using baseball-style arbitration (also known as last- or final-offer arbitration) in accordance with this section 7.7.
COMMENT: Baseball arbitration "is designed to produce a settlement, not a verdict." Thomas Gorman, The Arbitration Process -- the Basics, in Baseball Prospectus (Jan. 31, 2005), http://goo.gl/Qh1l (BaseballProspectus.com). When parties agree to baseball arbitration, the arbitrator must choose between the competing awards proposed by the parties. That constraint forces each party, in submitting its proposed award, to think hard about how the arbitrator sees the case and whether the arbitrator will regard the other party's proposed award as “closer to the pin.” That, in turn, greatly improves the odds that the parties will reach an agreed settlement.
The parties’ agreement to baseball arbitration should be documented in writing, e.g., via an exchange of emails among counsel and the arbitrator.
Each party is to provide the arbitrator and the other party with a written proposed decision disposing of the stated issue or issues (each, a "proposed decision").
The arbitrator may specify a deadline for submitting a proposed decision (ten business days after the end of the hearing if not otherwise agreed or directed).
Each party may include, in its proposed decision, a brief explanation why the arbitrator should select that proposed decision.
In the interest of speeding up settlement discussions at the hearing, the parties are encouraged, but not required, to exchange proposed decisions while their representatives are still at the place of the hearing.
The arbitrator may advise the parties, no more than once, that in the arbitrator's view, neither proposed decision should be selected (preferably explaining why); in that case, the arbitrator will allow the parties time in which to submit revised proposed decisions.
Except as provided in § 7.7.6, the arbitrator will select, without modification, the one proposed decision that the arbitrator regards as most-closely matching the decision that the arbitrator would render.
The arbitrator will retain jurisdiction for clarification or remand
(delete if not agreed)
The arbitrator will retain jurisdiction for purposes of (1) clarifying the award and, (2) if necessary, deciding any issues remanded to the parties for determination (for example, specific remedies) as to which the parties were unable to agree on remand.
The final award may be appealed within the AAA (delete if not agreed)
INTRODUCTION: This section is adapted from the AAA Optional Appellate AAA Commercial Rules, which are available at http://goo.gl/PMWo0M (adr.org).
The parties have agreed that (1) the final award and (2) any other award that the arbitrator designates as an appealable award (each, an “underlying award”) may be appealed pursuant to the AAA’s Optional Appellate AAA Commercial Rules (“Appellate Rules”).
COMMENT: The parties’ agreement should be documented in writing, e.g., via an exchange of emails among counsel and the arbitrator.
The underlying award is to be, at a minimum, a reasoned award.
The underlying award will not be considered final until after the time for filing the notice of appeal pursuant to the Appellate Rules has expired with no party filing such a notice.
Appeals must be initiated within 30 days of receipt of the underlying award, as defined by Rule A-3 of the Appellate Rules, by filing a notice of appeal with any AAA office.
If an appeal is timely filed, the decision rendered by the appeal tribunal may be entered in any court having jurisdiction thereof.
The final award may be partially retried in court (delete if not agreed)
INTRODUCTION: Under U.S. federal law, a party dissatisfied with an arbitration award might well have only a limited right to appeal or otherwise contest the award on its merits and/or on procedural grounds, even if the parties had previously agreed otherwise. Some practitioners see this as a significant disadvantage of arbitration, even a fatal one.
To try to remedy that problem, this provision briefly delays the binding effect of an arbitration award. The intent is to give a dissatisfied party a short period of time in which to commence a non-jury court action to retry the dispute—with cost-shifting provisions to encourage the dissatisfied party to accept the award instead.
The parties have agreed that the final award will not be binding, and the relevant part or parts of the dispute may be adjudicated de novo in a court of competent jurisdiction, if all of the following conditions are met:
COMMENT: The parties’ agreement should be documented in writing, e.g., via an exchange of emails among counsel and the arbitrator.
A party to the arbitration that desires to challenge some or all of the final award (the “challenger”) must give notice of its challenge to each other party, effective no later than 10 business days after the issuance of the award, setting forth a short and plain statement of the challenge showing that the challenger is entitled to relief.
COMMENT: The 'short and plain statement' requirement is modeled on that of Rule 8 of the [U.S.] Federal Rules of Civil Procedure; see also the [U.S.] Supreme Court's holdings on this point in its Iqbal and Twombly cases. The requirement is included here in case the rules of procedure in the court in which the challenge action is filed do not require such a statement.
The challenger must duly file and serve an action (the "challenge action"), in a court of competent jurisdiction, against one or more other parties to the arbitration (each, a "challenge respondent"), no later than 30 days after the issuance of the award.
The challenge action must seek only one or both of:
relief that the challenger sought, but was not granted, from or against the challenge respondent in the arbitration; and/or
a declaratory judgment (or comparable action by the court) that a challenge respondent is not entitled to relief that was granted against the challenger in the final award.
Time is of the essence for each prerequisite set forth in § 8.2.1; for the avoidance of doubt, IF: A challenger, for any reason, does not meet all such prerequisites as to a given challenge respondent; THEN: The final award will automatically become binding between that challenger and that challenge respondent, without further action by any individual or organization.
Any “applicable limitation period,” as defined below, is to be extended until the challenge filing deadline to the extent necessary to permit filing of the challenge action.
COMMENT: It's entirely possible that a demand for arbitration was filed in time to comply with an applicable statute of limitations, but that the limitation period expired while the arbitration was pending. This clause expressly addresses that possibility by extending the limitation period from the date of the (timely) arbitration demand until the challenge filing deadline.
For this purpose, the term "applicable limitation period" refers to any limitation period whose expiration did not preclude asserting a claim for relief in arbitration, but would preclude filing the challenge action.
Against the possibility that applicable law does not permit the above extension of the applicable limitation period, the relevant challenge respondent separately and expressly agrees not to assert the expiration of the applicable limitation period as a defense to the challenge action.
To reduce the cost of the challenge action and duplication of effort, any challenger or challenge respondent may file a motion—and may represent to the court that the motion is joined by all other parties to the challenge action—requesting that the court take one or more of the following actions:
admit into evidence some or all of the record in the arbitration hearing, in the general form of a joint appendix in an appeal under the [U.S.] Federal Rules of Appellate Procedure (or as otherwise required or permitted by applicable law or rules), without regard to any objection made at the arbitration hearing or in the challenge action; and/or
deem the non-binding final award of the arbitrator to be the report of a master who was appointed, with the consent of the parties, to hold trial proceedings and recommend findings of fact, with the same effect as stated in Rule 53(f) of the [U.S.] Federal Rules of Civil Procedure.
Neither party will be entitled to discovery in or concerning the challenge action except by leave of the court for good cause as shown by clear and convincing evidence.
With respect to any given challenge respondent, IF: The final judgment in the challenge action, from which no further appeal is taken or possible, is not at least 20% more favorable to the challenger than the arbitration award; THEN: The challenger must pay or reimburse that challenge respondent for:
all costs of court taxed to that challenge respondent in the challenge action; and
all reasonable expenses, including for example reasonable fees and -expenses for attorneys and expert witnesses, incurred by that challenge respondent in both the arbitration and the challenge action (including without limitation in all appeals from the judgment in the challenge action).
COMMENT: The cost- and expense-shifting provisions of this clause are similar to those of, e.g., Fed. R. Civ. P. 68 (offers of judgment; shifts costs only, not attorneys' fees); Ariz. Rev. Stat. § 12-133(I) (the letter in parentheses at the end is I, capital "eye") (relates directly to trial de novo of arbitrations); Fla. Stat. § 44.103 (ditto); Ga. Code Ann. § 9-11-68 (offer of judgment; shifts both court costs and attorneys' fees); N.J. Court Rule 4:58 (ditto); Tex. Civ. Prac. & Rem. Code ch. 42 (ditto).
To the greatest extent not prohibited by applicable law, EACH PARTY PERMANENTLY, VOLUNTARILY, KNOWINGLY, AND IRREVOCABLY WAIVES any right it may have to trial by jury of the challenge action or any related issue.
COMMENT: This waiver of a jury trial should be enforceable even in states such as California and Georgia, which prohibit advance waivers of the jury-trial right. (A party seeking to enforce the waiver might try to argue that state-law prohibitions of jury-trial waivers were pre-empted by the Federal Arbitration Act.)
* * *
This order continues in effect unless and until amended by subsequent order.
[Arbitrator name], arbitrator
TOEDT & TOEDT — ARBITRATION SCHEDULING ORDER (ARTICLE) PAGE
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