Seventh Circuit Reiterates the Great Deference Given to Arbitral Awards

The great deference given to arbitrators and their awards is unquestionable in the US. Under the Federal Arbitration Act, there is no appeal of an arbitral award. Parties can only seek to modify, vacate or confirm an arbitration award. The court’s scope of review of an arbitration award is narrow. Where, as in reinsurance arbitrations, arbitrators are given even greater leeway to decide cases–especially where there is an honorable engagement clause–the courts’ scope of review of an arbitration award is restricted even further.

In a recent case, the Seventh Circuit reiterated these concepts in the context of a reinsurance arbitration with multiple awards involving the billing of asbestos-related losses.

In Continental Casualty Co. v. Certain Underwriters at Lloyd’s of London, No. 20-2892 (7th Cir. Aug. 23, 2021), after an arbitration hearing and the issuance of a final arbitration award, an interim arbitration award and a post final award order, the cedent sought to confirm the final award, but to vacate the last two orders. The panel, in its final award and the subsequent orders, decided not only the specific billing methodology question that reinsurers originally had presented, but also what the consequences of its ruling were for the three insured companies it named. And the panel clarified the question that remained after the final order about the applicability of its ruling to future billings relating to asbestos products losses for those three companies. The district court confirmed everything and the cedent appealed.

In affirming, the Seventh Circuit reiterated the limited scope of review given to arbitration awards by the courts. Some of the court’s statements are helpful to understand how courts address challenges to arbitration awards. For example, the court provided this summary analysis at the outset of its opinion:

Arbitration and adjudication in court differ in a number of meaningful ways. One central distinction relates to the exceedingly narrow scope for judicial review of a final arbitral award. Whereas a decision by a court of first instance is usually subject to de novo review for questions of law, and more deferential, yet still meaningful, review for questions of fact, arbitration awards are largely immune from such scrutiny in court. The FAA spells out a narrow set of reasons that may support a court’s confirmation, vacatur, or modification of an award, see 9 U.S.C. §§ 10-11, and the Supreme Court held that these “provide exclusive regimes” for review. Hall Street Assocs., 552 U.S. at 590.

The court explained that an arbitral award must draw its essence from the contract. Accordingly, the scope of the agreement to arbitrate–whether the arbitrators were given a broad or narrow mandate–is critical to the narrow scope of review of an arbitration award. Here, the arbitration clause provided as follows:

The arbitrators shall interpret this Agreement as an honorable engagement and not as merely a legal
obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law, and they shall make their award with a view to effecting the general purpose of this Agreement in a reasonable manner rather than in accordance with a literal interpretation of the language.

In this type of arbitration clause, there are several broadening factors that allow the arbitration panel great discretion in interpreting the contract and devising a remedy. First, we have the honorable engagement provision. The court noted that the district court, along with the Second and First Circuits, held that an honorable engagement clause gives the panel wide discretion over remedies.

Second, the clause relieves the panel of all judicial formalities and allows the panel to abstain from following the strict rules of law, with an eye toward affecting the general purpose of the contract rather than based on a literal interpretation of the contract’s language. This too, demonstrates that there are no specific restrictions on the remedies that the panel could formulate.

The court found that the arbitration clause gave the panel the power to resolve the case on general principles, not just legal entitlements, “and that seems to be what they did.” The court held that the arbitration panel acted within the authority conferred by the contract. Because the court concluded that the arbitrators did not stray beyond the boundaries of their authority, the court affirmed the district court’s order confirming of all three awards and orders.