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.

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The Limits on Challenging an Arbitration Award in an Insurance Dispute

Losing parties in arbitrations often seek to vacate the arbitration award claiming that the arbitrator was guilty of misconduct or manifestly disregarded the law. Convincing a court to vacate an arbitration award is not easy and is not typically successful. Under US law, particularly the Federal Arbitration Act (“FAA”), there is no appeal from an arbitration award and the bases to vacate the award are narrow and limited. See FAA, § 10.

In a recent Summary Order, the Second Circuit Court of Appeals, reiterated these principles, although the court did grant some relief to the party seeking vacatur.

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Power to the Arbitrators

In the beginning, arbitration was unfavored and the courts intervened with frequency. Then came the Federal Arbitration Act (“FAA”), which created a federal policy in favor of arbitration. This policy applies equally in federal or state court as long as the contract involves interstate commerce.

The courts, however, were still involved in gateway issues like whether there was a valid arbitration agreement entered into by the parties (arbitrability). But as case law on arbitrability developed, the courts found that where the parties delegated the authority to decide gateway issues like arbitrability to the arbitrator, it was then up to the arbitrator, and not the court, to determine those arbitrability questions in the arbitration. Sounds counterintuitive, but there you have it in a brief summary.

That brings us to a short decision by a New York intermediate appellate court highlighting this issue in an insurance arbitration context.

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