When an arbitration panel issues a final award any challenge to that award faces an uphill battle.  That is because under the Federal Arbitration Act (“FAA”) a final arbitration award must be confirmed (if requested) and can only be vacated for a very narrow set of reasons.  Of the four grounds for vacatur under Section 10 of the FAA, subsection (a)(4) provides that an award may be vacated  “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”  Where the arbitration award draws its essence from the parties’ contract, courts typically will not find that the arbitrators exceeded their powers even if their award interprets the contract differently than the court.  But where the arbitrators mete out their own brand of industrial justice and read provisions out of the contract, a finding that the arbitrators have exceeded their powers is a likely outcome.

In a recent 9th Circuit non-insurance/reinsurance case, both the district court and the circuit court found that the arbitrator in a government contract-related dispute over termination exceeded his powers by issuing an award that essentially wrote out of the contracts essential terms required by the federal government for government contractors.

In Aspic Engineering & Construction Co. v. EEC Centcom Constructors LLC, No. 17-16510, 2019 U.S. App. LEXIS 2774 (9th Cir. Jan. 28, 2019), the court affirmed an order vacating an arbitration award that exceeded the arbitrator’s powers.  The underlying subcontracts had provisions that incorporated Federal Acquisition Regulation (“FAR”) clauses, which govern termination of the contracts for convenience.  After the subcontracts were terminated for convenience, a dispute arose over damages on termination and an arbitration ensued.  The arbitrator held for the subcontractor and found that the subcontracts did not reflect a true meeting of the minds between the parties based on local contracting norms compared to US government contracting.

In affirming the district court’s order vacating the arbitration award, the circuit court stated that the issue on appeal was not whether the award was reasonable, but whether the arbitrator exceeded his powers in finding that the subcontractor did not have to comply with the FAR provisions.  The court stated that an arbitrator may not “disregard contract provisions to achieve a desired result.”  While an arbitrator may interpret the contract taking into consideration the parties’ intentions shown through acts and conduct, the arbitrator may not use his or her own rationalization to substitute for the parties’ actual past procedures.

The court concluded that when the arbitrator determined that the subcontractor did not have to comply with the FAR requirements, he exceeded his authority and failed to draw the essence of the award from the contract.  Because the award disregarded specific provisions of the plain text of the contract in an effort to prevent what the arbitrator deemed to be an unfair result, the award was irrational under the FAA.  The award directly conflicted with the contracts without evidence of the parties’ past practices deviating from them in order to achieve a desired result.

Here’s a good quote from the opinion that applies to insurance and reinsurance disputes under the FAA:

We have become an arbitration nation.  An increasing number of private disputes are resolved not by the courts, but by arbitrators.  Although courts play a limited role in reviewing arbitral awards, our duty remains an important one.  When an arbitrator disregards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene.

The power of arbitrators is limited by the contract under interpretation.  Stray too far from the contract and the award may not be upheld.