Avoiding Judicial Intrusion or Fairness?

According to this week’s reading, “[t]he form of [an arbitration] award will vary depending on the parties’ agreement and applicable rules; there may or may not be a published rationale or opinion along with the [arbitration] award.  The issuance of a ‘bare’ [arbitration] award, limited to a straightforward declaration of the panel’s grant or denial of relief, has long been viewed as a bulwark against judicial intrusion into the realm of arbitration.”

While a straightforward declaration of a panel’s grant or denial of relief may provide a bulwark against judicial intrusion, it appears the lack of a published rationale or opinion along with an arbitration reward implicates fairness concerns.  After all, in courtroom proceedings, a well-reasoned, detailed opinion is a required hallmark of fairness.

Arbitrators are not infallible.  PMA Capital Ins. Co. v. Platinum Underwrites Bermuda, Ltd. provides an example of an unfair arbitration award.

PMA Capital Insurance Company (“PMA”) and Platinum Underwriters Bermuda, Ltd. (“Platinum”) entered into a reinsurance agreement that contained, among other things, a “deficit carry forward” provision.  A dispute arose between the parties concerning the validity and scope of this provision, which was submitted to arbitration.  After a full hearing on the merits, a panel of arbitrators issued a one-page award in favor of Platinum, which stated that the “deficit carry forward” provision was “eliminated” from the reinsurance agreement, and ordered PMA to pay $6 million pursuant to that provision.  The arbitrator’s award did not state any reason or explanation for its decision.

PMA moved to vacate or, in the alternative, modify the award on the grounds that the arbitrators’ decision was contrary to both the relief sought by the parties in the arbitration and the plain language of the reinsurance agreement.

The U.S. District Court for the Eastern District of Pennsylvania granted PMA’s motion to vacate on two bases.  First, the Court found that the award was not rationally derived from the reinsurance agreement, because the arbitrators “wrote out” a key provision in that agreement without any explanation.  The Court noted that the “honorable engagement clause” in the reinsurance agreement, though providing the arbitrators with broad discretion to order certain remedies they deemed appropriate, and allowing it to abstain from following the strict rules of law, did not give the arbitrators authority to re-write the contract.  Second, the Court found that the award could not be rationally derived from the parties’ submissions, because neither party asked for the arbitrators to eliminate the “deficit carry forward” provision, or argued that any money was currently due under that provision.  

Accordingly, applying the standard set forth by Section 10(a)(4) of the Federal Arbitration Act, the Court held that the award was “completely irrational” and should be vacated.

This week’s reading enumerated the following non-statutory grounds for vacatur:  “’manifest disregard of the law,’ ‘irrationality,’ ‘arbitrariness and capriciousness,’ [and] ‘public policy.’  In my opinion, if the foregoing grounds are present, vacatur is certainly warranted.  Without published rationale or opinions along with awards, it follows that the various routes to avoiding unfair arbitration awards may be strained or foreclosed.

With the preceding paragraphs in mind, it is unsurprising that this week’s reading explained while,“[t]traditionally, arbitration awards have tended to be issued without an accompanying rationale or explanation[,]” “[t]oday, commercial arbitration agreements often call for arbitrators to reveal their reasoning.”

What’s more important to you, avoiding judicial intrusion or fairness?

PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 659 F. Supp. 2d 631 (E.D. Pa. 2009) aff'd, 400 F. App'x 654 (3d Cir. 2010)