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Third Circuit holds arbitrator exceeded his powers despite "honourable engagement" provision
Practical Law UK Legal Update Case Report 0-504-0982 (Approx. 3 pages)
Third Circuit holds arbitrator exceeded his powers despite "honourable engagement" provision
by Practical Law
| Published on 01 Dec 2010 • USA (National/Federal) |
Abby Cohen Smutny (Partner) and Lee A. Steven (Counsel), Lauren Mandell (Associate), Leah Witters (Associate), White & Case LLP
The Third Circuit has ruled that an honourable engagement clause does not allow an arbitrator to read language out of a commercial contract under the Federal Arbitration Act (FAA).
The Third Circuit has affirmed a district court's order vacating an arbitral award because the arbitrators exceeded their power under the FAA when they granted relief not sought by either party and eliminated material terms from the contract.
The parties, PMA Capital and Platinum Underwriters, entered into a contract that required Platinum Underwriters to indemnify PMA for its insurance policy obligations. The contract had a "deficit carry forward provision" requiring PMA to reimburse Platinum Underwriters for losses carried over from the previous year. The contract also had an "honourable engagement" provision that required arbitrators to "make their award with a view to effecting the general purpose of the Agreement in a reasonable manner rather than in accordance with the literal interpretation of the language."
In the arbitration, Platinum Underwriters asked the arbitrators to determine how to calculate the carry forward amount and to require PMA to reimburse Platinum Underwriters for its losses.
In a one page award, the arbitrators ordered PMA Capital to pay Platinum Underwriters US$6,000,000 within 30 days and removed "deficit carry forward" from the contract. The arbitrators denied all other requests for relief.
PMA Capital successfully petitioned the district court to vacate the award. In the appeal that followed, the Third Circuit affirmed. It explained that the honourable engagement provision only gave the arbitrators the power to look beyond the literal language in the contract, not to wholly delete contract provisions. By so doing, the arbitrators exceeded their powers under the FAA. Arbitrators may not grant relief not requested by the parties, rewrite material terms of the contract, or remove material terms from the contract.
This case demonstrates that even when parties grant arbitrators broad powers to interpret the contract, the arbitrators' powers are limited by the scope of their authority and the FAA. If parties choose to use honourable engagement provisions, they can assume that the arbitrators will interpret their contract in a common-sense manner, but will not be able to make material changes to their contracts or grant relief that parties did not request.