Do Arbitrators Exceed their Powers by Imposing Liability on Corporate Officers who were not Parties to the Arbitration Agreement?—Part II

Arbitrators Exceed their Authority Post

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Do Arbitrators Exceed their Powers By Making an Award Against a Nonsignatory Officer who Participates in the Arbitration in His Individual Capacity Without Objection?

Part I discussed how under circumstances like those in our hypothetical arbitrators exceed their powers when they decide disputes  between a party to a pre-dispute arbitration agreement and a non-party to  that agreement. In our hypothetical:

  1. Party A and Corporate Party B were parties to the arbitration agreement;
  2. Party A demanded arbitration against Party B only;
  3. Party A did not demand arbitration against the CEO, request that the CEO voluntarily join the arbitration or otherwise argue that the CEO should be joined or treated as a party;
  4. The CEO appeared at the arbitration only in his capacities as a witness and party representative of Party B, never purported to appear in his own behalf and did not request the arbitrator to award him any relief in his individual capacity (i.e., on behalf of himself).

But suppose instead that: (a) Party A demands arbitration not only against B, but also against the CEO, and B; (b) the CEO does not  object to arbitration on the ground he was not a party to  the pre-dispute arbitration agreement; (c) B and the CEO assert only that “the claims against [the CEO] should be dismissed because corporate officers are not individually liable for their company’s breach of contract[;]” and (d) the CEO participated in the arbitration and asked the arbitrator to award him relief in his individual capacity (that is, in his own right, not simply as an agent for the corporation). Judgment for whom?

In Stone v. Theatrical Investment Corp., No. 14 Civ. 6494 (PAE), slip op. at 1, 8-9 (S.D.N.Y. Dec. 2, 2014), U.S. District Judge Paul A. Engelmayer, who sits on the United States District Court for the Southern District of New York,  ruled that A prevails. According to the opinion, the corporate officer “waived his right to object to the arbitrator’s jurisdiction over him” by: (a) not objecting during the arbitration on the ground he was not bound by the arbitration agreement; and (b) by requesting relief in his individual capacity. See slip op. at 8-9.

Under the Federal Arbitration Act a person not a party to a pre-dispute arbitration agreement can be bound by it where, in response to a demand for arbitration, or a request to arbitrate, the person participates in the arbitration without objection.  See, e..g., Opals on Ice Lingerie v. Body Lines, Inc., 320 F.3d 362, 368-69 (2d Cir. 2003); Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100, 1105 (2d Cir. 1991).  While “a party is bound by an arbitral award only where it has agreed to arbitrate,” such “an agreement may be implied from the party’s  conduct.” Gvozdenovic, 993 F.2d at 1105.

In both of  our hypothetical scenarios, and in Stone, the  pre-dispute arbitration agreement was between Party A and Party B. The CEO was not a party to that agreement.

In our first hypothetical, Party A never demanded or requested arbitration against the CEO or otherwise argued that the CEO should be bound by the result of the arbitration.  The CEO’s participation in the arbitration was not as a party but as a witness and a party representative.

In the second, and in Stone, A demanded that the CEO arbitrate the dispute. The CEO then participated in the arbitration without objecting to the arbitrator’s authority to decide the dispute A demanded the CEO to submit to arbitration. That in and of itself is typically enough for a court to hold that a party to an arbitration agreed to arbitrate the dispute. See, e.g., Opals, 320 F.3d at 368-69.  But not only did A demand arbitration against the CEO, but the CEO requested the panel to order it relief in its individual capacity.

In the first hypothetical the arbitrator exceeded her authority because the CEO did not expressly or implicitly consent to arbitration. But in Stone (and in our second hypothetical) there was no dispute that the CEO, by his conduct, at least implicitly consented to arbitrate disputes with A:  A’s demand that the CEO arbitrate the veil-piercing claim was an offer to arbitrate, and the CEO accepted that offer by participating in the arbitration as a party without reserving its rights, and by affirmatively requesting relief in his individual capacity.

Next time, we’ll look at how the CEO might have reserved his right to litigate in court A’s veil-piercing claim, assuming that was what he would have preferred.



Do Arbitrators Exceed their Powers by Imposing Liability on Corporate Officers who were not Parties to the Arbitration Agreement?

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Arbitrators Exceed their Powers when they Violate Arbitration’s First Principle

What the U.S. Supreme Court sometimes calls the “first principle” of arbitration law is that “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986). Ordinarily, one of  the strongest arguments against confirmation of an arbitration award under the  Federal Arbitration Act— and in support of vacating it—is that a party did not submit the dispute to arbitration or agree to submit it to arbitration. Under those circumstances, arbitrators exceed their powers under Section 10(a)(4) of the Federal Arbitration Act. See 9 U.S.C. § 10(a)(4) (2013) (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.”); Porzig v. Dresdner, Kleinwort, Benson, North Am., LLC, 497 F. 3d 133, 140-41 (2d Cir. 2007).

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Do Arbitrators Exceed their Powers by Deciding a Dispute Between Parties that did not Agree to Arbitrate with Each Other?

Given arbitration law’s first principle, wouldn’t arbitrators exceed their powers by purporting to hold a corporate officer liable for a corporation’s debts where the officer was not a party to the arbitration agreement? Surprising as it might seem, the answer is “it depends.”

Suppose party A and corporate party B enter into a contract under which B would pay A $X dollars for services A would provide B. The contract contains an arbitration agreement under which A and B agree to arbitrate all disputes between them arising out of or relating to their contract. B’s CEO is not a party to the agreement to arbitrate or to the agreement itself.

All is well for a period, that is, until B breaches the contract by not paying A all of its fees. The evidence shows that B’s CEO—who was not a party to the arbitration, but appeared as a witness and client representative for B—commingled corporate with personal funds and arguably engaged in activities that might  justify “piercing” the so-called “corporate veil,” that is provide legal grounds for holdingf a corporate officer personally liable for the corporation’s debts. The evidence also shows that B is quite likely insolvent.

A does not attempt to make the CEO a party to the arbitration or ask the arbitrator to impose liability on the CEO for B’s debts. The arbitrator—citing the “broad arbitration agreement,” the CEO’s presence at the arbitration hearings and the “strong federal policy in favor of arbitration”—decides to cut to the chase by making an award that declares that B breached the contract and that B and the CEO are jointly and severally liable for the full amount of the balance due under the contract between A and B.

A promptly makes an application to confirm the award, naming B and the CEO as parties. B and the CEO oppose confirmation of the award on the ground that the CEO did not agree to arbitrate, or to submit to arbitration, any claims A might have against the CEO, and, in any event, A never even attempted to submit to arbitration any claims against the CEO. Judgment for whom?

Well, under these facts, a court faithfully applying the consent not coercion principle of arbitration law would not confirm such an award. The officer never agreed to arbitrate and never submitted the dispute over his alleged personal liability to the arbitrator. Moreover, A never attempted to submit to arbitration a dispute it might have with B’s CEO. Under these circumstances, the arbitrator simply had no authority to make the CEO personally liable for its debts. See, e.g., Porzig, 497 F.3d at 140-41; Orion Shipping. & Trading Co. v. Eastern States Petroleum Corp., 312 F. 2d 299, 300-01 (2d Cir. 1963) (Kaufman, J.).

But, as we’ll see, our hypothetical is a straightforward one. If we change the facts just a bit, then the result would likely be very different, a point recently well-illustrated by a case decided by a judge of the U.S. District Court for the Southern District of New York.

More on that in our next post.  .  .  .

Is a Motion, Petition or Action to Vacate an Arbitration Award under Section 10 of the Federal Arbitration Act Basically an Appeal of the Arbitrator’s Award?    

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When a party is on the wrong end of an arbitration award that he, she or it thinks is fundamentally unfair, tainted by impropriety, or disconnected from the agreement the arbitrator was supposed to interpret and apply, the first question that comes to mind is whether there might be some form of recourse available. In court, the usual avenue of relief from an adverse judgment or order is an appeal.

But under the Federal Arbitration Act (a/k/a the “FAA”) one cannot—in any meaningful sense of the word—“appeal” an arbitration award to a court. In court litigation an appeal involves judicial review by an appellate court under which a panel of judges reviews trial-court rulings on questions of law independently—that is, as if the appellate court were deciding the question for itself in the first instance. The appellate court reviews the trial court’s findings of fact on a “clearly erroneous” or “clear error” standard of review, that is, paying a certain degree of deference to the finder of fact (the jury or trial judge). While appellate review does not involve a retrial on the merits, it is broad and searching, particularly where outcomes turn solely on questions of law.

The Federal Arbitration Act does not authorize courts to review arbitration awards under an appellate standard of review, even if the parties consent to a court applying such a standard. Parties can agree before or after a dispute arises to an arbitration procedure that empowers another arbitrator or panel of arbitrators to review an award under an appellate or some other standard of review, but arbitration awards are subject to very limited and highly deferential review by courts, and then only on a few narrow grounds.

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The Federal Arbitration Act Award-Enforcement Process

The Federal Arbitration Act award enforcement process permits either party to make an application to vacate, modify or correct an award, or an application to “confirm” it, that is, enter judgment on it. Since the deadline for applying to vacate, modify or correct an award is considerably shorter than that for confirming an award, in many cases, parties who are seeking relief from the award make the initial application. If a putative challenging party does not timely seek relief, and the other party seeks confirmation after the expiration of the deadline for making an application to vacate, modify or correct the award, then the challenging party is time-barred from asserting grounds for vacatur or modification, even simply as affirmative defenses to confirmation. (See, e.g., L. Reins. & Arb. Law Forum post here.)

Let’s assume a party makes a timely motion to vacate an award. What will likely then happen is the other party will cross-move to confirm the award. The burden on the party seeking confirmation is pretty modest. Generally the party moving to confirm will need to show that the parties: (a) agreed to arbitrate; (b) consented to entry of judgment on the award; (c) appointed an arbitrator or panel of arbitrators; and (d) submitted the dispute to the arbitrators, who issued the award. The award is presumed valid and the court does not review its outcome or substance.

Once the modest prerequisites for confirmation have been established by a properly supported petition or motion to confirm an award, then the court “must grant” confirmation “unless the award is vacated, modified or corrected” under Federal Arbitration Act Sections 10 or 11. 9 U.S.C. § 9. Thus, apart from those relatively rare cases where a party can show that the parties never agreed to arbitrate at all (and that the challenging party did not waive that defense), or perhaps never even impliedly consented to entry of judgment on the award, the only grounds on which the losing party can oppose confirmation are those set forth in Section 10 and 11.

The only exception might be if the award interprets the contract in a way that causes it to violate a well-defined and explicit public policy, or if the remedy the arbitrator awards violates the criminal law or requires one of the parties to do so. For example, one would not expect a court to enter judgment on an award that purported to authorize the prevailing party to inflict bodily harm on the losing party or vice-versa. That principle is simply an application of the contract-law rule that courts will not enforce contracts that violate public policy. See, generally, W. R. Grace & Co. v. Rubber Workers, 461 U.S. 757, 766 (1983); United Food & Commercial Workers Int’l Union v. King Soopers, 743 F.3d 1310, 1315 (10th Cir. 2014). Fortunately, just as contracts rarely are unenforceable on public policy grounds, so too, arbitrators rarely, if ever, make awards that require parties to violate the law.

Grounds for Modifying or Correcting an Award under Federal Arbitration Act Section 11

For the most part a motion to modify an award is limited to correcting mathematical, typographical or other technical errors appearing on the face of the award, or severing from the award rulings on issues not submitted to the arbitrators (i.e., issues the parties did not ask the arbitrators to decide). See 9 U.S.C. § 11(a) (2013) (“evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award”); 9 U.S.C. § 11(c) (“award is imperfect in matter of form not affecting the merits of the controversy”); 9 U.S.C. § 11(b) (“arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted”). The court’s “order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.” 9 U.S.C. § 11. If a party only seeks modification or correction of an award, even if the challenging party prevails, the end result of the proceeding will be the court’s entry of a judgment on the modified or corrected award.


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Grounds for Vacating an Award under Federal Arbitration Act Section 10

A motion to vacate an award under Section 10 of the Federal Arbitration Act may be granted only where:

  1. “the award was procured by corruption, fraud, or undue means” (9 U.S.C. § 10(a)(1));
  2. “there was evident partiality or corruption in” any of the arbitrators (9 U.S.C. § 10(a)(2));
  3. “the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced” (9 U.S.C. § 10(a)(3)); or
  4. “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” (9 U.S.C. § 10(a)(4)).

9 U.S.C. § 10(a)(1)-(4).

The U.S. Supreme Court has held that these four, statutory grounds are exclusive in FAA-governed cases, and cannot be expanded by party agreement. See Hall Street Assoc., L.L.C. v. Mattel, Inc., 552 U.S. 576, 578 (2008).

Although none of the four grounds explicitly authorizes review of an award’s outcome, the Supreme Court has held that arbitrators “exceed[] their powers” under Section 10(a)(4) if they “stray[] from interpretation and application of the agreement” and substitute for the parties’ agreement their “own brand of .  .  . justice.” See Stolt-Nielsen, S.A. v. AnimalFeeds, Int’l Corp., 559 U.S. 662, 668 (2010) (quotation and citations omitted).  Under this standard—sometimes referred to as the “essence of the agreement” or manifest disregard of the agreement standard—the court may review an arbitrator’s decision on issues that the parties agreed to arbitrate to determine whether there is some arguable basis on which to conclude that the arbitrator construed or applied the parties’ agreement. See, e.g., Stolt-Nielsen, 559 U.S. at 668-72; Oxford Health Plans LLC, v. Sutter, 133 S. Ct. 2064, 2068-71 (2013). If not, the award may be vacated.

The standard is narrow and meeting it presents a “high hurdle” that a challenger cannot overcome simply by showing that the arbitrators “committed an error —or even a serious error.” Id. The sole question for the court “is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract.” See Hill v. Norfolk and Western Ry. Co., 814 F. 2d 1192, 1194-95 (7th Cir. 1987) (Posner, J). If the arbitrator is even “arguably” interpreting the contract, then the arbitrator’s award cannot be vacated. See Oxford, 133 S. Ct. at 2068 (citation and quotation omitted).

Some (but not all) circuits also hold that courts may—under Section 10(a)(4), or “as a judicial gloss” on all the Section10(a) grounds—vacate awards for “manifest disregard of the law,” a standard that overlaps to some extent with the “essence of the agreement” or “manifest disregard of the agreement” standard. See Stolt-Nielsen, 559 U.S. at 668 n.3; Oxford, 133 S. Ct. at 2068-71 (2013); see, e.g., Schwartz v. Merrill Lynch & Co., Inc., 665 F. 3d 444, 451-52 (2d Cir. 2011) (manifest disregard of the law is a judicial gloss on Section 10(a)); Comedy Club, Inc. v. Improv West Assoc., 553 F.3d 1277, 1290 (9th Cir. 2009) (manifest disregard of the law falls under Section 10(a)(4)). Vacatur under that standard may be appropriate if arbitrators disregard or ignore a well-defined, explicit, clearly applicable and outcome determinative rule of law that the challenger argued to the arbitrators. See, e.g.,  Schwartz, 665 F.3d at 451-52. Manifest disregard of the law does not authorize courts to vacate awards for errors of law—even serious ones—or “a failure on the part of the arbitrators to understand or apply the law.” See, e.g., Lagstein v. Certain Underwriters at Lloyd’s, 607 F.3d 634, 641 (9th Cir. 2010) (quotation and citation omitted).

The two “outcome review” standards discussed above authorize vacatur only when there is not even a barely colorable basis in the contract or controlling law for the award. They do not even vaguely resemble the appellate review standards that are ordinarily applied to trial court decisions on the merits.

The limited scope of the challenge is not the only obstacle one seeking relief from an award must overcome. Courts tend to be skeptical of challenges, even ones having a solid basis, and generally one must establish that the only legitimate inference that can be drawn from the law and undisputed facts is that vacatur is warranted. Even where there are factual disputes, courts usually will not order discovery or evidentiary hearings absent “clear evidence of impropriety.”  See, generally, Andros Compania Maritima, S.A. v. Marc Rich & Co., 579 F.2d 691, 701, 702 (2d Cir. 1978).


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Is there Anything I can do to Help Protect My Rights?

If you believe that an arbitrator’s award: (a) exceeds the authority the parties agreed to delegate to the arbitrators or the authority they actually delegated to them; (b) is fundamentally at odds with the parties’ agreement or clearly applicable law argued to the arbitrators; (c) is tainted by serious impropriety; (d) is the product of fundamental, prejudicial procedural unfairness; or (e) otherwise seems to suffer from some fundamental defect, then you should consult with an attorney who regularly practices arbitration law. That attorney should be able to determine relatively quickly whether or not there appears to be a basis for a challenge and if so, roughly what the chances of success are. And if there is a basis for proceeding, and one decides to proceed, then the attorney should be able to handle the matter in the way it is supposed to be handled.

The Federal Arbitration Act and state statutes (where applicable) authorize vacatur as a kind of modest fail-safe mechanism to address relatively rare cases where an arbitration award is the product of a serious breach of an agreement to arbitrate. When vacatur is granted in an appropriate case, that doesn’t mean an award challenger is a disgruntled—but lucky—party who escaped the consequences of its agreement to arbitrate. It means the challenger was denied the benefit of the arbitration bargain envisioned by the Federal Arbitration Act and that the court upheld that bargain.

But remember: Vacatur is a remedy of last resort. The best way to protect your interests is to make fully-informed decisions about whether to agree to arbitrate, taking into account arbitration’s risks and potential benefits. If you decide to opt for arbitration, it should be on terms designed to meet your dispute resolution interests and goals. Arbitration is indeed a matter of consent, not coercion, but that principle is helpful only when consent is fully and meaningfully informed.

If, after having agreed to arbitrate, a dispute arises that is submitted to arbitration, you need to go forward fully informed and represented by at least one counsel who knows the ins and outs of arbitration law, arbitration procedure and arbitration in general and has the requisite experience to protect your legitimate interests. Arbitration and litigation are too very different animals. Don’t end up being someone who consults with experienced arbitration-law counsel for the first time after receiving a highly questionable arbitration award, for far too often those persons learn, after it is too late to do anything about it, that matters should have been handled differently during the proceedings, that agreeing to arbitrate at all in the circumstances was inadvisable, that the terms on which they agreed to arbitrate were not what they should have been or some combination or all of the above.

As is so with many other things in life, an ounce of prevention is worth a pound of cure. It is tempting to think that, because arbitration is a private, alternative form of dispute resolution, courts will step in if necessary to ensure that “justice” is done. But as we’ve seen, that is so only in unusual cases. And when you think about it, that should come as no surprise: arbitration is a matter of contract, and courts are at least as loathe to save parties from the consequences of their arbitration agreements as they are to save them from the consequences of any of their other agreements. The “I didn’t know” or “my counsel didn’t know” excuse almost always falls on deaf ears.

If you want the kind of “justice” the court system metes out, then do not waive your rights to receive it by entering into an arbitration agreement. Remember that the Federal Arbitration Act presents a bargain that can sometimes be Faustian: if you’re willing to give up the right to appeal, and most of court litigation’s niceties, and will be satisfied with dispute resolution that usually promises at best, rough justice, then you may (or may not) receive the benefit of a relatively speedy, efficient, informal and confidential form of dispute resolution, which, depending on the particular dispute, may or may not increase your odds of prevailing or losing on the merits. That bargain works well for some but poorly for others, and whether you’re one of the some or the others generally turns on the circumstances surrounding the transaction or legal relationship, the types of disputes that are likely to arise out of it, who your adversary is, who the arbitrators are likely to be and a host of other things.

But if you do decide to consider agreeing to arbitrate disputes, do yourself a favor and consult with a lawyer experienced with and knowledgeable about arbitration and arbitration law. If a dispute arises that requires arbitration, consult with that lawyer again. That kind of modest investment made early on, before any problems arise, may decrease the likelihood that any actually will, and if they do, may increase the likelihood that you’ll have a meaningful basis on which to seek redress.

Welcome to the Arbitration Award Practice Blog!


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Today we launched Loree & Loree’s Arbitration Award Practice website and with it, this blog: the Arbitration Award Practice Blog.

Loree & Loree has been blogging since March 2009 about arbitration law and reinsurance-related matters under our main blog platform: The Loree Reinsurance and Arbitration Law Forum. We’ve written quite a bit about arbitration award enforcement in that blog, including “Nuts & Bolts” or “Arbitration & Mediation FAQs” features, which are intended to be straightforward, plain English articles addressing arbitration law topics or issues that are important (or at least frequently arise) or are sometimes misunderstood.  Usually, the titles of those articles are in question form, with the body of the article answering the question.

Not all of our Loree Reinsurance and Arbitration Law Forum articles are in a “Nuts & Bolts” or “FAQs” format, but based on our Google Analytics statistics, most of these articles have been pretty popular, and some have remained quite popular for years. So when we considered what type of articles would be best suited for a blog about arbitration award enforcement, we concluded that the FAQs or Nuts & Bolts format would not only be the most useful to readers of this blog, but also the most relevant to persons who might be interested in our Arbitration Award Practice site.

So articles written in that format will  be the focus of the Arbitration Award Practice Blog, but what will be the focus of  those articles? The informal tag-line that appears on our posts page sums it up: “Nuts and Bolts and FAQs About Confirming, Enforcing, Vacating, Modifying and Correcting Arbitration Awards Under the Federal Arbitration Act and State Arbitration Statutes.”

Now all we have to do is start posting away, and once we do, we hope you’ll enjoy the fruits of our labor.  .  .  .

Philip J. Loree Jr.