Commercial Litigation and Arbitration

Broad Arbitration Clause Confers on Arbitrator the Power to Award Compensatory Sanctions, Even If Contract Provides that Each Party Bears Own Fees

From ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Co., 564 F.3d 81 (2d Cir. 2009):

Where an arbitration clause is broad, arbitrators have the discretion to order such remedies as they deem appropriate.*** This is because it is “not the role of the courts to undermine the comprehensive grant of authority to arbitrators by prohibiting” them from fashioning awards or remedies to “ensure[ ] a meaningful final award.” ***

Consistent with this principle, we here clarify that a broad arbitration clause, such as the one in this case, ... confers inherent authority on arbitrators to sanction a party that participates in the arbitration in bad faith and that such a sanction may include an award of attorney's or arbitrator's fees. This conclusion finds support in Synergy Gas Co. v. Sasso, 853 F.2d 59, wherein this Court ruled that, after an arbitrator ordered the reinstatement of a discharged employee with backpay, the arbitrator did not exceed his authority in further awarding the employee's union attorney's fees. In so holding, we noted that “[a]rbitrators have ... occasionally awarded attorney's fees” in circumstances where one party had acted in bad faith and that such fees fairly compensated the party for costs incurred as a result of such actions.

[Footnote 3] Because National Travelers has not challenged the fee award on the ground that it was punitive, rather than compensatory, we have no occasion to consider an arbitrator's authority to award attorney's fees in excess of the amount necessary to compensate for the losses and expenses attributable to a party's arbitrating in bad faith.

The Ninth Circuit has also rejected a challenge to an arbitration award of attorney's fees, recognizing a bad faith exception to the general “American Rule” that each party bears its own attorney's fees. See Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1064 (9th Cir. 1991). The court explained: “Federal law takes an expansive view of arbitrator authority to decide disputes and fashion remedies.... In light of the broad power of arbitrators to fashion appropriate remedies and the accepted ‘bad faith conduct’ exception to the American Rule, we hold that it was within the power of the arbitration panel in this case to award attorneys' fees.” ***

EMC submits that this case is distinguishable because the agreement at issue in Todd Shipyards Corp. v. Cunard Line, Ltd. specifically integrated Rule 43 of the Commercial Rules of the American Arbitration Association, which states that “‘[t]he arbitrator may grant any remedy or relief which the Arbitrator deems just and equitable within the scope of the agreement of the parties.’ ” 943 F.2d at 1062-63 (quoting Rule 43). We do not, however, consider a reference to Rule 43 to be essential where, as in this case, the parties' arbitration clause applies broadly to every dispute arising under their agreement, ... and where the arbitrators find that a party did not arbitrate in good faith.... Indeed, the underlying purposes of arbitration, i.e., efficient and swift resolution of disputes without protracted litigation, could not be achieved but for good faith arbitration by the parties. Consequently, sanctions, including attorney's fees, are appropriately viewed as a remedy within an arbitrator's authority to effect the goals of arbitration.

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