A. Drawing Lines
For pure intellectual challenge, few endeavors match the task of setting principled standards to distinguish an arbitrator’s good faith mistakes from an excess of authority. In bargaining for out-of-court dispute resolution, parties to arbitration agreements commit themselves to respect the result regardless of who wins. The award is intended to be final even if one side thinks that the arbitrator got it wrong.
Arbitration is a consensual process, however, unfolding within an enclosure created by the contract and applicable arbitration law. The litigants accept the risk of arbitrator mistake only for decisions falling within the borders of arbitral authority.
Great practical importance attaches to how lines are drawn between arbitrator mistake and excess of authority. Indeed, the distinction goes to the heart of what arbitration is all about. A simple error is normally not subject to appeal, since the litigants have asked an arbitrator, not a judge, to decide the legal and factual merits of their disputes. By contrast, no court should recognize an award falling beyond the arbitrator’s authority. Thus some measure of judicial scrutiny over arbitral jurisdiction remains a vital safeguard to the integrity of the process, and constitutes an essential corollary to enforcement of legitimate awards.
Error of law or excess of powers?
The House of Lords decision in Lesotho Highlands v. Impreglio1 serves as a prism through which to separate several of the themes that inhere in the nature of arbitral authority. In rejecting arguments that an error about the currency of an award represented an excess of jurisdiction, their Lordships confirmed a healthy appreciation that arbitrators do not exceed their powers simply by making a mistake.
Construction of a dam in the African nation of Lesotho gave rise to a dispute between the builder and the owner. The dispute was submitted to arbitration by a three-member tribunal sitting in London. The builder claimed amounts which, had they been paid when due, would have been payable largely in Lesotho maloti.
By the time of the award, however, the project was finished, and the contractors had no need of maloti. The arbitrators, therefore, denominated the award entirely in four hard European currencies that the contract had indicated for non-maloti payments, using the historic exchange rates provided in the contract.2 Since the maloti had collapsed between the contract payment date and the award, the owner suffered the downward slide of the maloti.
Understandably disappointed, the owner challenged the award. A frontal attack, however, was not possible. As permitted under the 1996 Arbitration Act,3 the parties had excluded appeal on questions of law by electing to arbitrate under the rules of the International Chamber of Commerce, which provide for the finality of awards.4
The Arbitration Act, however, also permits awards to be set aside for “serious irregularity,” defined to include “the tribunal exceeding its powers.”5 The owner argued that the arbitrators went beyond their powers by the way they fixed the award in European currencies.6
Section 48 of the Arbitration Act permits arbitrators to “order the payment of a sum of money in any currency.” The owner argued that the hard currency award was an improper exercise of this power, and misapplied the contract and applicable law. According to this view, the Arbitration Act simply clarified that awards need not be made in sterling.
Their Lordships decided that the award’s choice of currency did not constitute an excess of powers. In so doing, they looked to the radical nature of recent changes in English arbitration law, evidencing an intent to restrict judicial intervention in the arbitral process. The result Page Id: 182ReferencesArbitration Act (United Kingdom [gb]) 1996 c.23Part I Arbitration pursuant to an arbitration agreement, The award, s.48 RemediesPart I Arbitration pursuant to an arbitration agreement, The award, s.49 InterestPart I Arbitration pursuant to an arbitration agreement, Powers of the court in relation to award, s.67 Challenging the award: substantive jurisdictionPart I Arbitration pursuant to an arbitration agreement, Powers of the court in relation to award, s.68 Challenging the award: serious irregularity, (2), (b)Part I Arbitration pursuant to an arbitration agreement, Powers of the court in relation to award, s.69 Appeal on point of lawPart I Arbitration pursuant to an arbitration agreement, Supplementary, s.82 Minor definitionsArbitration Rules 1998-2011 (International Chamber of Commerce)Rules of Arbitration, Awards, Art.28 Notification, Deposit and Enforceability of the Award, 6 IC(p. 183) was an affirmation that a mere error of law will not amount to an excess of power. In both policy and logic, this result seems correct. Arbitration would not be binding if awards could be vacated simply because arbitrators misinterpreted the contract or imperfectly exercised their powers.7
Prohibition on Bootstrapping
The decision in Lesotho Highlands does not stand for the proposition that arbitrators can create their own jurisdiction. While the principal speech by Lord Steyn suggested that the Arbitration Act gave “unconstrained” power to make an award in any currency,8 his colleagues disagreed.9 Lord Steyn then went on to posit that the power was not unconstrained, and that arbitrators had erred in interpreting either the contract or the Arbitration Act. In either event, he said, the arbitrators would have done no more than commit error of law.10
That a mistake in contract interpretation should not be reviewable seems uncontroversial. The arbitrators’ job is to interpret the parties’ agreement.
The possibility of a mistake interpreting the Arbitration Act, however, might be more troublesome. Interpretation of arbitration statutes normally falls to courts. Arbitrators cannot, simply by their own bare assertion, create powers they do not have. If an arbitration statute requires awards to be denominated in sterling, it is hard to see how an arbitrator’s ipse dixit can generate authority to award Swiss francs.
Lord Steyn, however, makes clear that the most that might have occurred in Lesotho Highlands was erroneous exercise of powers that actually existed.11 An award of Swiss francs might be an imperfect exercise of arbitral power, but would not be a jurisdictional invention.
The contours of arbitrator power may be more difficult to ascertain in some situations than in others. For example, a contractual choice-of-law clause might designate a legal system that prohibits arbitrators from awarding punitive damages.12 Such a clause, however, might be read to designate only substantive state contract law, not including arbitral procedure.13 Moreover, as the U.S. Supreme Court has noted, it is not always obvious when damages are punitive rather than compensatory.14
Finally, the decision in Lesotho Highlands cannot stand for the proposition that arbitrators may purposefully ignore their mandate. The arbitrators awarded currencies considered “appropriate in the circumstances” after having taken careful note of the contract stipulations,15 and looked only to currencies and exchange rates in the parties’ agreement. Nothing suggests that their award was a fig leaf to cover intentional disregard of the contract.
First principles
Lesotho Highlands serves as a springboard for examining several analytic wrinkles in arbitral jurisdiction. Most modern arbitration statutes prohibit appeals related to the substantive merits of an award. Unlike judges, arbitrators do not normally find their decisions reversed for mistake of law. Arbitration statutes do, however, allow challenge to awards that go beyond the arbitrators’ mission,16 whether described as an “excess of jurisdiction,” “excess of authority,” or “excess of powers.”17
A party disappointed by an award will sometimes attempt a “back-door” appeal, through arguments which depict the arbitrator’s mistake as an excess of authority rather than a contract misinterpretation. Errors of law in contract interpretation seem to lend themselves to being portrayed as excess of jurisdiction. An award allowing lost profits, for example, might be portrayed as an arrogation of power not granted by the contract.18
Sound distinctions between simple mistake and excess of authority rest on two fundamental principles. First, an agreement to arbitrate normally means accepting that the arbitrator might make a mistake in evaluating the merits of the parties’ claims and defenses. It would make little sense to say that an award will be binding if litigants automatically get a second bite at the apple, turning arbitration into foreplay to court proceedings.
Equally important, however, is the principle that litigants in arbitral proceedings do not expect to be bound by overreaching intermeddlers. Decisions on matters never submitted to arbitration deserve no more deference than the opinions of a random commuter passing through the Paris Métro or New York’s Grand Central Station.
The world of legal education might provide an illustration of the distinction between a simple mistake and a jurisdictional error. In American law faculties, the professor who teaches a course normally bears responsibility for assigning grades. If the professor gives one of her students a “B” then that is the grade. It matters little that a colleague who teaches in that field might find the grade severe, and evaluate the exam as “A” quality. The faculty has granted each teacher authority to grade his or her exams.
The language of jurisdictional challenges can create a risk of loading the analytic dice by using the term “arbitrator” to refer to an individual who might never have received a mandate from the parties. Labeling someone an arbitrator does not in itself confer authority to decide disputes, any more than calling a tail a leg adds to the limbs of Abraham Lincoln’s proverbial dog.19 A document styled “Award” might rest on an alleged arbitration clause that was forged or signed by someone without authority, or which explicitly covers a different dispute. In this Page Id: 184ReferencesConvention on the Settlement of Investment Disputes Between States and Nationals of Other States (International Centre for Settlement of Investment Disputes [ICSID]) 575 UNTS 159, UNTS Reg No I-8359, 17 USTS 1270, TIAS 6090, UKTS 25 (1967) Cmnd 3255Main Text, Ch.IV Arbitration, Section 6 Recognition and Enforcement of the Award, Art.53, (1) ICCook Chocolate Company v Salomon Incorporated and ors, No 87 Civ 5705 (RWS), 684 F.Supp. 1177 (S.D.N.Y. 1988), 22nd March 1988, United States; New York; District Court for the Southern District of New York [SDNY]Parsons & Whittemore Overseas Company Incorporated v Société Générale de l'Industrie du Papier, Appeal, 508 F 2d 969 (2d Cir 1974), (1976) I YB Com Arb 205, 23rd December 1974, United States; Court of Appeals (2nd Circuit) [2d Cir](p. 185) context, to speak of “award” enforcement presumes that the author of the document was authorized to decide the dispute, which is precisely the matter in controversy.20
Party expectations
Arbitrators might exceed their authority in at least three different ways. First, they might join a non-signatory21 that never agreed to arbitrate.22 Second, they might fail to respect the scope of their arbitral mission by making an award on matters never submitted to arbitration, or by intentionally disregarding the clear procedural mandates on how the case was to be decided.23 Finally, an arbitral tribunal might go beyond its jurisdiction through decisions not permitted by mandatory arbitration law, whether as to subject matter (for example employment disputes) or remedies (for example punitive damages).
In many of these instances, defining jurisdictional excess often brings to mind a “we know it when we see it” approach.24 While this provides a convenient starting point, the absence of intellectual rigor will not make it satisfying for very long. Most thoughtful people accept the difficulty of completely eliminating cultural blinders in decision-making. Few suggest, however, that the answer lies in a purely subjective approach incapable of principled articulation.
The parties’ intent at the time of contract signature serves as the proper touchstone for deciding challenges related to the scope of arbitral authority. Courts should ask: “Does the controverted decision address a question that the parties submitted to arbitration?” If so, arbitrators have not exceeded their power unless the decision is otherwise off-limits due to constraints imposed by the applicable arbitration law.
Not everyone, however, admits that a line can be drawn between mistake of law and excess of authority. Many years ago, Lord Denning commented on the relationship between mistake and jurisdictional excess with the provocative (and now generally discredited) suggestion that “Whenever a tribunal goes wrong in law it goes outside the jurisdiction conferred on it and its decision is void.”25 His assumption seemed to be that mistakes are not authorized, and thus by definition fall beyond the arbitral mission.26
Page Id: 185ReferencesBGH, Urteil vom 03.12.1992 - III ZR 30/91, III ZR 30/91, NJW 1993, 1798, 3rd December 1992, Germany; Federal Court of Justice [BGH]Jacobellis v Ohio, No 11, 378 US 184 (1964), 22nd June 1964, United States; Supreme Court [US]Pearlman v Keepers and Governors of Harrow School, [1979] QB 56, [1978] 3 WLR 736, [1979] 1 All ER 365, United Kingdom; England and Wales; Court of Appeal [EWCA](p. 186) Normally, the allocation of functions between judges and arbitrators explains itself by reference to contract principles.27 Agreements to arbitrate are enforced to protect expectations.28 When business managers agree to settle differences by arbitration, judicial deference to the arbitral process commends itself by virtue of the same policies that justify enforcement of contracts in general: giving effect to the parties’ legitimate choices.
On occasion, jurisdictional tools can be misused, clouding sound analysis. The well-known principle of Kompetenz-Kompetenz permits arbitrators to determine their own jurisdiction as an initial matter.29 Sometimes, however, this principle has been misapplied to suggest that courts need not investigate the parties’ real intentions on the existence or scope of arbitral authority.30 The temptation to such voodoo jurisprudence, which expects verbal formulae to change rights independent of context,31 must be resisted. Agreements to arbitrate are made by entities and individuals, not pieces of paper.
Ripeness and staleness
On occasion, arbitral jurisdiction is contrasted with notions of admissibility, a term used to describe constraints on the right to file claims in cases clearly subject to arbitration. Since the matter is properly before the arbitrators, their decisions would usually not be reviewable in court.32 Admissibility might relate to whether a claim is ripe enough (or too stale) for adjudication, or to arbitral preconditions (such as mediation) or time bars (a prohibition on claims more than six years after the alleged wrong).33
In some instances, jurisdictional and admissibility questions may overlap. For example, a brokerage contract might be subject to rules that make an investor’s claim ineligible for arbitration unless filed within six years after the allegedly inappropriate advice or trade. Although there is no grumbling as the stock rises, when the market goes sour years later the investor complains his savings were lost due to an improper purchase.34 Sometimes the parties by agreement will provide guidance on who decides (judge or arbitrator) whether the time period has run.35 In some cases, however, time bars derive from the statute of limitations in Page Id: 186ReferencesContec Corporation v Remote Solution Company Limited, No 04-0382-CV, 398 F 3d 205 (2d Cir 2005), 14th February 2005, United States; Court of Appeals (2nd Circuit) [2d Cir]Howsam v Dean Witter Reynolds Incorporated, Reversed, Docket No 01-800, 537 US 79 (2002), 123 S Ct 588 (2002), (2004) XXIX YB Com Arb 232, 10th December 2002, United States; Supreme Court [US]JSC Surgutneftegaz v President and Fellows of Harvard College, 3rd August 2005, United States; New York; District Court for the Southern District of New York [SDNY]Minnesota Statutes (as amended) (Minnesota)Ch.65B Automobile Insurance, §65B.525 Arbitration Procedure; Rules of CourtSphere Drake Insurance Limited, formerly known as Odyssey Re (London) Limited v All American Insurance Company, 256 F.3d 587 (7th Cir. 2001), 3rd July 2001, United States; Court of Appeals (7th Circuit) [7th Cir]United States Code (United States [us])Title 28 Judiciary and Judicial Procedure, Part V Procedure, §655 Arbitrators(p. 187) the law applied to the merits of the dispute (usually chosen by the parties) and thus fall to the arbitrator as part of the decision on the merits.36
Preconditions to arbitration do not always lend themselves to facile analysis. In one intriguing case, Vekoma v. Maran Coal,37 Switzerland’s highest court annulled an award in which the arbitrators had declared themselves competent to hear a claim arguably brought after the contractually stipulated time limits. The contract required claims to be filed within thirty days after the parties agreed that their differences could not be resolved by negotiation. The arbitrators found that settlement negotiations had broken down in April 1992, and thus a May filing was timely. The respondent took the position that failure to settle occurred in January, when a letter from the claimant met with silence.
The court vacated the award, finding the arbitration clause lapsed by May when the claim was filed. Saying that negotiations might fail as a matter of either fact or law (tatsächlich oder normativ), the court found failure as a matter of law when the January offer went unanswered.38 Whether the court was right to review the arbitrators’ determination about time limits depends largely on the parties’ intention in drafting their contract. Here as elsewhere, jurisdictional determinations often remain very fact sensitive.
One questionable aspect of this decision is that the Swiss court apparently deemed its review powers to be greater on questions of law than of fact, perhaps analogizing to review of cantonal court decisions. As a policy matter, this distinction is highly problematic. If arbitrators wrongly assume Company A acted as agent for Company B in signing an arbitration clause, they exceed their authority as to Company B whether from misunderstanding the law of agency or from a factual mistake about who signed the contract.
Footnotes:
* Adapted from The Nature of Arbitral Authority: A Comment on Lesotho Highlands, 21 Arb. Int’l 483 (2005).
1 Lesotho Highlands Development Authority v. Impreglio SpA [2005] UKHL 43 (30 June 2005).
2 The four currencies indicated in the parties’ contract were British sterling, French francs, Deutsche Marks, and Italian lire. The francs, Marks, and lire were then valued in euros, which had replaced the national currencies in France, Germany, and Italy. The contract provided for 58.35% payment in maloti, with remaining payments 5.95% in Deutsche Marks, 13.38% in French francs, 10.97% in Italian lire, and 10.35% in British pounds.
3 Arbitration Act 1996, § 69. For arbitrations in London, the “question of law” subject to appeal must be a matter of English law. See Arbitration Act 1996, § 82.
4 See Arbitration Rules of the International Chamber of Commerce, Art. 28(6).
5 Under Arbitration Act 1996, § 68(2)(b), that procedural irregularity must cause substantial injustice. Compare Section 67, permitting award vacatur for excess of “substantive jurisdiction.” For a case that involves challenge both under Section 67 and 68 see Westland Helicopters Ltd. v. Al-Hejailan [2004] EWHC 1625 (Comm.), reprinted in 17 World Trade & Arb. Mat’ls 245 (Feb. 2005).
6 The House of Lords also confirmed the arbitrators’ right to give pre-award interest, albeit with less controversial conclusions. The broad power to award interest under Section 49 of the 1996 Arbitration Act gave rise to no disagreement among their Lordships.
7 Speech by
Lord Steyn, HL decision of 30 June 2005, para. 32.
9 Lords Hoffmann, Scott, and Rodgers agreed that error of law does not equal excess of power. However, they disagreed with Lord Steyn’s construction of Section 48 concerning an arbitrator’s power to order payment of money in any currency. Lord Phillips (paras. 43–54) went further and stated that the arbitrators had purported to exercise a discretion that the statute did not give them.
10 HL decision of 30 June 2005, para. 23.
12 See e.g. New York law as expressed in Garrity v. Lyle Stuart, Inc., 40 N.Y. 2d 354 (1976).
13 Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995), upholding an award for punitive damages in a dispute covered by a New York choice-of-law clause.
14 See Pacificare Health Systems v. Book, 538 U.S. 401 (2002).
15 See portions of award cited in HL decision of 30 June 2005, para. 10.
16 Some arbitral regimes permit annulment for excess of authority only when a tribunal “manifestly” goes beyond its powers. See Article 53(1)(b) of the 1965 Washington (ICSID) Convention, insightfully discussed in Philippe Pinsolle, Manifest Excess of Power and Jurisdictional Review of ICSID Awards, ICSID Annulment, 2 Transnat’l Disp. Mgmt. 39 (Apr. 2005).
17 For the purpose of this analysis, the terms jurisdiction, authority, and powers are used interchangeably. While slight nuances might exist, all describe the limits of arbitrator behavior permitted by the relevant legal and contractual framework. On possible differences, see Lord Phillips in Lesotho Highlands (para. 51) discussed previously, acknowledging that “the concept of an excess of power that is not an excess of jurisdiction is not an easy one,” but still suggesting that an award in the wrong currency constitutes the former if not the latter.
18 See Parsons & Whittemore Overseas v. Société Générale (RAKTA), 508 F. 2d 969 (2nd Cir. 1974).
19 Abraham Lincoln is said to have asked, “If I call a tail a leg, how many legs does a dog have?” He then answered, “Five? No, four. Calling a tail a leg does not make it so.”
20 This linguistic problem is easier to see when a controversy surrounds the existence of the arbitration clause than when it concerns the clause’s scope.
21 In some cases arbitration agreements may be concluded by reference to an unsigned document. Nevertheless, the term “non-signatories” remains useful shorthand to designate those persons whose relationship to the arbitration may at first blush be unclear, and who cannot easily be called “non-parties” given that their status as “party” is exactly what is asserted, often through theories such as agency.
22 In some instances (albeit rarely), an implied obligation to arbitrate may arise from trade usage. See BGH, Urt. V. 3.12.1992, III ZR 30/91, discussed in 1993 Deutsche Zeitschrift fur Wirtschaftsrecht 465 (commentary by Klaus-Peter Berger) where Germany’s highest court, Bundesgerichtshof, decided that a duty to arbitrate might be implied through custom in the sheepskin trade.
23 An arbitration clause giving a tribunal power to decide controversies arising from one contract would not necessarily apply to disputes arising from a prior or subsequent commercial relationship between the same parties. And an agreement to settle disputes through ICC arbitration in Paris could not normally be satisfied through AAA arbitration in New York.
24 See Jacobellis v. Ohio, 378 U.S. 184, 197 (1964) (Potter Stewart concurring opinion).
25 See Lord Denning, The Discipline of the Law 74 (1979). See also Pearlman v. Keepers and Governors of Harrow School [1978] 3 WLR 736, 743 (C.A.).
26 Compare Christopher R. Drahozal, Default Rule Theory and International Arbitration Law, 5 Int’l Arb. News (ABA) 1 (Winter 2004/2005).
27 Regulatory impulses also come into play, at least at the margins, when courts hesitate to enforce private decision-making that runs afoul of public policy, either by virtue of touching subjects too sensitive to be removed from courts (e.g. claims of discrimination) or because the decision-making process is tainted with bias or corruption.
28 In the United States, so-called “court-annexed arbitration” rests on a different footing, since the parties retain a right to de novo trial. See 28 U.S.C. § 655 (1994). It is also misleading to apply the term “arbitration” to state delegation of minor claims to organizations such as the American Arbitration Association. See e.g. Minn. Stat. § 65B.525 (requiring arbitration of motor vehicle accident claims not in excess of $10,000).
29 See William W. Park, The Arbitrability Dicta in First Options v. Kaplan: What Sort of Kompetenz-Kompetenz Has Crossed the Atlantic?, 12 Arb. Int’l 137 (1996).
30 See Sphere Drake Ins. v. All American Ins., 256 F. 3d. 587 (7th Cir. 2001).
31 See e.g. Contec Corp. v. Remote Solution Co. Ltd., 398 F 3d. 205 (2nd Cir. 2005). Compare JSC Surgutneftegaz v. Harvard College, 2005 WL 1863676 (S.D.N.Y. 2005).
32 There might, however, be some situations in which valid jurisdictional challenges could be mounted to improper decisions on admissibility. If a contract says no actions may be filed before 2010, a putative award in 2005 would appear to most observers as an excès de pouvoir (subject to annulment) rather than simply an unreviewable mistake about calendars.
33 For a comparison of jurisdiction and admissibility in investment arbitration, see Ian A. Laid, “A Distinction without a Difference? An Examination of the Concepts of Admissibility and Jurisdiction in Salini v. Jordan and Methanex v. USA” in T. Weiler (ed.), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law 201 (2005).
34 In this regard, one recalls the scene from the movie Casablanca, in which the French police captain says he is “shocked” to find gambling in “Ricks Café”—all the while quite happy to take his winnings.
35 See Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002).
36 Statutes of limitations relating to arbitration law (rather than the underlying claim) are for judges. For example, in a motion to compel arbitration opposed on the basis that it was made too late, an American court found that the Federal Arbitration Act failed to provide its own statute of limitations, and thus borrowed analogous limitations from state law principles at the place where the court was sitting. See National Iranian Oil v. Mapco Int’l, 983 F. 2d 485 (3rd Cir. 1992).
37 See Tribunal fédéral (Bundesgericht) decision in Transport-en Handelsmaatschappij Vekoma B.V. v. Maran Coal Co., Civil Division I, 17 August 1995, reprinted 14(4) ASA Bull. 673 (1996) with commentary by Philippe Schweizer.
38 See 14(4) ASA Bull. 676–78, para. 3.
39 See Burchell v. Marsh, 58 U.S. 344, 349 (1855).
