Arbitration agreements are a common element found in most contracts. From the terms and conditions required to use iTunes to that big business deal you just closed, arbitration clauses ensure that any dispute arising under this agreement will be settled out of the courts and by a neutral arbitrator. Through the terms of the contract, the arbitration agreement grants minimally-restricted powers to an arbitrator to decide the dispute submitted as he or she sees fit.
The authority of arbitrators to order relief is broad, so much that the arbitrator even has the ability to provide relief that could not be awarded by a court. While monetary damages are most often awarded, arbitrators frequently award equitable and other forms of relief, including specific performance, injunctive relief, consequential damages, liquidated damages, attorneys’ fees and punitive damages. Expansively inclusive arbitration clauses and the limited “appealability” of arbitration awards tend to feed the arbitrator’s ever-increasing dominion of power.
Where Do Arbitrators Derive Their Authority?
Generally, arbitrators obtain the majority of their power directly from the arbitration agreement. If the arbitration agreement requires that the arbitration adheres to the Commercial Arbitration Rules of the American Arbitration Association (“AAA”), then Rules R-45 and R-36 determines the scope of the arbitrator’s remedial authority.
R-45(a) allows an arbitrator to award any remedy or relief that the arbitrator deems just and equitable. In addition, the award must be within the scope of the parties’ agreement. Rule R-45 also specifically authorizes the arbitrator to issue interim and interlocutory awards, and to assess fees, expenses, compensation, interest and attorneys’ fees. Most courts have interpreted this language to provide the arbitrator with very broad authority to award remedies.
Rule R-36 provides an additional authority to take necessary interim measures, including injunctive relief and measures to protect or conserve property, and to require security for costs. The AAA’s commercial rules also contain “Optional Rules for Emergency Measures of Protection.” These rules empower the AAA to quickly select an emergency arbitrator who can award interim emergency relief. To be applicable, though, the parties must provide for these rules in their arbitration agreement.
However, the arbitrator’s power can be limited from the outset. An arbitration agreement may expressly limit the remedies that an arbitrator may award. Also, if the issues submitted to arbitration are limited in any way by the parties, it could restrict the range of remedies an arbitrator is empowered to award. If this boundary is overstepped by an arbitrator, a court could find, on appeal, that the arbitrator lacked authority to award a particular remedy.
Appealing an Arbitrator’s Decision
Technically, arbitrators must devise a remedy that is appropriate to the facts of the case before them. Parties that are unhappy with the arbitrator’s award may contend that the arbitrator exceeded his or her authority. While courts generally believe that taking an arbitration award to court defeats the purpose and spirit of an arbitration clause, a judge may review the sources of the arbitrator’s authority to determine whether an arbitrator’s award is proper.
However, parties seeking to overturn an arbitration award have a steep hill to climb. The power of the arbitrator has been increased and consistently enforced through the courts. Studies show that a party seeking to upset an arbitration award was likely to be successful only one out of every five times. Because of this reinforcement of power by the judicial system, arbitrators decisions are rarely appealed, and even when they are appealed, the results are not usually changed.
A broadly worded arbitration clause parlayed with the absence of any limitations affecting remedies. allow arbitrators to have the flexibility to award even unusual relief if appropriate to resolve the dispute. Addressing the arbitrator’s authority when drafting the arbitration agreement may prevent additional headaches if and when an unexpected dispute surfaces.