You see it all the time: a prayer for attorneys fees at the end of a complaint or answer even when there is no apparent basis for the request. In arbitration, however, requests like this can be self-fulfilling, creating their own legal basis.
This puzzling situation arises because arbitrators, to a large extent, are the final judges of their own jurisdiction and authority. California courts defer not only to arbitrators' determinations about the arbitrability of particular issues, but also to arbitrators' selection of remedies. Unless expressly negated by the arbitration agreement, the remedies awarded will be upheld if they bear any rational relationship to disputed issues. In fact, the courts even uphold arbitration awards granting relief that a court would not have been permitted to award.
Because of the fluid nature of arbitral remedies, parties and their attorneys must be careful when crafting submission agreements or filing pleadings in an arbitration. Most arbitration submission agreements expressly incorporate the pleadings, thus making the content of these documents crucial to determining the arbitrators' authority. Imprecise wording or overreaching might permit the arbitrators to rule on issues that the parties never intended to arbitrate and may authorize remedies that otherwise would have been unavailable under prevailing law.
The courts' handling of arbitrators' attorneys fee awards exemplifies the potential pitfalls of imprecise pleading. Under the so-called American rule, the winner in litigation generally cannot recover attorneys fees from the losing party. Many parties nevertheless routinely request attorneys fees in pleadings filed in civil court, thinking there is little downside to the tactic. Even if the requesting party loses the case, a mere prayer for relief generally does not alter the traditional rule that each side bear its own attorneys fees.
This casual approach to pleading can have unintended consequences in the arbitration context. Unless permitted by contract, arbitrators typically lack the authority under state law to award fees to the prevailing party (Thompson v. Jespersen, 222 Cal. App. 3d 964, (1990)). California Code of Civil Procedure §1284.2 specifically provides that parties should bear their own fees "unless the arbitration agreement provides otherwise." By their conduct in the arbitration, however, parties may be deemed to acquiesce to a fee award.
A request for fees in a statement of claim could be enough to confer authority to award fees to the prevailing party where there otherwise would have been no basis for such relief. A few courts outside of California have addressed this very situation, concluding that fee requests in pleadings provided sufficient grounds to uphold the arbitrators' award. For example, in Spector v. Torenberg, 852 F. Supp. 201 (S.D.N.Y. 1994), the underlying arbitration agreement did not contain an attorney fee clause.
Applying the Federal Arbitration Act and New York law, the New York court ruled that arbitrators did not exceed their authority in awarding fees to the prevailing respondents because the claimants' arbitration demand and their arbitration brief included a request for fees. The other side also requested fees. Claimants argued that they initially were under the mistaken belief that certain American Arbitration Association rules provided an attorneys fees remedy. The court found that, regardless of claimants' reasoning, the parties' conduct provided a sufficient contractual basis to support the arbitrators' award — surely a surprise to claimants.
Unexpected results like these derive from the flexible nature of the arbitral forum. A court's jurisdiction is prescribed by law and statute. By contrast, the scope of an arbitration is a matter of agreement between the parties and thus is indeterminate. So long as they do not fundamentally alter the nature of arbitration, parties are free to modify the rules that will govern the resolution of their dispute and the scope of available relief. It also is expected that arbitrators may engage in the "free exercise" of flexibility and creativity in making remedial decisions (Advanced Micro Devices Inc. v. Intel Corp., 9 Cal. 4th 362 (1994)).
Arbitrators are not restricted to following legal rules, but may base their decision on elastic principles of justice and equity. This discretion includes the power to grant remedies that a court could never provide. As the California Supreme Court noted in its ruling in Advanced Micro Devices, the remedies available to a court "are only the minimum available to an arbitrator (unless restricted by agreement)."
The lack of restrictions on the decision-making authority of arbitrators, coupled with the general rule of arbitral finality, makes it extremely difficult to challenge relief granted in arbitration on the ground that the arbitrators exceeded their authority. A court will not vacate an arbitrator's selection of remedies as long as it is even arguably based on issues or disputes submitted to the arbitrator.
In Advanced Micro Devices, the Supreme Court provided a detailed analysis of the incredible leeway that arbitrators enjoy in determining appropriate remedies. There, AMD and Intel had an agreement for exchanging technical product information. The agreement also provided that either company could elect to manufacture and distribute the other company's product. The non-developing company was to receive the necessary technical information and licenses to act as a second source. After a dispute arose, AMD initiated an arbitration alleging breach of contract. The arbitrator found that Intel had breached the express terms of the contract and the implied covenant of good faith and fair dealing. The arbitrator awarded some monetary relief but concluded that damages for the breach of the implied covenant were not capable of ready and certain calculation. Instead, he fashioned equitable remedies that even the arbitrator described as a "depart[ure] from a conventional approach to relief." This included a permanent and royalty-free license to certain Intel intellectual property and a two-year extension of certain patent and copyright licenses.
Intel sought to vacate these equitable remedies on the ground that the arbitrator exceeded his authority. The California Supreme Court confirmed the award in its entirety. Emphasizing the flexibility arbitrators enjoy in fashioning remedies, the court held that a chosen remedy may not be vacated simply because it is not authorized by law or by a specific term of the contract. Rather, the award will be upheld if it merely bears "some rationale relationship" to the contract and the 'The courts' handling of arbitrators' attorneys fees awards exemplifies the potential pitfalls of imprecise pleading.' breach.
The Ninth Circuit employed a similar rationale in Michigan Mutual Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826 (1995). In that case, the only relief specifically requested was rescission or a declaration that one party had a continuing obligation to reimburse the other for money paid to cover certain insurance claims. The arbitration panel, however, went beyond the requested relief and established precedent conditions for future payments between the parties, essentially reforming the parties' contract.
The Ninth Circuit held that the issue of conditions precedent to reimbursement was "implicit in the submission." The scope of the remedy was proper because the panel had the power to formulate any relief it deemed appropriate as long as the panel was even arguably construing or applying the contract. The court distinguished the case from those in which "the arbitrators' inquiry, procedures or remedies were specifically limited by the parties' arbitration agreement."
Submission agreements often incorporate by reference all issues presented in pleadings. Thus, allegations in a statement of claim or statement of answer not only put the parties on notice of the disputed issues but also define the scope of the arbitrators' power and the arsenal of remedies at their disposal.
It follows that parties should not seek remedies in arbitration, whether in pleadings or orally, unless they are willing to accede to the authority of the arbitrators to grant such relief. A form request for fees in a statement of claim could have significant consequences if one's client happens to lose. A claimant seeking attorneys fees as a prevailing "plaintiff" under a consumer statute is similarly well advised to set forth the specific statutory basis for claiming fees rather than making a general prayer for such relief, which might confer authority on the arbitrators to award fees to either party.
As a corollary to this principle, parties wishing to exclude issues from arbitration must expressly and unambiguously limit the arbitrators' authority in the arbitration contract, pleadings or submission agreements. Arbitrators typically do not exceed their authority when they grant unforeseen relief that goes beyond what the parties specifically requested. Arbitrators have the authority to decide any issue that may be implicit in the submission, and the restraints on their remedial decision-making are minimal, especially in California.
Some critics have suggested that the minimal level of scrutiny of arbitrators' choice of remedies can turn an arbitration into a game of chance. Yet courts assume that parties bargain for flexibility and creativity when selecting an arbitral forum for resolving disputes. A careful choice of words in submission agreements and pleadings will limit this uncertainty attendant in the arbitration process. ❖
Reprinted with permission from the issue of The Recorder's Arbitration & Mediation. © 2004 NLP IP Company.
All rights reserved. Further duplication is prohibited. For further information contact Paula Ryplewski at (415) 749-5410.