Reliastar Life Ins. Co. of New York v. EMC National Life Co., 2009 WL 941173 (2nd Cir. 2009)

Brief Summary
The Second Circuit held that an arbitration panel did not exceed its power by awarding attorney fees for bad faith conduct, even though the underlying contract called for the parties to pay their own fees.

Complete Summary
The issue in this case was whether an arbitration panel exceeded its power by sanctioning a party for bad faith conduct with an award of fees and costs. The fees included both attorney fees and fees paid to the arbitrators. Reversing the district court, the Second Circuit held that this award was not beyond the panel’s power under the terms of the arbitration agreement.

The Second Circuit applied a two-part test. First, the type of award an arbitrator grants must draw its essence from the parties’ agreement. Second, and if the first test is met, the court will uphold an award so long as the arbitrator’s justification is at least barely colorable. The court framed the issue as whether the parties’ agreement limited the arbitrators’ authority to sanction bad faith conduct. Because the parties’ agreement conferred comprehensive authority to the arbitrators, the court held the arbitrators’ power to sanction bad faith was inherent. Further, because the agreement’s section on fees simply reiterated the American Rule that each party must bear its own fees, including arbitrator fees, the court held there was no indication of intent to limit the well-recognized bad faith exception to the American Rule, which allows fee shifting in order to sanction bad faith conduct.

A dissenting judge argued that arbitrators, unlike judges, lack inherent authority to sanction bad faith conduct. The dissenting judge noted that arbitrator power must be conferred by the parties and that inherent power is, by definition, not conferred. Finally, the dissenting judge argued that, because the contract cited the American rule without citing the bad faith exception to the rule, the contract expressly forbade the type of bad faith sanction rendered by the arbitrators in this case.

Significance of Opinion
Although judicial deference to arbitrator discretion is nothing new, the existence and extent of arbitrators’ inherent powers is a less settled area of law.

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