Has the Seventh Circuit Court of Appeals Expanded the Grounds for Reviewing Arbitration Awards?
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Has the Seventh Circuit Court of Appeals Expanded the Grounds for Reviewing Arbitration Awards?
Author: Randolph E. Ruff, Shareholder, Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
A fundamental tenet of arbitration is that arbitration awards are subject to very limited review and are rarely vacated due to an error in contract interpretation. The Illinois Uniform Arbitration Act sets forth just five limited grounds under which a court can vacate an arbitration award, including fraud; evident partiality; where the arbitrators exceeded their powers; where the arbitrators refused to permit material evidence; or where no arbitration agreement existed. 710 ILCS 5/12. Illinois courts will usually not vacate an arbitration award for mere "errors in judgment or mistakes of law" unless "gross errors of judgment in law or [ ] gross mistake[s] of fact" are "apparent on the face of the award." Rauh v. Rockford Products Corp., 574 N.E.2d 636, 644 (Ill. 1991).
The Illinois Uniform Arbitration Act permits courts to modify awards only where there was an evident miscalculation, the arbitrators ruled on a matter not submitted to them, or the award is in an imperfect form. 710 ILCS 5/13. So, where arbitrators make "an evident miscalculation of figures in arriving at the award, the reviewing court will modify or correct the award." Shearson Lehman Brothers, Inc. v. Hedrich, 639 N.E.2d 228, 232 (Ill. App. 1994).
Arbitration awards that hinge on an interpretation or application of a particular contract provision are usually not disturbed. Herricane Graphics, Inc. v. Blinderman Construction Company, Inc., 820 N.E.2d 619 (Ill. App. 2004). The Illinois Supreme Court stated the test as follows:
"[T]he question for the court is whether the construction of the contract made by the arbitrator is a reasonably possible one that can seriously be made in the context in which the contract was made. Stated affirmatively, if all fair and reasonable minds would agree that the construction of the contract made by the arbitrator was not possible under a fair interpretation of the contract, then the court would be bound to vacate or refuse to confirm the award."
Rauh at 643, (quoting 10 Vand. L. Rev. 685, 706 (1957)); Garver v. Ferguson, 76 Ill. 2d 1, 9-10, 389 N.E.2d 1181 (Ill. 1979). A limited scope of review is consistent with most interpretations under the Federal Arbitration Act as well.
The Seventh Circuit Court of Appeals, however, may have opened the door to a broader judicial review of the contract-interpretation logic underlying arbitration awards under Illinois law. In a recent majority opinion written by Judge Posner, the Seventh Circuit reversed a district court’s order refusing to set aside an arbitration award and held that the arbitrators had exceeded their powers under the Illinois Uniform Arbitration Act by erroneously interpreting the parties’ agreement. Bankers Life and Casualty Insurance Company v. CBRE, Inc., No. 15 1471 (7th Cir. July 29, 2016).
Factual background
The case involved the interpretation of a real estate listing agreement under which CBRE brokered a deal in which Bankers Life & Casualty Insurance Co. (Bankers) sublet its existing commercial lease and moved to a new building under more favorable lease terms. Bankers was unwilling to enter the deal unless the net revenues received from the sublease of its existing space and the rental terms on the proposed new space netted Bankers $7 million. The parties entered a listing agreement under which CBRE was obligated to "present all offers and counteroffers to [Bankers]" and to "answer [Bankers’] questions relating to offers, counteroffers, notices, and contingencies."
CBRE prepared and presented to Bankers a cost-benefit analysis (CBA) of the proposed transaction showing that Bankers would net $6.9 million from the deal. Bankers proceeded with the transaction. CBRE’s analysis had a $3.1 million error in it because CBRE failed to include in its calculation the tenant build-out allowance that Bankers would owe to the new subtenant on the sublease. As a result, Bankers ended up netting $3.8 million instead of $6.9 million.
Bankers initiated a private arbitration seeking to recover from CBRE the $3.8 million difference, plus approximately $4.5 million in commissions that CBRE was to have received from the transaction. After hearing evidence, the panel of arbitrators entered an award in favor of CBRE, finding that the listing agreement did not explicitly require CBRE to furnish Bankers with a correct CBA. On Bankers’ motion for reconsideration, the panel revised its award acknowledging that "the Listing Agreement obligated CBRE to answer questions accurately," and that "CBRE made a mistake and that mistake was material." Yet the panel found in favor of CBRE this time on grounds that the CBA included a disclaimer that "clearly provides that CBRE was not responsible for errors." Bankers filed an action in federal district court seeking to vacate the award, but the trial court denied Bankers’ request.
The Seventh Circuit’s Decision
On appeal, the Seventh Circuit reversed, holding that the arbitrators had exceeded their authority. The court stated that the arbitration panel "was authorized to interpret the contract. The contract did not include the cost benefit analyses. The panel’s reliance on the disclaimer in the CBAs was therefore unjustified. The disclaimer is not part of the Listing Agreement; it was not negotiated by the parties but merely inserted by CBRE unilaterally."
The court continued: "The arbitrators’ role was to interpret the agreement, not additions to it by one party without the consent of the other—such additions could not amend the agreement." The court concluded that "the award in this case was based on documents outside the parties’ agreement and ignored the agreement itself—the Listing Agreement."
One dissenting judge pointed out that the majority’s contract analysis might have been correct, if the majority had been charged with the initial contract interpretation. But, the dissent argued, the court’s role after the parties have agreed to arbitration is to review, on an extremely limited basis, whether the arbitrators "exceeded their powers." Most courts limit such review to cases where the arbitrators essentially make calculation errors. The dissent concluded that the award may have contained "an erroneous interpretation of the contract, but the decision is plainly grounded in the contract, so we cannot vacate the award." (Emphasis in original.)
Key Takeaways
The Seventh Circuit’s opinion suggests that a court reviewing an arbitration award may look to the contract-interpretation logic of the reasoned award and vacate the award if it determines that the logic is based on facts outside of the contract. The Seventh Circuit never applied the test adopted by the Illinois Supreme Court that would overturn the award only where "all fair and reasonable minds would agree that the construction of the contract was not possible under a fair interpretation of the contract." Rauh at 643. Bankers Life therefore may represent an expansion of the grounds on which arbitration awards can be reviewed and overturned.
The Bankers Life decision interpreted Illinois law but is not binding on Illinois state courts. However, the opinion’s author is a well-known and influential federal appellate court judge. Regardless of whether Judge Posner’s analysis is adopted by Illinois courts, the Bankers Life opinion will likely result in additional attempts by disappointed arbitration parties to obtain relief from arbitration awards in the circuit and federal courts. Broadening the grounds for challenging arbitration awards may negatively impact the efficiency and finality of arbitration in Illinois.
Author: Randolph E. Ruff, Shareholder, Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
A fundamental tenet of arbitration is that arbitration awards are subject to very limited review and are rarely vacated due to an error in contract interpretation. The Illinois Uniform Arbitration Act sets forth just five limited grounds under which a court can vacate an arbitration award, including fraud; evident partiality; where the arbitrators exceeded their powers; where the arbitrators refused to permit material evidence; or where no arbitration agreement existed. 710 ILCS 5/12. Illinois courts will usually not vacate an arbitration award for mere "errors in judgment or mistakes of law" unless "gross errors of judgment in law or [ ] gross mistake[s] of fact" are "apparent on the face of the award." Rauh v. Rockford Products Corp., 574 N.E.2d 636, 644 (Ill. 1991).
The Illinois Uniform Arbitration Act permits courts to modify awards only where there was an evident miscalculation, the arbitrators ruled on a matter not submitted to them, or the award is in an imperfect form. 710 ILCS 5/13. So, where arbitrators make "an evident miscalculation of figures in arriving at the award, the reviewing court will modify or correct the award." Shearson Lehman Brothers, Inc. v. Hedrich, 639 N.E.2d 228, 232 (Ill. App. 1994).
Arbitration awards that hinge on an interpretation or application of a particular contract provision are usually not disturbed. Herricane Graphics, Inc. v. Blinderman Construction Company, Inc., 820 N.E.2d 619 (Ill. App. 2004). The Illinois Supreme Court stated the test as follows:
"[T]he question for the court is whether the construction of the contract made by the arbitrator is a reasonably possible one that can seriously be made in the context in which the contract was made. Stated affirmatively, if all fair and reasonable minds would agree that the construction of the contract made by the arbitrator was not possible under a fair interpretation of the contract, then the court would be bound to vacate or refuse to confirm the award."
Rauh at 643, (quoting 10 Vand. L. Rev. 685, 706 (1957)); Garver v. Ferguson, 76 Ill. 2d 1, 9-10, 389 N.E.2d 1181 (Ill. 1979). A limited scope of review is consistent with most interpretations under the Federal Arbitration Act as well.
The Seventh Circuit Court of Appeals, however, may have opened the door to a broader judicial review of the contract-interpretation logic underlying arbitration awards under Illinois law. In a recent majority opinion written by Judge Posner, the Seventh Circuit reversed a district court’s order refusing to set aside an arbitration award and held that the arbitrators had exceeded their powers under the Illinois Uniform Arbitration Act by erroneously interpreting the parties’ agreement. Bankers Life and Casualty Insurance Company v. CBRE, Inc., No. 15 1471 (7th Cir. July 29, 2016).
Factual background
The case involved the interpretation of a real estate listing agreement under which CBRE brokered a deal in which Bankers Life & Casualty Insurance Co. (Bankers) sublet its existing commercial lease and moved to a new building under more favorable lease terms. Bankers was unwilling to enter the deal unless the net revenues received from the sublease of its existing space and the rental terms on the proposed new space netted Bankers $7 million. The parties entered a listing agreement under which CBRE was obligated to "present all offers and counteroffers to [Bankers]" and to "answer [Bankers’] questions relating to offers, counteroffers, notices, and contingencies."
CBRE prepared and presented to Bankers a cost-benefit analysis (CBA) of the proposed transaction showing that Bankers would net $6.9 million from the deal. Bankers proceeded with the transaction. CBRE’s analysis had a $3.1 million error in it because CBRE failed to include in its calculation the tenant build-out allowance that Bankers would owe to the new subtenant on the sublease. As a result, Bankers ended up netting $3.8 million instead of $6.9 million.
Bankers initiated a private arbitration seeking to recover from CBRE the $3.8 million difference, plus approximately $4.5 million in commissions that CBRE was to have received from the transaction. After hearing evidence, the panel of arbitrators entered an award in favor of CBRE, finding that the listing agreement did not explicitly require CBRE to furnish Bankers with a correct CBA. On Bankers’ motion for reconsideration, the panel revised its award acknowledging that "the Listing Agreement obligated CBRE to answer questions accurately," and that "CBRE made a mistake and that mistake was material." Yet the panel found in favor of CBRE this time on grounds that the CBA included a disclaimer that "clearly provides that CBRE was not responsible for errors." Bankers filed an action in federal district court seeking to vacate the award, but the trial court denied Bankers’ request.
The Seventh Circuit’s Decision
On appeal, the Seventh Circuit reversed, holding that the arbitrators had exceeded their authority. The court stated that the arbitration panel "was authorized to interpret the contract. The contract did not include the cost benefit analyses. The panel’s reliance on the disclaimer in the CBAs was therefore unjustified. The disclaimer is not part of the Listing Agreement; it was not negotiated by the parties but merely inserted by CBRE unilaterally."
The court continued: "The arbitrators’ role was to interpret the agreement, not additions to it by one party without the consent of the other—such additions could not amend the agreement." The court concluded that "the award in this case was based on documents outside the parties’ agreement and ignored the agreement itself—the Listing Agreement."
One dissenting judge pointed out that the majority’s contract analysis might have been correct, if the majority had been charged with the initial contract interpretation. But, the dissent argued, the court’s role after the parties have agreed to arbitration is to review, on an extremely limited basis, whether the arbitrators "exceeded their powers." Most courts limit such review to cases where the arbitrators essentially make calculation errors. The dissent concluded that the award may have contained "an erroneous interpretation of the contract, but the decision is plainly grounded in the contract, so we cannot vacate the award." (Emphasis in original.)
Key Takeaways
The Seventh Circuit’s opinion suggests that a court reviewing an arbitration award may look to the contract-interpretation logic of the reasoned award and vacate the award if it determines that the logic is based on facts outside of the contract. The Seventh Circuit never applied the test adopted by the Illinois Supreme Court that would overturn the award only where "all fair and reasonable minds would agree that the construction of the contract was not possible under a fair interpretation of the contract." Rauh at 643. Bankers Life therefore may represent an expansion of the grounds on which arbitration awards can be reviewed and overturned.
The Bankers Life decision interpreted Illinois law but is not binding on Illinois state courts. However, the opinion’s author is a well-known and influential federal appellate court judge. Regardless of whether Judge Posner’s analysis is adopted by Illinois courts, the Bankers Life opinion will likely result in additional attempts by disappointed arbitration parties to obtain relief from arbitration awards in the circuit and federal courts. Broadening the grounds for challenging arbitration awards may negatively impact the efficiency and finality of arbitration in Illinois.
Chicagoland AGC