Arbitrators and judges have a natural tension. Judges, especially federal judges, wield enormous power and command authority and respect. Arbitrators, particularly in specialized industries like insurance and reinsurance, are typically former executive officers of companies and do not preside over anything other than the particular arbitral dispute to which they have been appointed. Arbitrators, again especially in specialized industry disputes like insurance and reinsurance, are often excused from following the rules of law and are directed by the arbitration provision to consider the custom and practice of the industry. Judges have to follow the law.
So when arbitral issues are presented to judges there is the tendency for judges to consider the merits of the dispute even though the merits are typically left for the arbitrators to decide. Most judges resist the pull to put their two cents in about how they would address the merits because most judges understand that it is federal policy to encourage and support arbitration and to let the arbitrators deal with the substance of the dispute. But once in a while a judge may stick his or her nose into the early stages of an arbitration and make a ruling that affects how that arbitration will operate in the future. That happened in a recent case decided by the United States Court of Appeals for the Second Circuit.
In Benihana, Inc. v. Benihana of Tokyo, LLC, No. 14-841 (2d Cir. Apr. 28, 2015), the district court granted certain pre-arbitration relief by way of injunctions concerning trademarks and the like. The district court also barred the defendant from making a certain argument to the arbitration panel should the panel make a particular finding. The substance of the preliminary injunction doesn’t matter for our point here. The issue for the circuit court was whether the district court erred in enjoining a party to an arbitration from making an argument to the arbitration panel.
In reversing that part of the district court’s injunction in aid of arbitration, the court stated a well-known rule, but which was violated in this case: “When a dispute is properly before an arbitrator, a district court should not interfere with the arbitral process on the ground that, in its view of the merits, a particular remedy would not be warranted.” The court went on to admonish the plaintiff that it “may not subvert its agreement to arbitrate by obtaining a determination from the district court in advance that there are no grounds for the arbitrator to grant a particular remedy.” The time to challenge an arbitrator’s decision is after a final award has been obtained. And as we know, even then, the opportunities to vacate an arbitration award are very few and very difficult to achieve.
Why is all this important to insurance and reinsurance disputes? Because the scope of an arbitrator’s power and whether an arbitrator has exceeded that power has been hotly contested in many a reinsurance arbitration. Here, one of the parties sought to define the scope of the arbitrator’s power in advance by obtaining a preliminary court ruling limiting the arbitrator’s power to order a particular remedy because a party contended that it was not permitted by the parties’ contract. The circuit court made clear that this tactic will not fly.
Once a party has elected to submit a dispute to arbitration, holds the court, the broad arbitration provisions grant the arbitrators jurisdiction over all disputes concerning the parties’ agreement. And that jurisdiction is unconditional and unlimited. So where the arbitration clause demonstrates that the parties intended to grant the arbitrator the power to decide questions of arbitrability, then the arbitrator is empowered to decide whether type of relief requested by a party is arbitrable. The court held that once an arbitrator has jurisdiction over a matter, any subsequent construction of the contract and the parties rights under it is for the arbitrator to decide.
If the arbitration clause were narrow and clearly left for the court the decision of arbitrability, a different result might have occurred, but where the arbitration clause is broad and grants jurisdiction to the arbitrator to decide all issues, then the court cannot step in and pre-judge what the arbitration panel may decide. If, in fact, the arbitrator does not have power under the agreement to grant certain relief, then the courts will address whether the arbitrator exceeded her powers after the final award is issued.