Unlocking Answers through Dispute Resolution

Submit a Case

Use an Honorable Engagement Provision

Use an Honorable Engagement provision to make the “steep uphill climb” toward arbitral vacatur improbable.

By Anthony C. Adamopoulos, Esq. ©2015

In May, the First Circuit of the United States Court of Appeals issued a decision of interest to arbitration practioners. Of exceptional interest is the court’s recognition that when arbitration agreements contain an Honorable Engagement provision “… the prospects for successful arbitration are measurably enhanced…”.

First State Insurance Co. and New England Reinsurance Corporation v. National Casualty Co., 781 F.3d 7 (1st Cir. 2015) 1 (First State)  described and confirmed, in a clear and plain manner, two concepts of arbitration: (1) the unlikelihood of having arbitration awards vacated and (2) the value of an “ honorable engagement” provision in arbitration agreements.

In First State, the arbitration Panel’s award arose out of a dispute involving eight reinsurance agreements.  The Panel’s interpretation of the agreements was the basis for its award.  The award included the establishment of a payment protocol and a reservation of rights procedure.

The appellant, National Casualty Company, contended that the interpretation that led to the payment protocol exceeded the Panel’s authority and that the reservations of rights procedure “…[did] not draw its essence from the underlying agreements.” Id. P. 10.

The unlikelihood of vacatur.

The Panel first describes the practical likelihood of having an arbitral award vacated:

“A party that implores a court to vacate an arbitration award normally faces a steep uphill climb: the scope of judicial review of arbitration awards is ‘among the narrowest known in the law’.”  Me. Cent. R.R. Co. v. Bhd. of Maint. of Way Emps., 873 F.2d 425, 428 (1st Cir. 1989).” First State Insurance Company, 781 F.3d at 9.

“… A federal court’s authority to defenestrate an arbitration award is extremely limited. … A legal error (even a serious one) in contract interpretation is, in and of itself, not a sufficient reason for a federal court to undo an arbitration award. … Only if the arbitrators acted so far outside the bounds of their authority that they can be said to have dispensed their own brand of industrial justice will a court vacate the award. … Put another way, as long as an arbitration award draw[s] ‘its essence’ from the underlying agreement, it will withstand judicial review — and it does not matter how ‘good, bad, or ugly’ the match between the contract and the terms of the award may be.” (Internal quotation marks and citations omitted.).  First State Insurance Company, 781 F.3d at 11.

Massachusetts case law provides a similar “steep uphill climb”:           “… on review of an arbitrator’s decision, we do not review the arbitrator’s findings of fact or conclusions of law for error… . Judicial review of an arbitration award is narrowly confined… . [A] court is bound by the arbitrator’s findings and rulings ‘even if they appear erroneous, inconsistent, or unsupported by the record at the arbitration hearing’. ” (Internal quotation marks and citations omitted.) American Fed’n of State, County, & Mun. Employees, Council 93, AFL-CIO v. School Dep’t of Burlington, 462 Mass. 1009,1010 (2012) Rescript affirming: American  Fed’n of State, County, & Mun. Employees, Council 93, AFL-CIO v. School Dep’t of Burlington, 78 Mass. App. Ct. 511, (2011).

The First State Panel does not set new law; rather, it boldly reiterates what seasoned arbitral attorneys know about overturning an award, from step one, it is a “steep uphill climb”.

For Massachusetts practitioners, arbitration law generally flows from two sources, U.S. Code, Title 9 – Arbitration, The Federal Arbitration Act  (FAA) and M.G.L. Ch. 251 – The Uniform Arbitration Act for Commercial Disputes, The Massachusetts Arbitration Act (MAA). “In all relevant respects, the language of the FAA and the MAA providing for enforcement of arbitration provisions are similar, and…[our Supreme Judicial Court] has interpreted the cognate provisions in the same manner.” Warfield v. Beth Israel Deaconess Medical Center, Inc., 454 Mass. 390,394 (2009).

The FAA, at Section 10, lists four reasons for vacating an arbitral award. The MAA’s Section 12, lists five.

The value of an Honorable Engagement provision.

What power does an honorable engagement provision give to arbitrators? “…[A]n honorable engagement provision empowers arbitrators to grant forms of relief, such as equitable remedies, not following the strict rules of law.’ ” First State Insurance Company, 781 F.3d at 12.

Until this case the First Circuit had “…not had occasion to address the operation and effect of an honorable engagement provision in an arbitration clause.” First State Insurance Company, 781 F.3d at 12.

The arbitration section in each of the subject reinsurance agreements contained an honorable engagement provision. That provision “… directs the arbitrators to consider each agreement as an honorable engagement rather than merely a legal obligation and [it] goes on to explain that the arbitrators are relieved of all judicial formalities and may abstain from following the strict rules of law.” (Internal quotation marks omitted.)  First State Insurance Company, 781 F.3d at 12.

The Panel spoke plainly on the value of such a provision.  “This is a huge advantage: the prospects for successful arbitration are measurably enhanced if the arbitrators have flexibility to custom-tailor remedies to fit particular circumstances. … An honorable engagement provision ensures that flexibility.” First State Insurance Company, 781 F.3d at 12.

As to the Appellant’s contention that the arbitrators’ payment protocol was not derived from the subject Agreements, the Panel, in effect, said that while Appellant’s contention may be sound in contract law it is not relevant, because, “… the honorable engagement provisions in the arbitration clauses of the underlying agreements authorized the arbitrators to grant equitable remedies”. First State Insurance Company, 781 F.3d at 12.

The take away.

If parties negotiating an arbitration agreement want to measurably reduce the chance of a future award being vacated they should craft into their arbitration agreement an honorable engagement provision and thereby make the “steep uphill climb” toward vacatur remotely improbable to reach.

1 The Panel that heard this case included Hon. David H. Souter, Associate Justice (Ret.) of the Supreme Court of the United States.

2 “The FAA was originally enacted in 1925… and then reenacted and codified in 1947 as Title 9… Its purpose was to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts. Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 219-220, and n. 6 (1985); Scherk v. Alberto-Culver Co., 417 U. S.506, 510, n. 4 (1974).”  Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991)