Arbitrator Power to Sanction Bad Faith Conduct: Can it Be Limited by the Arbitration Agreement?
Australian Law Journal, Vol. 84, p. 82, February 2010
8 Pages Posted: 23 Nov 2011
Date Written: February 1, 2010
To what extent can the parties to an arbitration agreement limit an arbitrator’s power to impose sanctions? Because the arbitrator’s power arises from the agreement of the parties, it would seem that if the parties placed an express limitation on the arbitrator’s power in the arbitration clause, the arbitrator could not exceed that limitation. However, in ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Ins. Co., the Second Circuit upheld an arbitrator’s decision imposing attorneys’ fees on one party, despite an express provision in the arbitration clause that each party would bear its own costs and fees. The arbitrator’s decision to allocate fees against the losing party was based on his conclusion that the party acted in bad faith. In upholding the award, the Second Circuit reasoned that the parties’ agreement about equal allocation of costs and fees could be fairly understood as based upon “the expected context of good faith dealings.” Thus, because the assumption underlying the agreement was that both parties would act in good faith, when one party did not act in good faith, the clause did not prevent the tribunal from imposing a sanction. In dictum, the Second Circuit declared that if parties clearly wanted to limit an arbitrator’s power, they could do so by stating explicitly that a reallocation of costs would not be permissible even if there were a finding of bad faith. Although the Second Circuit’s basic decision seems justified, its dictum saying that parties could contract out of certain sanctions for bad faith conduct appears more problematic, given the mandatory obligation under state law for parties to act in good faith.
Keywords: Commercial arbitration, bad faith, sanctions, remedies
JEL Classification: K33, K41
Suggested Citation: Suggested Citation