An Official Exception to Functus Officio: American Arbitrators Can Alter Their Own Ambiguous Awards

Overview

On November 28, 2018, in General Re Life Corp. v. Lincoln National Life Insurance, No. 17-2496 (2d Cir. 2018), the U.S. Second Circuit Court of Appeals joined the Third, Fifth, Sixth, Seventh, and Ninth Circuits to recognize a formal exception to the doctrine of functus officio: where an arbitration award is ambiguous, arbitrators retain their jurisdiction and authority to clarify, and thus alter, that award. [1] On this precedent, arbitrators can do so even over the objection of parties to the dispute. Arbitrators are permitted do so as long as it meets the three-part test: (1) the final award is ambiguous; (2) the clarification merely clarifies the award, rather than substantively modifies or rewrites it; and (3) the clarification comports with the parties’ intent as set forth in the agreement that gave rise to arbitration.

It now appears to be settled federal law in the U.S. that an exception to functus officio exists where an arbitral award fails to address a contingency that later arises, or when the award is susceptible to more than one interpretation. In such circumstances, it falls to the arbitrator or panel itself – not a reviewing court on appeal – to resolve the issue by retaining jurisdiction to do so. As the Second Circuit noted, this narrow rule is intended to further the goals of arbitration to settle disputes efficiently and avoid long and expensive litigation.

Background and the Decision

The underlying matter concerned a Reinsurance Agreement between the parties, which allowed General Re to increase premiums only if the increase was founded on a “change in anticipated mortality”. [2] If premiums were increased, Lincoln could “recapture” its life insurance policies, rather than pay increased premiums. When the premiums were increased, Lincoln elected to arbitrate whether there had been a “change in anticipated mortality”. The Reinsurance Agreement itself provided for such arbitration.

The arbitration panel found a “change in anticipated mortality” such that premiums had been legitimately increased. The arbitral award directed that if Lincoln then chose to “recapture” its policies, all premium and claim transactions paid by one party to the other following the effective date of the recapture were to be unwound. It expressly noted that any disagreement over the calculations of amounts owed should be submitted to the panel for resolution. In its own view, the panel broadly retained “jurisdiction over this matter to the extent necessary to resolve any dispute over the calculation and payment of the amounts awarded”.[3]

Lincoln exercised its right to recapture. The parties differed on how to read the unwinding language in the arbitral award. Lincoln moved for the panel to clarify the issue; General Re argued to confirm the original award without a clarification. A majority of the panel found the award contained “ambiguities requiring clarification” and issued a formal clarification (“Clarification”), finding that both parties were wrong in their reading of the award in relation to the Reinsurance Agreement.[4] The panel disposed of the matter accordingly. Upon petition, the district court confirmed the Clarification.

On appeal in the Second Circuit, General Re argued, among other things, that the doctrine of functus officio prevented the arbitration panel from altering its award. Typically, this doctrine holds that once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreement by the parties, to re-determine those issues. The Second Circuit noted that in an arbitration context, “[t]he traditional rationale underlying this rule is that it is necessary to prevent re-examination of an issue by a non-judicial officer potentially subject to outside communication and unilateral influence”.[5] (Note this departs from the typical rationale when functus officio is invoked in a formal court context, where the classical purpose of the doctrine is to allow finality of judgments from courts which are subject to appeal and provide litigants a stable basis from which to launch an appeal).[6]

The Second Circuit affirmed the district court, thereby confirming the Clarification. By doing so, it endorsed a common law exception to functus officio such that an arbitrator can clarify or construe an arbitration award that seems complete but proves to be ambiguous in its scope and implementation, when the three-part test noted above is met.

Takeaways

This U.S. common law development now appears firmly entrenched, and its significance is multifold, each worthy of comment:

  • On one hand, it likely leads to an increase in judicial economy and efficiency. Allowing the parties and arbitrators to clarify issues relating to an arbitral award on a narrow, common sense basis, without the need for a reviewing court to intervene, has the potential to save time, expenses, and resources for all those involved. Moreover, by default – for better or for worse – it could also decrease the number of arbitral awards that are subject to a court’s opinion, thus maintaining the confidentiality that often underlies arbitrations.
  • On the other hand, it raises concerns about the judicial recognition of finality in arbitral proceedings. The scope and confines of this functus officio exception remain somewhat unclear. It is difficult to say precisely what constitutes ‘ambiguity’ and mere ‘clarification’ as opposed to ‘modification’. Further, the parties may differ on the intent as set forth in the agreement that gave rise to arbitration, rendering it difficult to determine whether the ‘clarification’ comports with that intent, and thus requiring a more in-depth analysis by the arbitrator than envisioned when assessing a ‘clarification’. The more in-depth the analysis becomes, the more the arbitrator begins to resemble a reviewing court assessing its own substantive judgment. Ultimately, the more this analysis becomes a case-by-case assessment, the less this exception to functus officio resembles an actual carve-out that is equally applicable in all circumstances.

In any event, claimants and respondents alike in arbitrations, with matters that may be subject to the jurisdiction of U.S. federal district courts, should make note of this now seemingly settled principle. It could both procedurally and substantively impact how an arbitral award unfolds. Should the parties find themselves potentially subject to such a scenario, a related issue concerns a need to consider whether the operative arbitration agreement or rules already provide a procedure for such a ‘clarification’ to be made, but perhaps on different terms, or with different boundaries, as compared to that provided for under the common law. In the event of a conflict between the two, it might be said the agreement or rules pertaining to the issue should prevail, depending on what their legal status may be. But given the potentially sweeping impact of this now-well-settled common law exception, perhaps that answer is less clear.

Implications for International Arbitration Law

From an international arbitration law perspective, such an exception in U.S. federal courts could have consequences for parties to internationally-constituted or seated arbitrations. It is no secret that by virtue of, for example, the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly the “New York Convention”), a bedrock of the international arbitration system, and its sweeping codification into U.S. federal statute (9 U.S.C. § 201 et seq.), U.S. federal courts lie as a common repository with broad jurisdiction for enforcement of arbitration agreements and awards all over the world. Should an ambiguous award from an internationally-constituted or seated arbitrator find its way subject to the reach of U.S. federal courts, it is worth questioning whether this common law exception would cause that U.S. federal court to remand that award to the international seat from which it came pending clarification before enforcement. It is indeed difficult to enforce an award that cannot otherwise be understood.

Another related question perhaps concerns a hypothetical scenario whereby the ambiguous award emanates from an international seat with legislation or rules that prohibit clarifications or similar alterations to be made to the award by the arbitrator once the award is given. In that scenario, it is questionable whether the foreign law or principle to this effect would take precedent in a U.S. federal court, or whether the common law exception in U.S. law would override in a U.S. federal court.

The bottom line is that if an arbitral award could be subject to U.S. federal court jurisdiction, for whatever reason, the parties would be wise to view the finality of that award in light of this common law exception to functus officio now established in U.S. federal courts. 

Implications for Canadian Arbitration Law

From a Canadian arbitration law perspective, there is no known Canadian authority as expressly equivalent to this judicially-recognized exception to functus officio in U.S. jurisprudence. The prevailing view in Canada at this point appears to be the Supreme Court of Canada’s comments in Chandler v. Assn. of Architects (Alberta), [1989] 2 S.C.R. 848:

The doctrine of functus officio states that an adjudicator, be it an arbitrator, an administrative tribunal or a court, once it has reached its decision cannot afterwards alter its award except to correct clerical mistakes or errors arising from an accidental slip or omission … “To allow the adjudicator to again deal with the matter of its own volition without hearing the entire matter ‘afresh’ is contrary to this doctrine”[.][7]

The Supreme Court’s view may appear more conservative as compared to the scope of the exception to functus officio recently endorsed by the Second Circuit. However, in Chandler, the Supreme Court also stated that “the principle should not be strictly applied” where an enabling statute permits the decision to be reopened in order to enable a tribunal to discharge the function committed to it by enabling legislation.[8] This flexibility may also extend to a private arbitration agreement if its terms specified as much.

The Supreme Court’s recognition that the doctrine of functus officio should be applied flexibly and not strictly could perhaps be interpreted as the Canadian equivalent of the exception to functus officio endorsed in U.S. federal courts. If so, this general common law view would go further than what is currently reflected in certain statutes in Canada on this issue. In Ontario, for example, under Article 33 of the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law, being Schedule A to the International Commercial Arbitration Act, R.S.O. 1990, c. I.9, a party “may request the arbitral tribunal to give an interpretation of a specific point or part of the award” - but only “if so agreed by the parties … with notice to the other party”.

[1]General Re Life Corp v Lincoln National Life Insurance, No. 17-2496 (2d Cir. 2018) [“Second Circuit Decision”].

[2] Second Circuit Decision, supra at page 3.

[3] Second Circuit Decision, supra at page 5.

[4] Second Circuit Decision, supra at page 7.

[5] Second Circuit Decision, supra at page 10.

[6] See e.g. comments in Doucet-Boudreau v. Nova Scotia (Minister of Education), 2003 SCC 62 at para. 79.

[7]Chandler v Assn. of Architects (Alberta), [1989] 2 S.C.R. 848 at 867 (Justice L'Heureux-Dubé in dissent, but uncontroversial on this general point with respect to arbitrators).

[8]Chandler v Assn. of Architects (Alberta), [1989] 2 S.C.R. 848 at 862 (Justice Sopinka for the majority).

international arbitration arbitration disputes Arbitration awards

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