Second Circuit Upholds Arbitration Panel's Authority to Award Attorney Fees as a Sanction

Copyright 2009.  All rights reserved. 

In ReliaStar Life Insurance v. EMC National Life, Slip. Op. 07-0828-cv (April 9, 2009), a divided panel of the U.S. Court of Appeals for the Second Circuit affirmed a $3.8 million award of attorney fees as a sanction for bad faith in an arbitration.  In so doing, the Second Circuit reversed a ruling by the district court that arbitrators are not authorized to award attorney fees as a sanction where the parties' written agreement provides that each party "shall bear the expense of its own arbitrator . . . and related outside attorney fees . . . ."   ReliaStar will be widely cited in arbitrations in which attorney fees are sought as a sanction for bad faith.

The ReliaStar majority rejected the argument that a contractual agreement that each party shall bear its own expenses and fees bars an award by an arbitration panel of fees and costs as a sanction for failing to arbitrate in good faith.  Over the objection of the dissenting judge, the majority described the contractual clause as simply a statement of the American Rule, in which each party typically bears responsibility for its own attorney fees, but held that such a clause only applies "in the expected context of good faith dealings."  ReliaStar at 11 (emphasis in original).

The district court earlier found that the contract clause did prohibit an award of attorney fees and even described the clause as being as "clear as a bell," but on appeal the majority disagreed.  The majority found the clause inapplicable to bad faith situations and pointed to the broad authority conferred on the arbitrators by the parties' Coinsurance Agreements to decide all disputes under those contracts.  The court also emphasized prior Second Circuit precedent showing deference to arbitration awards and approving awards of attorney fees as a sanction for bad faith in arbitrations. 

On the oft-discussed question of how much contractual support is necessary to find that arbitrators have the authority to award attorney fees as a sanction, the majority announced:

we here clarify that a broad arbitration clause, such as the one in this case . . . , confers inherent authority on arbitrators to sanction a party that participates in the arbitration in bad faith and that such a sanction may include an award of attorney's or arbitrator's fees . . . the authority to sanction inheres in the comprehensive arbitral authority.

ReliaStar at 8 and 8, n.2.   This language is likely to be widely cited in cases where the contractual authority of arbitrators to award fees as a sanction is in issue.

ReliaStar involved a substantial sanction of $3.8 million.  The decision is silent as to whether this was National Travelers' total cost of arbitrating against ReliaStar.  And there was no finding that an award of this size was necessary to compensate National Travelers for ReliaStar's bad faith.  The majority recognized that the scope of a permissible fee award sanction could be an issue in future cases, but found that where National Travelers had not raised the issue, in this case "we have no occasion to consider an arbitrator's authority to award attorney fees in excess of the amount necessary to compensate for . . . a party's arbitrating in bad faith."  ReliaStar at 9, n. 3. 

Parties are on notice that, at least in the Second Circuit, a broad arbitration clause may be enough absent an express contractual bar to support an award of attorney fees as a sanction.  Where all fees and costs cannot be said to have been incurred due to bad faith, however, the question of how much in fees may be awarded remains for another day.

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