CASE NOTES: Remand to Arbitrator To Add Reasoning Does Not Violate Functus Officio Doctrine

Smarter Tools Inc. v. Chongqing Senci Import & Export Trade Co., Ltd.
(2d Cir. No. 21-724, January 17, 2023)

The doctrine of functus officio has frustrated many for years, as it may prevent an arbitrator from correcting a mistake in a final award even though the arbitrator recognizes the mistake.

In mid-January 2023, the US Court of Appeals for the Second Circuit issued an opinion in Smarter Tools Inc. v. Chongqing Senci Import & Export Trade Co., Ltd. (2d Cir. No. 21-724, January 17, 2023) that concluded a U.S. District Court had appropriately remanded an international arbitration award to the original arbitrator to supply reasoning notwithstanding the functus officio doctrine. This appellate opinion is useful for its explanations of (1) why the doctrine did not prevent the remand and (2) why remand was appropriate rather than vacatur of the award.

In Smarter Tools, an arbitrator for the International Centre for Dispute Resolution (ICDR) had issued an award in favor of Chongqing Senci. Considering competing motions for confirmation and vacatur of the Award, the U.S. District Court for the Southern District of New York determined that the arbitrator had exceeded his authority because he had failed to issue a reasoned award as requested by both sides. Rather than vacating the award as Smarter Tools (STI) requested, the District Court remanded to the arbitrator for “clarification of [the arbitrator’s] findings.” The District Court stated that vacatur “must be strictly limited in order to facilitate the purpose underlying arbitration: to provide parties with efficient dispute resolution, thereby obviating the need for protracted litigation.” (internal quotation marks omitted).

After the remand, the arbitrator added reasoning to the award and the District Court then confirmed the amended award over the objections of STI. Among STI’s arguments for vacating the revised award, was the argument that the remand to the arbitrator had been improper because the arbitrator had been rendered functus officio upon issuing the initial final award. STI also asserted that remanding the award to the arbitrator rather than vacating the award for an excess of authority was contrary to the Federal Arbitration Act (FAA).

The District Court rejected STI’s arguments and confirmed the revised ICDR award. Petitioner STI then appealed that decision to the Court of Appeals.

The Appeals Court explained that STI’s primary appellate argument was that the district court erred in remanding for the arbitrator to issue a reasoned award, in contravention of the doctrine of functus officio and the Federal Arbitration Act (FAA). Absent a finding of ambiguity, or a minor clerical error, STI argued, vacatur was the only remedy once the district court determined that the arbitrator exceeded its authority by failing to issue a reasoned award.

The Court of Appeals applied the customary deferential standard of review to the arbitrator’s findings, but reviewed the District Court remand ruling as a matter of law.

The appeals panel stated that the Second Circuit recognizes several exceptions to the determination that a final award renders the arbitral tribunal functus, including ambiguity, indefiniteness, failure to address a later arising contingency, clarification and to assist the reviewing court to determine if the arbitrator had manifestly disregarded the law.

While the issue of whether a court may remand for an arbitrator to produce a reasoned award is an open question in our Circuit, several of our cases contain dicta indicating that, in similar circumstances, remand is the proper remedy. In Landy Michaels Realty Corp. v. Local 32B-32J, Service Employees International Union, AFL-CIO, the panel found itself without jurisdiction to review the appeal of a district court order remanding to the arbitrator to correct a miscalculation of damages. See 954 F.2d 794, 797 (2d Cir. 1992). The parties agreed that the arbitrator miscalculated the damages, and the district court remanded to the arbitrator to reconsider the damages award. In dismissing for lack of jurisdiction, we noted that:

If this case were within our appellate jurisdiction at this time, we would face the substantial question whether the district court’s remand order exceeded the limited scope of review available to a court asked to enforce or vacate an arbitration award. Though some narrow authority to return a matter to an arbitrator may exist where the arbitration task has not been fully performed or where the uncertainty of an award requires clarification, that authority does not extend to obliging the arbitrator to revisit an issue because of a court’s disagreement with its resolution. Id. (emphasis added).

Similarly, in Siegel v. Titan Industrial Corp., we observed that district courts have the power to remand to the arbitrator “to clarify the meaning or effect of an award.” 779 F.2d 891, 894 (2d Cir. 1985). Thus:

Where, as here, an arbitrator’s award appears to have been reached on the basis of a precise mathematical calculation, it is desirable, and in some cases may be necessary, to know the basis for the calculations underlying the award. A remand for clarification in such circumstances would not improperly require arbitrators to reveal their reasons, but would instead simply require them to fulfill their obligation to explain the award sufficiently to permit effective judicial review. Id.

In Hardy v. Walsh Manning Securities, L.L.C., we recognized that we may “remand to the [arbitrator] for purposes broader than a clarification of the terms of a specific remedy. That is, we have the authority to seek a clarification of whether an arbitration panel’s intent in making an award evidences a manifest disregard of the law.” 341 F.3d 126, 134 (2d Cir. 2003) (internal quotation marks and alterations omitted); see also Tully Constr. Co./A.J. Pegno Constr. Co., J.V. v. Canam Steel Corp., No. 13 Civ. 3037, 2015 WL 906128, at *20 (S.D.N.Y. Mar. 2, 2015) (remanding to the arbitrator for the “purposes of issuing a ‘reasoned award’” and concluding “the doctrine of functus officio presents no impediment to that approach”).

Applying these principles to the facts of the Smarter Tools dispute, the Court of Appeals concluded that common sense and the policy underpinning the functus officio doctrine support the District Court’s decision to remand to the arbitrator rather than vacating the ICDR award.

Where, as here, a district court determines that the arbitrator failed to produce an award in the form agreed to by the parties, remand for a properly conformed order is a permissible choice. It simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued after the hearing. See Gen. Re Life Corp., 909 F.3d at 549 (finding exception to the functus officio doctrine to promote “the twin objectives of arbitration: settling disputes efficiently and avoiding long and expensive litigation”). Nor does a remand in such circumstances undermine the functus officio doctrine’s purpose, which is to prevent arbitrators from changing their rulings after issuance due to outside influence by an interested party. See, e.g.,Colonial Penn, 943 F.2d at 331-32 (“The policy underlying this general rule is an unwillingness to permit one who is not a judicial officer and who acts informally and sporadically, to re-examine a final decision which he has already rendered, because of the potential evil of outside communication and unilateral influence which might affect a new conclusion.” (internal quotation marks omitted)); Glass, Molders, Pottery, Plastics & Allied Workers Int’l Union, AFL-CIO, CLC, Loc. 182B v. Excelsior Foundry Co., 56 F.3d 844, 847 (7th Cir. 1995) (“Once they return to private life, arbitrators are less sheltered than sitting judges, and it is feared that disappointed parties will bombard them with ex parte communications and that the arbitrators, not being professional judges or subject to the constraints of judicial ethics, will yield . . . .”).

The appeals judges also contended that remand was, in this situation, consistent with the exception to the functus officio doctrine for clarification of an ambiguous award. The judges recalled that, in the Second Circuit, “[a]n arbitrator may issue a clarification of an ambiguous award if: “(1) the final award is ambiguous; (2) the clarification merely clarifies the award rather than substantively modifying it; and (3) the clarification comports with the parties’ intent as set forth in the agreement that gave rise to arbitration.”

For the appeals panel, that “align[ed] with what occurred here: the original award was found not to provide the reasoned award the parties bargained for; in its amended award, the arbitrator clarified the original award by including a rationale for rejecting STI’s counterclaims; and this clarification is consistent with the parties’ intent that the arbitrator issue a reasoned award.

The Court of Appeals also declined to accept petitioner STI’s argument that vacatur was the only option available to the District Court under the FAA. STI argued that § 10 of the FAA contained the grounds for vacatur of an award, while § 11 of the FAA contained the grounds for modification or correction of an award. Section 10, contended the petitioner, required vacatur because the District Court had found the arbitrator exceeded his authority by failing to include reasons in the initial final award.

The Court rejected this argument, applying the presumption in favor of enforcing an award and concluding that the absence of reasoning in the initial final award fit more closely within the authority of FAA § 11 to require modification or correction of the award.

Rather, the failure to provide a reasoned award best fits under Section 11 of the FAA, which allows a court to “make an order modifying or correcting the award . . . [w]here the award is imperfect in matter of form not affecting the merits of the controversy.” 9 U.S.C. § 11(c) . . . .

Where, as here, the parties agree that the arbitrator will produce a reasoned award, the failure to provide one renders the award “imperfect in matter of form not affecting the merits of the controversy.” 9 U.S.C. § 11(c). Remand for the arbitrator to produce an award in a form consistent with the parties’ agreement both “effect[s] the intent” of the parties and “promote[s] justice” between them, consistent with § 11. See id. § 11. We thus find no error in the district court’s decision to remand for the production of a reasoned award, rather than vacating the original award and forcing the parties to begin anew.

Interestingly, the Court of Appeals did not address whether the power of the courts under FAA § 11 to modify or correct an award included the power to order the underlying arbitral tribunal to make those modifications or corrections, rather than the court doing so itself. The Appeals Court was apparently satisfied that existing precedent made that course of action clear.

At bottom, this decision arguably expands the “clarification” exception to the functus officio doctrine to encompass a failure to provide reasons in the award rather than require a complete redo of the arbitration by vacating the initial final award. That is not a wholesale rejection of the functus doctrine, but it does continue a path in some U.S. courts of minimizing the adverse effects of that doctrine by construing its exceptions broadly to avoid requiring an entirely redone arbitration.

Mark Kantor is a retired partner of Milbank, Tweed, Hadley & McCloy (now Milbank LLC), an international arbitrator in investment and commercial disputes, adjunct professor at the Georgetown University Law Center and editor-in-chief of the online journal Transnational Dispute Management.