A recent decision by the U.S. District Court for the Southern District of New York has reinforced the basic principle that, although arbitration does not fundamentally require reasoned awards, courts will require reasoned awards when the parties’ underlying contract either expressly requires such or references arbitral rules that provide for such.[1]  In Smarter Tools, Inc. v. Chongqing SENCI Import & Export Trade Co., the plaintiff sought to vacate an arbitral award rendered against it on the basis that the award was not sufficiently reasoned.  The court ultimately decided that the award was insufficiently reasoned but, rather than vacate it entirely, remanded the case back to the arbitrator for supplementation.

Plaintiff Smarter Tools, Inc. (“STI”) had purchased thousands of gas-powered inverter generators from defendant SENCI Import and Export Trade Co. (“SENCI”).  STI stipulated that it owed SENCI approximately $2.4 million for the purchases of the generators, but also alleged that SENCI had breached their agreement by providing generators that were not compliant with California and federal environmental regulations.  SENCI instituted arbitral proceedings against STI to recover the unpaid balance for the generators delivered; STI counterclaimed for failure to provide compliant generators and for unilaterally cancelling certain scheduled deliveries.

The relevant contract provided that any disputes be resolved by arbitration in accordance with the rules of the International Centre for Dispute Resolution (“ICDR”), the international division of the American Arbitration Association (“AAA”).  Article 30 of the ICDR rules states: “The tribunal shall state the reasons upon which an award is based, unless the parties have agreed that no reasons need be given.”  Furthermore, the parties admitted that they had both requested a reasoned award be rendered in the arbitration.[2]

The award rendered by the arbitrator totaled six pages and scarcely touched upon STI’s counterclaim against SENCI.  With respect to STI’s counterclaim, the arbitral award “made no findings as to whether any generators provided by SENCI were defective or non-compliant, nor whether SENCI unilaterally cancelled scheduled deliveries.”[3]  The “Relief Awarded” section of the arbitral award stated simply “STI must pay SENCI $2,402,680.43” and “STI’s claims against SENCI are denied.”[4]

Before analyzing whether the arbitral award was sufficiently reasoned, the district court restated the basic principle that, although “an arbitrator’s rationale for an award need not be explained,” parties remain “free to contract around the default rule and require arbitrators to issue more detailed awards.”[5]  Decisions by the Second Circuit Court of Appeals in prior cases have held that a “reasoned award” requires “something more than a line or two of unexplained conclusions, but something less than full findings of fact and conclusions of law on each issue.”[6]  According to the Second Circuit, a “reasoned award sets forth the basic reasoning of the arbitral panel on the central issue or issues raised before it,” but “need not delve into every argument made by the parties.”[7]

In light of this precedent, the district court held that the arbitral award between STI and SENCI was not sufficiently reasoned.  The district court was unsatisfied with the arbitrator’s “conclusory” statement that, “having heard all of the testimony [and] reviewed all of the documentary proofs and exhibits,” he did “not find support for STI’s claims.”[8]  The arbitrator did not provide any further rationale for his decision aside from finding STI’s expert witness not credible.  Notably, STI did not rely on this expert’s testimony in support of its counterclaims against SENCI.[9]

After finding the arbitral award to be insufficiently reasoned, the district court remanded the case back to the arbitrator to supplement his award instead of vacating it entirely.  The court held that the burden of proof for vacatur is a high one and such a remedy “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.”[10]

While courts in a number of other jurisdictions have reached similar conclusions in requiring reasoned awards, they have not formed a definitive consensus as to the standard for determining whether an arbitral award is actually sufficiently reasoned.  For example, the English High Court of Justice has held that a reasoned award is “one which states the reasons for the award in sufficient detail for the court to consider any question of law arising therefrom.”[11]  In more practical terms, the Supreme Court of Austria has provided the following guidance:

If the arbitral tribunal follows the position of a party, whether factually or legally, the reference to its submissions may be sufficient.  The same may apply if the parties are able to understand the reasons for the decision in spite of merely brief statements in the arbitration award as a result of a substantive and/or legal situation in the proceedings.  On the other hand, if the arbitral tribunal relies on considerations not raised by the parties or discussed in the proceedings, it will have to explain its reasons in more detail in the award.[12]

Representing the farthest end of the spectrum, the Supreme Court of Victoria, Australia has held that arbitrators have “a duty to give reasons of a standard which was equivalent to the reasons to be expected from a judge deciding a commercial case.”[13]

The court’s ruling in Smarter Tools is another reminder that when drafting an arbitration clause and selecting which arbitral institution’s rules will apply if any disputes arise, it remains important to be familiar with the rules of the selected institution.  For example, the default rule under the Commercial Arbitration Rules of the AAA do not require a reasoned award unless the parties request a reasoned award in writing prior to the appointment of the arbitrator(s).  In contrast, the Arbitration Rules of the International Chamber of Commerce (“ICC”) International Court of Arbitration affirmatively require that an award “shall state the reasons upon which it is based.”  If the selected institution’s rules do not expressly require a reasoned award, it is typically desirable to expressly require a reasoned award in the text of the arbitration clause.  Particularly because of the very limited rights of review of an arbitral award, insisting upon a reasoned award is likely to improve the quality of the decision making.  Of course, if a reasoned award is required, Smarter Tools provides a broader avenue for the losing party to hinder enforcement of the award by seeking vacatur in court.

Further complicating the issue is the Smarter Tools court’s decision to remand the award to the arbitrator, instead of vacating it.[14]  While the decision appears sensible and more practical on its face, it could raise yet further issues that need to be addressed.  Once an arbitrator or a tribunal has closed the proceedings and issued an award, they become functus officio – which generally divests them of further authority over the case.[15]  This would seemingly prohibit the arbitrator in Smarter Tools from actually issuing a second, more reasoned award.[16]  A number of federal appeals courts have, however, recognized an exception to functus officio, to permit tribunals to clarify ambiguous awards in certain limited circumstances.[17]  Whether that exception covers an arbitrator expanding on his award and providing further reasoning (as required by the Smarter Tools court) remains to be seen.  But if it does, it might not only promote efficiency, but may also discourage unhappy litigants from bringing this type of challenge without good reason since, if successful, they could simply find themselves back before the same arbitrator/tribunal.

The varying approaches by courts to determining the sufficiency of a reasoned award is just one more example of how nuanced and intricate international arbitration can be.  Taken together with the complications relating to the various institution-specific rules and differing jurisdictions’ approaches to the principle of functus officio, Smarter Tools is a reminder of the potential complexities in arbitration, and the opportunities that those complexities may afford a knowledgeable litigant.

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