Arbitration: Challenging the Award: Part IX
Does the Award Draw its Essence
from the Arbitration Agreement?

By: Samuel Wampler

Reprinted from February 2006 ohioconstructionlaw.com

Last month we looked at a case where a party dissatisfied with an arbitration award sought to vacate the award in court. We also looked at what happened when a court was asked to vacate an award on substantive grounds, but there was not a sufficient record before the court to determine whether the arbitrator made a material mistake or committed extensive impropriety. But a complete record does not always guarantee success, as this month’s decision shows.

This month we look at a recent case where, as often happens, the parties spent almost as much, if not more, time in court as they did in arbitration. This month’s decision arose from the parties’ third trip to the Court of Appeals following the sale of an insurance business. On February 3, 2006, the Court of Appeals for Sandusky County decided Bowden v. Weickert, 2006-Ohio-471, putting an end to the dispute that began with the filing of a lawsuit in 1999—unless one of the parties appeals to the Ohio Supreme Court.

Bringing this case to a close, the court said:

In Bowden II, we expressed concern over the fact that, in this case, "multiple proceedings" have been commenced in the trial court, and this court, in addition to a mediation and two arbitration proceedings. At this point, no issues "arising out of" the original purchase agreement remain to be resolved. Accordingly, today's decision puts an end to the arbitration proceedings required by the original purchase agreement.

In this most recent proceeding, the buyer of the insurance business complained that the trial court should not have confirmed the arbitrator’s decision in favor of the seller. In the dispute, the details of which are not material to this article, the seller was awarded $80,230 as a result of the second arbitration hearing. The buyer had asked the trial court to vacate the award, citing as its grounds R. C. § 2711.10(D), which provides as follows:

In any of the following cases, the court of common pleas shall make an order vacating the award upon the application of any party to the arbitration if:

* * * *

(D) The arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

On appeal the buyer furnished the Court of Appeals with a transcript of the arbitration hearing along with the exhibits presented to the arbitrator. Unlike the case in last month’s article, where the record of the arbitration was not made available to either the trial court or the Court of Appeals, in this case the court had a record to review. The buyer argued that the arbitrator exceeded its authority by “ignoring the terms of the original purchase agreement” and by making an award that had “no rational nexus” to the agreement. In further support of its argument, the buyer contended that the arbitrator also refused to adopt the opinion of the buyer’s CPA that the buyer had actually overpaid the seller under the terms of the agreement.

In reviewing the trial court’s refusal to vacate the award, the Court of Appeals (as we have seen in past articles) stated several well-accepted propositions of common law that apply when reviewing an arbitration award:

• “[G]enerally arbitration awards are presumed valid, and a reviewing court may not merely substitute its judgment for that of the arbitrator”;

• “R.C. 2711.10 sets forth narrow grounds upon which a court of common pleas may review an arbitration award”;

• “The standard of review to be employed on appeal is whether the lower court erred as a matter of law in confirming the arbitration award”;

• “Accordingly, our review in this case is narrowly confined ‘to an evaluation of the confirmation order of the common pleas court and we cannot review the substantive merits of the award absent evidence of material mistakes or extensive impropriety’”;

• “It is well established that an arbitrator will not be found to have exceeded his or her authority, so long as the award ‘draws its essence’ from the underlying contract”;

• “An arbitrator’s award draws its essence from an agreement when there is a rational nexus between the agreement and award, and where the award is not arbitrary, capricious or unlawful’; and

• “The overriding policy reason for this limited form of review is founded upon the principle that when parties voluntarily agree to submit their dispute to binding arbitration, they agree to accept the result regardless of its legal or factual accuracy.”

Against these guiding principles, the Court of Appeals reviewed the record before it, which included testimony from the parties, witnesses (including the buyer’s CPA) and exhibits provided to the arbitrator. The court stated that “after reviewing the entire record before the trial court and the arbitrator, we cannot say the arbitrator’s resolution of the above issues had no ‘rational nexus’ to the purchase agreement, or that they were ‘arbitrary, capricious, or unlawful.’”

Of particular note was the fact that the court was unwilling to second-guess the arbitrator’s weighing of the testimony of the buyer’s CPA. The CPA testified as to his opinion of the future value of a lump sum payment made by the buyer during the dispute in an attempt at settlement. The lump sum payment was not required under the original contract. If the arbitrator had accepted the CPA’s testimony, it could have reduced the amount of the award to the seller, or even made an award to the buyer. However, the Court of Appeals pointed out that the arbitrator was free to accept or reject the CPA’s testimony regarding the future value, if any, of the lump sum payment.

There are several lessons to be learned from this case: (1) just because you have agreed to arbitration does not necessarily mean you will not be spending years in court over your dispute; (2) even if you have a complete record for review before a trial or appellate court, your opportunity to vacate an arbitration award will be limited to the statutory grounds set forth in R. C. § 2711.10; and (3) when challenging an arbitration award, you will undoubtedly face many of the common law propositions listed above, which present a formidable task to overcome.

Next month we will continue to look at specific cases where the courts have vacated or refused to vacate arbitration awards.