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When Is an Arbitration Award Final?

In American International Specialty Lines Insurance Company v. Allied Capital Corporation the New York Court of Appeals wrestles with a simple yet significant question: When is an arbitration award truly final such that it may not be altered?  2020 N.Y. Slip Op. 02529 (2020).

The matter arose out of dispute between an insurer and its insureds that was adjudicated in arbitration. By way of background, the insureds had previously settled a federal qui tam action involving allegations of their participation in loan origination fraud.

Following this settlement, the insureds sough payment from their insurer for their defense costs and indemnification for the settlement. When the insurer denied coverage, the insureds demanded arbitration based on the insurer’s alleged breach of two relevant insurance policies.

During the arbitration, both the insureds and the insurer moved for summary disposition of the arbitration. Ultimately, the arbitration panel issued what it termed a “Partial Final Award” in which it determined that Allied Capital Corporation (“Allied”), one of the insureds, was not entitled to indemnification. The panel determined however that Allied was entitled to defense costs and that because there was a factual dispute regarding the amount of legal expenses incurred during the federal action, the issue of damages would be resolved by a separate evidentiary hearing before the panel.

Before the evidentiary hearing could be held, the insureds sought reconsideration of the Partial Final Award. The insurer opposed the reconsideration under the doctrine of functus officio, arguing that the panel was without authority to reconsider the Partial Final Award.

The panel revised its previous determination and issued a “Corrected Partial Final Award,” determining that Allied was in fact entitled to indemnification. A majority of the panel rejected the contention that the functus officio doctrine precluded reconsideration. Subsequently, the panel conducted the evidentiary hearing in order to determine the amount of Allied’s covered defense costs and ultimately issued a “Final Award” granting Allied recovery against the insurer for indemnification of the settlement and defense costs.

The insurer commenced a proceeding seeking vacatur of the Corrected Partial Final Award and the Final Award and the reinstatement and confirmation of the original Partial Final Award based on the doctrine of functus officio.

The Supreme Court denied the petition and confirmed the Final Award. However, the Appellate Division reversed and granted the insurer’s petition, vacating the Corrected Partial Final Award and Final Award and confirming the Partial Final Award. The Appellate Division concluded that under the doctrine of functus officio it was improper and in excess of the panel’s authority for the panel to reconsider the Partial Final Award.

The insureds then appealed the matter to the Court of Appeals.

The Court of Appeals reiterated the principle that final awards are those that are coextensive with the issues submitted to the arbitrators. That was not the case with the Partial Final Award because it did not resolve all matters at issue in the arbitration. While acknowledging that federal case law has held that partial awards may be deemed to be final when the parties agree to treat them as such, the Court stated that it need not determine whether or how parties may treat partial awards as final.  The Court noted that even if parties to an arbitration may agree to the issuance of a partial determination that constitutes a final award, the parties in this matter had not done so.

Ultimately the Court held that absent an express, mutual agreement between the parties as to the issuance of a partial final award, the functus officio doctrine is not applicable. The Court thereby rejected the insurer’s argument that the panel had exceeded its authority by reconsidering the Partial Final Award. Accordingly, it reversed the Appellate Division, denied the motion to vacate the Corrected Partial Final Award and the Final Award, and confirmed the Final Award.

As a final note, it might also be of some interest that the insureds argued that the common law doctrine of functus officio is no longer valid under New York law. This argument was based upon the contention that the doctrine was grounded upon anti-arbitrational sentiments, which have long been rejected by New York courts and the Federal Arbitration Act. The Court of Appeals did not address this issue, holding that functus officio only applies to final awards and that the Partial Final Award, despite its name, was not in fact final. However, this case may provide a preview of a legal reckoning to come.

 

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