Recently, the Fifth Circuit Court of Appeals has once again show the stunning amount of deference that courts give to arbitration awards. In Kemper Corporate Servcs., Inc. v. Computer Sciences Corp., Kemper Corporate Services, Incorporated (“Kemper”), an insurance company, hired Computer Sciences Corporation (“CSC”), a software developer and technology-services company, to update its insurance software. The parties entered into a multi-year software-services contract, known as the “Exceed Agreement.” The Exceed Agreement contained provisions for arbitration, in that if the parties could not resolve a dispute through mediation, then the parties could submit the dispute to binding arbitration for a final determination.
The Exceed Agreement provided the Arbitrator with broad discretionary powers (as most do), with very few exceptions. However, one such exception did exist in the Agreement relating to the Arbitrators ability to award certain types of damages. Specifically, the Agreement provided that:
With respect to any matter brought before the arbitrator, the arbitrator shall make a decision having regard to the intentions of the parties, the terms of this Agreement, and custom and usage of the insurance and data processing industry. Such decisions shall be in writing and shall state the findings of fact and conclusions of law upon which the decision is based, provided that such decision may not (i) award consequential, punitive, special, incidental or exemplary damages or any amounts in excess of the limitations delineated in [another portion of] this agreement.
In the years following the execution of the Exceed Agreement, there were significant problems with the software CSC was developing. Nonbinding mediation did not resolve the resulting disputes. As a result, Kemper filed a demand for arbitration with the American Arbitration Association (“AAA”). Kemper sought damages including: “1) ‘all payments made by [Kemper] pursuant to the agreements’, and 2) all additional direct damages, ‘including internal salaries and other expenses [Kemper] had incurred on the project.’”
In the end, the Arbitrator awarded damages to Kemper. As requested, one category of the awarded damages were the “internal expenses of Kemper that were the natural and probable cause of CSC’s breach of the Exceed Agreement.” The Arbitrator categorized those damages as “direct” damages.
On appeal, one of the two questions asked by CSC was whether the Arbitrator had authority to “categorize damages as consequential or direct.” Here, the Fifth Circuit sided with the Arbitrator, concluding: “For the arbitrator to resolve the dispute between CSC and Kemper, which could include awarding damages, he had to categorize the potential damages into the permitted and the prohibited categories.
In discussing its review, the court of appeals stated that its review of arbitration award is said to be “very deferential.” A court’s deference will end, thought, if an “arbitrator exceeds the express limitations of his contractual mandate.” However, a court must “sustain an arbitration award even [the court] disagrees with the arbitrator’s interpretation of the underlying contract as long as the arbitrator’s decision draws its essence from the contract.” Therefore, when an arbitration decision is under review by a court of law, “the sole question for [the court] is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”
In this case, the Exceed Agreement expressly authorized the Arbitrator to award direct damages resulting from a breach, but it prohibited the arbitrator from awarding consequential damages. However, the issue arose because the Exceed Agreement was silent on which damages as should be categorized as direct, and which damages as would be consequential.
Because the Exceed Agreement did not provide any guidance on the topic, the court of appeals sided with Kemper. The court did not accept CSC’s argument that the arbitrator lacked the authority to “categorize damages as consequential or direct.” For the arbitrator to resolve the dispute between CSC and Kemper, which could include awarding damages, he had to categorize the potential damages into the permitted and the prohibited categories. Therefore, the court concluded that the authority to carry out such categorization was conferred by the Exceed Agreement because it was essential to the arbitrator’s task. Futher, as the court so aptly put it,
[a]s we resolve ‘all doubts in favor of arbitration,’ the arbitrator did not exceed the scope of his contractual authority by classifying and awarding damages to Kemper. Consequently, the award will be upheld if the arbitrator ‘even arguably interpreted the parties’ contract.’”
So, what does this mean for you? Well, if you are entering into a contract that contains a similar arbitration provisions and limitation against “consequential damages,” perhaps there should be some effort put forth into defining that category of damages.
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About Harrison Oldham
Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.
Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://