August 03, 2016

Bluster in the Windy City

Dear Readers, I do like Chicago. It’s my kind of town. The Friendly Confines. The Tarzan Pool.  The Tribune Tower. And of course, not to be missed, the US Seventh Circuit Court of Appeals, usually friendly confines for arbitration awards.

But sometimes even the best of friends can be cranky and difficult. They have bad hair days. And today, here in the friendly confines of my New York summer office, I submit to you that the eminent Seventh Circuit jurist Richard Posner had such a day in Bankers Life & Casualty Co. v. CBRE Inc., 2016 WL 4056400 (7th Cir. July 29, 2016), in which, joined by only one of his two panel colleagues, he held that a three-member arbitral tribunal of retired Illinois judges exceeded their authority and that their award rejecting a breach a contract claim had to be vacated for that reason.

This was a commercial real estate case between a tenant (Bankers) and broker (CBRE).  CBRE knew that another tenant in the building (Groupon) needed more space, and that Bankers could make do with smaller and cheaper space elsewhere. So Bankers contracted with CBRE to sublease its space, presumably to Groupon, and the contract provided that CBRE would answer Bankers’ questions about the potential sublease. Bankers had its eyes on suitable space in another building and asked CBRE: “What would be our net savings if we move to the new place and sublease to Groupon?”  As its answer, CBRE provided a written cost-benefit analysis that answered the question this way: “$7 million estimated, as indicated by this cost-benefit analysis, but we disclaim any responsibility for errors in this estimate.” CBRE made a big mistake: The $7 million did not account for a $3.1 million tenant improvement allowance that Bankers had offered to Groupon and that CBRE knew had been offered by Bankers to Groupon. Bankers did not notice CBRE’s mistake until it was too late, relied on the $7 million net savings estimate, closed the real estate deals, discovered the mistake later on, and brought an arbitration claim under JAMS Rules.

The panel issued an award rejecting all three of Bankers’ claims (breach  of contract, negligent misrepresentation, and an Illinois statutory claim). Our focus is on the breach of contract claim because that is the claim whose resolution was, per Judge Posner and one colleague, in excess of the panel’s authority. The panel, interpreting the contract, and not overlooking the “answer our questions,” provision but instead quoting it in haec verba, held that there was no express promise in the contract to provide an accurate representation of net savings from subleasing and moving, and that the “entire agreement” clause in the contract precluded implying such a term. CBRE moved for reconsideration, and the panel, evidently not alerted to the fact that the JAMS Comprehensive Arbitration Rules do not provide for reconsideration but only for correction of arithmetic or typographical or clerical errors in an award (Rule 24(j)), issued a procedural order denying Bankers’ reconsideration motion based on its lack of merit. In that order, the panel specifically addressed the argument that the “answer our questions” provision necessarily implied a duty to provide accurate answers and that the duty was breached by providing an inaccurate answer. The panel stated that the “answer our questions” duty was fulfilled by providing the cost-benefit analysis that included the disclaimer of responsibility for errors, and that CBRE’s position about the “answer our questions” clause furnished no reason to reconsider and alter the award’s outcome on the breach of contract claim.

The District Court confirmed the award, and reasoned that whether the panel’s interpretation of the contract was right or wrong, it was an interpretation of the contract and so the Court was required to confirm the award under the Illinois Uniform Arbitration Act which in substance and application is not materially different from the FAA. (The transcript of the hearing at which the District Court’s order was announced is available in the docket on the Northern District of Illinois website. I have downloaded it.)

But for Judge Posner the matter looked different. First, he treated the order denying reconsideration as an award, and subjected its reasoning to review according to the legal standards applicable to an award. He proceeded to analyze the panel’s position regarding the “answer your questions” provision, and concluded that the contractual duty to answer questions accurately could not be excused by the disclaimer in CBRE’s cost-benefit analysis because the disclaimer was not contractual but instead was a unilateral term inserted by CBRE in the cost-benefit analysis. In effect, per Judge Posner, the arbitration panel gave contractual effect to a non-contractual term and by doing so exceeded its powers which were, in relevant respect, confined to interpreting the contract as written.

It is a technical objection, I suppose, but I think a correct technical objection, to state that the Seventh Circuit ought to have treated the reasoning in the panel’s procedural order denying reconsideration of the award as a nullity because the proper ground for denial of reconsideration, under the JAMS Rules, should have been that the panel lacked power to entertain the reconsideration motion. As to the merits, the panel was functus officio save for potential correction of clerical or typographical or arithmetic errors appearing on the face of the award, and so the panel’s observations in the procedural order denying reconsideration about the disclaimer in the cost-benefit analysis and its relationship to the “answer your questions” obligation ought to have been treated as statements having no legal effect, and certainly not as an additional award. (The parties had stipulated that the initial award, denominated “Final Award,” should be re-named “Interim Award,” but this was because the panel had not yet dealt with cost-shifting . The re-naming did re-open the award, either for changes in result or for embellishment of its rationale.)

The panel’s actual award, as opposed to the procedural order that the Seventh Circuit majority erroneously treats as an award, did not even mention the disclaimer in the cost-benefit analysis, and so the vacatur of that original award based only on the supposed excess of power in referring to the disclaimer in a post-award order denying reconsideration seems quite dubious. The case was already decided without reference to the disclaimer, and so the Seventh Circuit majority has reverse-engineered the reasoning of the subsequent order into the award in order to come up with an excess of authority outcome.

But let’s suppose that the panel’s reasoning in the subsequent order had in fact appeared in the original award. What then?  Wasn’t the panel entitled to consider that the question Bankers had asked CBRE was “what do you estimate to be the net savings we can reasonably expect to achieve by moving and subleasing”? And wasn’t the panel entitled to to interpret the “answer your questions” provision as containing no implied prohibition against including a disclaimer of responsibility for errors affecting an estimate in the answer to a question that called for the making of such an estimate? One can certainly disagree with this interpretation of the contract, but it is not a “wacky” interpretation or a failure to give any interpretation.

Like the dissenting judge on the Seventh Circuit panel, Arbitration Commentaries dissents, and offers its fearless forecast that this case if it is even long remembered will be viewed more as a bad hair day for Judge Posner than as a significant precedent concerning judicial review of arbitration awards.

 

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