Eastern District of Pennsylvania holds arbitration panel exceeded its powers under "honorable engagement" clause | Practical Law

Eastern District of Pennsylvania holds arbitration panel exceeded its powers under "honorable engagement" clause | Practical Law

Daniel J. Leffell (Partner), Marc Falcone (Partner) and Jeffrey D. Kleinman (Associate), Paul, Weiss, Rifkind, Wharton & Garrison LLP

Eastern District of Pennsylvania holds arbitration panel exceeded its powers under "honorable engagement" clause

Published on 02 Oct 2009USA
Daniel J. Leffell (Partner), Marc Falcone (Partner) and Jeffrey D. Kleinman (Associate), Paul, Weiss, Rifkind, Wharton & Garrison LLP
The United States District Court for the Eastern District of Pennsylvania has vacated an arbitration panel's award, holding that the panel had exceeded its powers under a reinsurance agreement's "honorable engagement" clause.
On 17 September 2009, in PMA Capital Insurance Co. v. Platinum Underwriters Bermuda, Ltd., No. 09-84 (E.D.Pa. 2009), the United States District Court for the Eastern District of Pennsylvania vacated an arbitration panel's award, holding that the panel had exceeded its powers under a reinsurance agreement's "honorable engagement" clause. The court held that the panel's sua sponte elimination of a deficit carry-forward provision in the agreement, and its order of a one time payment, were irrational because "[n]o court has held that [an honorable engagement clause] gives arbitrators authority to re-write the contract they are charged with interpreting." The court also relied on the fact that neither party had sought the relief that the panel provided. Finally, the court reasoned that the panel's award was "completely irrational" because it did not "draw its essence" from the agreement and was instead "in manifest disregard thereof." The court also faulted the panel for not providing any explanation or reasoning to justify its decision.
The court's decision illustrates the proper limits of the honourable engagement clause, and is a noteworthy example of a lack of judicial deference to an arbitration panel's exercise of its discretionary powers where the panel attempted to re-write a contract in a sweeping and "irrational" manner.