Expert Commentary

Is It over Yet? "Functus Officio" in Reinsurance Arbitrations

It is natural to assume that once an arbitration panel has issued its final arbitration award, the arbitration is over, and the panel is disbanded. And, typically, that is what happens. But is that really the end of the story?


Reinsurance
June 2017

Generally, after an arbitration panel issues its final award to the parties, the panel is "functus officio." What does functus officio mean? It means that the arbitration panel's official function as the trier of the facts and the law has been completed. The panel's powers to decide the parties' dispute have expired, and its duties have been relieved because it has finished its work, issued a final award, and there's no more to be done.

Once the parties receive the final arbitration award, they may either accept the award and act accordingly or seek to modify, vacate, or confirm the award in court under Section 10 of the Federal Arbitration Act. Either way, typically the arbitration panel is not involved in any postaward activity or proceedings.

Exceptions to the Functus Officio Doctrine

But there are also judicial exceptions to the functus officio doctrine. These exceptions, as articulated by the courts, allow an arbitration panel to continue its service to correct a mistake apparent on the face of the award or finish their work where the award fails to adjudicate an issue submitted to arbitration for resolution or make sense of the meaning of the final award where the award results in an ambiguity that requires clarification.

Where a mistake appears on the face of the award, such as an obvious mathematical error or a clearly erroneous reference to the wrong contract, claim, or party, the parties are permitted to return to the arbitration panel that issued the final award and request a correction of the mistake in the award. Where parties go to the court because of mistakes on the face of the award, courts generally will direct parties to return to the arbitration panel to correct those obvious mistakes.

In a complicated reinsurance arbitration proceeding, it is very easy for the arbitration panel to make a mistake. Say there is a reinsurance dispute involving multiple facultative certificates reinsuring multiple excess liability policies over several years. If the arbitration panel decides the claims allocation issue in such a way that only certain excess liability policies cover the loss and that the loss may be ceded to only some of the facultative certificates, it is very simple for the arbitration panel to misstate which policies or facultative certificates are subject to the final arbitration award. If the mistake is obvious enough—like awarding a recovery under the 1998 facultative certificate for losses incurred under the 1994 excess liability policy, then a correction by the arbitration panel of the erroneous reference in the final arbitration award is appropriate.

Another example of an exception to the functus officio doctrine is where the award fails to award relief on an issue clearly presented to the arbitration panel for resolution. Mistakes like this happen when there are multiple issues submitted to the panel and one issue falls through the cracks. In those cases, courts will likely direct the arbitration panel to reconvene and render a revised final award incorporating a resolution on the missing issue.

Finally, if the arbitration award results in an ambiguity that requires clarification, courts may order the arbitration panel to reconvene to address the ambiguity. In fact, it is fairly frequent that the parties will ask the arbitration panel for clarification right away when the final award contains an ambiguity. The ambiguity may be obvious on the face of the award or may become obvious in the application of the final award by the parties. This exception is discussed further below.

Acting on the Exceptions to Functus Officio

Despite an arbitration panel's best efforts, mistakes happen. When one party has concerns about a provision of the final arbitration award, it may communicate with the panel and ask for a correction or clarification. The timing of that request and the view of the panel as to whether it needs to respond to that application become important issues.

As to timing, if the request to the arbitration panel occurs immediately after the arbitration award is issued, there is a stronger likelihood that the arbitration panel will consider the request. Sometimes, when issuing an arbitration award, the arbitration panel will retain jurisdiction for a period of time in case the parties cannot resolve a reconciliation issue or because of other actions that have to occur to effect the resolution of the dispute based on the final award. Generally, that retention of jurisdiction for a limited purpose or time is stated in the final arbitration award. Retaining jurisdiction holds off the functus officio doctrine for that brief period of time.

But where the arbitration panel has not expressly retained jurisdiction, a request to clarify or correct an award may be opposed by the other party, and the panel may decline to intervene, claiming that it is no longer empaneled and lacks the power to hear the application. In those cases, the complaining party has no choice but to go to court to seek judicial review of the final award and hope either the court will fix the problem or direct the arbitration panel to reconvene to fix the problem.

A Court's Response to Functus Officio

As discussed above, a court's review of a final arbitration award where a mistake or other exception to the functus officio doctrine is raised will depend on the nature of the issue and the length of time that has passed since the final arbitration award was issued. It is useful to illustrate this point with an example.

Assume that a final arbitration award has issued and one party believes that a clarification is required. The party seeking the clarification returns to the arbitration panel and obtains a clarified final arbitration award. The parties then go to court over a battle to confirm or vacate the clarified final award. The court, in this example, has to answer the challenging question of whether confirmation of a final arbitration award, as clarified, is warranted and permitted. The facts of the case may help determine whether a clarified final award was appropriately issued by the arbitration panel.

In this example, the arbitration panel issued a final majority award and then subsequently clarified an important aspect of the arbitration award concerning the relief granted after the parties reached an impasse on how to perform a required calculation. Each party had a different interpretation on what was described as a final arbitration award that "may have appeared to provide clear guidance on the parties' obligations." The parties could not agree on how to make that calculation required by the final arbitration award. One party pointed to a term of the treaty requiring that certain items be calculated in a particular way and claimed that this provision was inconsistent with the other side's proposed calculation.

In this scenario, the court likely will focus on whether there was an ambiguity requiring clarification where the final award, although seemingly complete, left doubt whether the issue submitted had been fully executed. In other words, even if the final arbitration award is seemingly clear on its face, if its execution renders it ambiguous and impossible to perform then a clarification may be warranted.

Importantly, an arbitration panel's clarification or correction of the final arbitration award must not modify or alter the original award. For the arbitrators to have had authority to issue a clarification, the provision of the final award must have been found ambiguous, and the clarification must merely clarify the ambiguity and not substantively change the final award.

Interestingly, there is little case law analyzing whether an arbitration award is ambiguous so that it may be clarified under the exception to the functus officio doctrine. The ambiguity identified in the example above is consistent with case law discussing ambiguity in the context of remanding an award to an arbitration panel. The parties' inability to agree as to the meaning of the award supports a finding that the original award was ambiguous. The final arbitration award in this example may be considered ambiguous in the context of the treaty because of a potential contradiction between the operative paragraph of the final arbitration award requiring the calculation and a section of the treaty that was relevant to the interpretation of the relief granted in the final arbitration award.

Courts addressing this issue also will likely defer to an arbitration panel's conclusion that there was an ambiguity that required clarification. Moreover, the award, as clarified, must be consistent with the original award and must merely clarify the relief awarded rather than the substance of the underlying dispute. The clarified award cannot impermissibly modify the spirit and basic effect of the original award.

Conclusion

Arbitration awards are final until they are not. In the typical scenario, after an arbitration panel issues a final arbitration award, its job is done and it is no longer empaneled to act. But where there is an obvious mistake on the face of the final award, or where the arbitration panel failed to address an issue clearly presented to the panel by the parties or resolution, or where on the face of the award or by its application an ambiguity arises, the arbitration panel may retain the power to fix those issues even after it has issued its final arbitration award.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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