An Arbitrator's Authority to Award Attorney Fees for Bad-Faith Arbitration

Article excerpt

This article discusses an arbitrator's authority under federal and state law, and the American Arbitration Association Commercial Arbitration Rules, to award attorney fees for bad-faith conduct during arbitration. Additionally, it examines the definition of bad faith and provides a justification for allowing arbitrators to make bad-faith awards.

During the classical period of Roman law, attorneys did not charge fees for legal advice or services.1 Consequently, high legal fees were no deterrent to filing a lawsuit. To ensure that parties did not abuse these free services and initiate litigation in bad faith, Roman jurists adopted the principle of lis crescens in duplum, which allowed them to double the judgment against anyone who initiated litigation without good cause.2 So began the long-standing tradition of penalizing parties for bad-faith litigation.3

Approximately 2000 years later, the U.S. Supreme Court adopted bad faith as an exception to the "American Rule" on shifting attorney fees.4 While the Court did not explain whether this exception applied in arbitration, it has since pushed a "national policy favoring arbitration,"5 which has caused arbitration to become significantly more prevalent in the American adjudicatory process. As a result, courts have struggled to determine the extent, if any, that the principle of penalizing parties for bad faith applies in modern arbitration.

The answer depends on several factors. First, does the parties' contract grant the arbitrator authority to award attorney fees? If so, then the answer is clear. The arbitrator can make an award of attorney fees for bad-faith arbitration. If not, then one must look to the law that governs the arbitration agreement. That is the subject of this article.

We discuss an arbitrator's authority to award attorney fees for bad-faith arbitration under the Federal Arbitration Act (FAA), the Uniform Arbitration Act (UAA), the 2000 Revised Uniform Arbitration Act (RUAA), and the American Arbitration Association's (AAA) Commercial Arbitration Rules. We also examine the definition of bad faith, and preemption under the Federal Arbitration Act, and we provide a brief justification for allowing arbitrators to make bad-faith awards.

The Arbitrator's Power to Award Attorney Fees

Generally, arbitrators entertaining a claim for attorney fees must consider: (1) whether they have the authority to make such an award, (2) how to allocate the award between the parties, and (3) how much they should award.6 As stated above, if the parties' agreement addresses these issues, then the arbitrator will decide the dispute in accordance with the agreement. The problem is that arbitration agreements frequently fail to address attorney fees. Accordingly, arbitrators often have to rely on case law interpretations of the arbitration rules that govern the proceeding. Unfortunately, the interpretations of rules concerning attorney fee awards based on a party's bad faith are inconsistent.

What Constitutes "Bad Faith" in Arbitration?

"Bad faith" lacks a precise definition, as the ultimate meaning of the term depends on the facts and circumstances of the underlying controversy.7 However, Black's Law Dictionary characterizes bad faith as a "dishonesty of belief or purpose,"8 and courts generally tend to apply a similar definition.9 Essentially, "bad faith" is a state of mind that is proved through conduct,10 and it can include anything from needlessly delaying the arbitration proceeding," to making unfounded allegations against the other party,12 to unreasonable behavior before the commencement of the arbitration.13

Bad-Faith Awards Under the FAA

The obstacle to making an award of attorney fees for bad-faith conduct lies in the laws that govern arbitration agreements, such as the FAA, which is silent on the arbitrator's authority to award such fees.14 In view of this silence and the broad powers of arbitrators in general, several federal courts, including the 9th and 11th Circuits, have found that arbitrators may award attorney fees for bad-faith arbitration, and they declined, either implicitly or explicitly, to overturn such awards under § 10 of the FAA. …