The scope of review of an arbitration award is very narrow, and courts are strongly inclined to confirm these awards except in very narrow circumstances. One of those exceptions occurs when an arbitrator decides an issue that the parties did not submit to her because “only those issues may be arbitrated which the parties have agreed shall be.” Fawzy v. Fawzy, 199 N.J. 456, 469 (2009). When that happens, a court may either vacate the award entirely or, depending on the facts, modify it if the law so permits. The U.S. District Court for the District of New Jersey was confronted with that situation In McHale v. Taylored Services, LLC, Civ. No. 16-1785 (D.N.J. July 7, 2016), where it confirmed an award granting severance pay to an employee who was deemed to have been fired without cause. However, the court rejected that portion of the award denying the employee his attorneys’ fees and costs under a contract provision awarding fees to the prevailing party, holding that the arbitrator’s denial of a fee award was based on a claim not before the court.
In McHale, the employment contract at issue contained provisions that entitled the employee to severance pay if he was fired without cause, required him to return all confidential information and company property when he left, compelled the parties to arbitrate “any claim, action, dispute, or controversy of any kind or nature …arising from or otherwise with respect to this Agreement,” and awarded attorneys’ fees and costs to the prevailing party in an arbitration. Ultimately, the employee was fired “for cause” and denied severance pay, allegedly because he was grossly negligent for not knowing that one of the employer’s staffing agencies was employing illegal aliens. The employee thereafter filed for arbitration. As described by the district court, the “dispute” submitted to arbitration by the employee was “[w]rongful and unlawful termination of employment ‘for cause.'” The plaintiff sought severance pay as well as fees and costs. In response, the employer filed a “Response and Defenses” in which it claimed as an affirmative defense that the employee was not entitled to severance pay because after he was terminated, he did not return a company laptop for at least four months.
The arbitrator issued a decision and award in favor of the employee, awarding him his severance pay but denying him attorneys’ fees and costs on the grounds that “both parties prevailed,” insofar as the employer had “prevailed” on its “counterclaim” that the employee had violated the confidentiality provisions of the employment agreement by not returning the laptop in a prompt manner. The employee then filed an action in state court to confirm the award of severance pay but to modify it so as to award him attorneys’ fees and costs. The employer removed the case to federal court, which granted the employee’s motion.
Deciding the case under the New Jersey Arbitration Act, N.J.S.A. § 2A:23B-1 to 32, the district court reversed that portion of the arbitration award denying the employee his attorneys’ fees and costs, observing that arbitrators may not decide issues that have not been submitted to them by the parties. The court found that the issue before the arbitrator was “whether [the employer] was reasonable in terminating [the employee] ‘for cause’ and, ultimately, whether [the employee] was entitled to severance.” The alleged reason for the discharge involved the use of alleged illegal aliens, not whether the employee breached a restrictive covenant after discharge. “It was only because [the employee] was wrongfully fired in the first place that the restrictive covenants came into play.” These were two distinct issues. Moreover, the issue of the restrictive covenant was not part of the submission because it was merely an affirmative defense and not a counterclaim. “A defense cannot be turned into a counterclaim merely by attaching a prayer for relief.” As such, the arbitrator exceeded his scope by sua sponte crafting a counterclaim on behalf of the employer and then concluding that it prevailed on the claim.
The district court next decided whether it had the authority to modify the award in the employee’s favor. Under New Jersey law, an award may be corrected if a court can do so “without affecting the merits of the decision upon the claims submitted.” N.J.S.A. § 2A:23B-24(a)(2). The district court determined that it could correct the award without affecting the merits of the decision because excluding the arbitrator’s determination that the employer prevailed on a restrictive covenant counterclaim created sua sponte by the arbitrator and that neither side was a prevailing party “does not affect the merits of the claim actually submitted – whether it was reasonable for [the employer] to fire [the employee] ‘for cause’ and whether [the employee] was entitled to severance.” Accordingly, the district court confirmed the award to the extent that it awards the employee severance pay and his fees and costs.
Bottom Line. The McHale case offers an excellent lesson for those who draft agreements, those who try arbitration cases, and for arbitrators themselves. As you draft agreements, you should clearly spell out those disputes which will and will not be covered by an arbitration agreement. Claimants should draft submissions expressly stating what the arbitrator is to decide, both in terms of liability and damages. Respondents who believe they may be entitled to relief, either monetary or otherwise, should clearly and expressly raise them as counterclaims and insist that they be part of any submission to the arbitrator. Finally, arbitrators must take great care to understand the submission of the parties and stick to it, not only as to liability but to relief as well. The submission, after all, describes the scope of the arbitrator’s authority. Any award that exceeds it is subject to vacation.