In Gen. Re Life Corp. v. Lincoln Nat’l Life Ins. Co., No. 17-2496-CV, 2018 WL 6186078, — F.3d. — (2d Cir. Nov. 28, 2018), the Second Circuit, for the first time, recognized “an exception to functus offico where an arbitration award is ambiguous,” holding that “the arbitrators retain their authority to clarify that award.” Id. at *3. In so holding, the court noted that it was joining the Third, Fifth, Sixth, Seventh, and Ninth Circuits “in recognizing an exception to functus officio where an arbitral award ‘fails to address a contingency that later arises or when the award is susceptible to more than one interpretation.” Id. at *10 (citations omitted).
The functus officio doctrine dictates that once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority ends and “the arbitrators have no further authority, absent agreement by the parties, to redetermine th[ose] issue[s].” T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 342 (2d Cir. 2010) (quoting Trade & Transp., Inc. v. Nat. Petroleum Charterers Inc., 931 F.2d 191, 195 (2d Cir. 1991)). “The rationale underlying this rule is to prevent re-examination of an issue by a nonjudicial officer potentially subject to outside communication and unilateral influence.” A/S Siljestad v. Hideca Trading, Inc., 541 F. Supp. 58, 61 (S.D.N.Y. 1981) (citing La Vale Plaza, Inc. v. R. S. Noonan, Inc., 378 F.2d 569 (3d Cir. 1967), aff’d, 678 F.2d 391 (2d Cir. 1982).
Despite this strict rule, exceptions have developed. In Hyle v. Doctor’s Assocs., Inc., 198 F.3d 368 (2d Cir. 1999), the Second Circuit adopted one such exception by holding that “an arbitrator retains limited authority to ‘correct a mistake which is apparent on the face of [the] award.’” Id. at 370 (alteration in original) (quoting Colonial Penn Ins. Co . v. Omaha Indem. Co., 943 F.2d 327, 332 (3d Cir. 1991)). Such mistakes include “clerical mistakes or obvious errors in arithmetic computation.” Id. (quoting Colonial Penn Ins. Co., 943 F.2d at 332).
Further, a district court, when presented with an award for confirmation, may remand such award to the arbitrator for clarification where the award is ambiguous. Id. (citing Colonial Penn, 943 F.2d at 333-34; Ams. Ins. Co. v. Seagull Compania Naviera, S.A., 774 F.2d 64, 67 (2d Cir. 1985)). “Because of the limited purpose of such a remand, which serves the practical need for the district court to ascertain the intention of the arbitrators so that the award can be enforced, there is not even a theoretical inconsistency with the functus officio doctrine.” Colonial Penn, 943 F.2d at 334 (citations omitted). However, until the Second Circuit issued its decision in Gen. Re Life Corp. v. Lincoln Nat’l Life Ins. Co., it had not adopted “clarification of ambiguity in an award” as an exception to functus officio.
General Re Life Insurance Corporation entered into an Automatic Self-Administered YRT Reinsurance Agreement (“Agreement”) with Lincoln National Life Insurance Company, which allowed General Re to increase premiums, but only if the increase was founded on a change in anticipated mortality. If General Re raised premiums, Lincoln was allowed under the Agreement to recapture its life insurance policies instead of paying the increased premiums.
General Re increased its reinsurance premiums effective April 1, 2014, and on June 4, 2014, Lincoln elected to arbitrate the rate increase, per the Agreement. During the pendency of the arbitration, Lincoln agreed to pay the pre-increase premium and General Re agreed to continue to pay claims that arose.
On July 1, 2015, following a multi-day hearing, the panel issued its award (“Final Award”). The issue was whether there was a change in the anticipated mortality so as to allow for a premium increase. The Final Award stated that there was a change in anticipated mortality such that General Re was entitled to increase premiums. The Final Award also provided that if Lincoln elected its right to recapture, the recapture would be retroactive to April 1, 2014 and “[a]ll premium and claim transactions paid by one party to the other following the effective date of recapture (i.e., from April 1, 2014) shall be unwound.” The Final Award stipulated that “[a]ny disagreement over the calculations shall promptly be submitted to the [arbitral panel] for resolution.” Finally, the panel retained “jurisdiction over this matter to the extent necessary to resolve any dispute over the calculation and payment of the amounts awarded herein” until “(ii) the date on which Lincoln recaptures the business reinsured under the [Agreement] and all associated balances due are paid.”
While Lincoln invoked its right to recapture on September 28, 2015, the parties disputed how to read the Final Award’s unwinding language with regards to premium payments made by Lincoln prior to the recapture date (“Unearned Premiums”) and claims prior to April 1, 2014. On October 26, 2015, Lincoln asked the panel settle the issue. General Re objected to this request, “arguing it was beyond the authority of the arbitrators because it sought reconsideration of, and a fundamental change to, the recapture methodology unambiguously ordered in the Final Award.”
On November 19, 2015, the panel issued a clarification (“Clarification”) based on the fact that the Final Award contained ambiguities, and that both parties were reading the Final Award inconsistently with the original Agreement. The panel directed the parties to read the Final Award in accordance with the Agreement, which meant that General Re was entitled to retain the Unearned Premiums it held as of April 1, 2014, but that General Re was accordingly liable for the claims on which it retained the Unearned Premiums, i.e. covered deaths before, on, or after April 1, 2014.
General Re petitioned the district court to confirm the Final Award and Lincoln petitioned to confirm the Clarification. The court declined to confirm the Final Award, but confirmed the Clarification. General Re then appealed.
The relevant issue on appeal was whether the panel exceeded its authority when it issued the Clarification because the panel was functus officio after the Final Award. The Second Circuit held that “where an arbitration award is ambiguous, we hold that the arbitrators retain their authority to clarify that award.” This served as an extension of the already established rule “that when asked to confirm an ambiguous award, the district court should instead remand to the arbitrations for clarification.”
Specifically, the Second Circuit set forth three conditions under which an arbitrator is not functus officio when he or she issues a clarification of an ambiguous final award: “(1) the final award is ambiguous; (2) the clarification merely clarifies the award rather than substantively modifying it; and (3) the clarification comports with the parties’ intent as set forth in the agreement that gave rise to arbitration.”
In applying these conditions, the Second Circuit, giving deference to the panel’s conclusion that the Final Award was ambiguous, held that “[g]iven that the language is susceptible to multiple meanings, it is ambiguous.” Id. Ultimately, the Second Circuit affirmed the district court’s confirmation of the Clarification.
Until General Re, no Second Circuit case had held that an ambiguity in an arbitration award is an exception to functus officio such that arbitrators have the authority to issue a clarification. Previously, Second Circuit cases had only recognized the authority of an arbitration panel to clarify an ambiguous award when asked to do so upon remand from the district court. For example in Hyle, despite the panel issuing a correction to its ambiguous award, the court denied confirmation of both the original award and the correction, and remanded the matter to the panel for clarification of the original award. The Second Circuit justified this action by stating that “[t]hough the arbitrator has now indicated in his ‘corrected’ award what he intended to order, he acted at a time when he might have lacked authority, and the District Court might have lacked authority to direct compliance with the arbitrator’s expressed intention.” Hyle, 198 F.3d at 371.
Post-General Re, it appears there is no question that, in the Second Circuit, a panel has the authority to clarify an ambiguous award. The case formally extends the functus officio exceptions to include clarifying an ambiguous award, so long as the clarification satisfies the three conditions noted above. The implication of this case is that if a panel clarifies an ambiguous award and a party moves to confirm that clarification, the party opposing confirmation cannot argue that the panel was functus officio when it rendered the clarification. Instead, that party can attack the substance of the clarification by arguing that: (1) the final award is not ambiguous; (2) the clarification substantively modifies the final award; and/or (3) the clarification does not comport with the parties’ intent as set forth in the agreement that gave rise to arbitration.