## Facts

- ReliaStar Life Insurance Company of New York and National Travelers Life Company (later succeeded by EMC National Life Company) entered into two substantially identical coinsurance agreements in 1997.
- The agreements contained a broad arbitration clause requiring arbitration of any dispute “under or relating in any way” to the agreements.
- A separate clause on arbitration expenses stated that each party would bear the cost of its own arbitrator and related outside attorneys’ fees, and share the expense of the third arbitrator.
- In 2006, EMC initiated arbitration seeking relief that would effectively terminate or restructure the coinsurance relationship on its preferred accounting approach.
- The arbitration panel largely ruled for ReliaStar, found the agreements remained in force, and awarded ReliaStar more than $21 million in past-due amounts.
- The panel also awarded ReliaStar more than $4 million in attorney’s fees and arbitrator-related fees and costs, characterizing the award as a sanction for EMC’s bad-faith conduct in the arbitration.

## Issues

1. Whether an arbitration clause stating each party “shall bear” its own attorney’s fees and arbitrator expenses removes arbitrators’ authority to award those fees and expenses as sanctions for bad-faith conduct.
2. Whether a sanction-based fee award in these circumstances means the arbitrators “exceeded their powers” warranting vacatur under FAA § 10(a)(4).

## Decision

- The Second Circuit reversed the district court’s partial vacatur.
- The court held the arbitrators did not exceed their powers by awarding fees and costs as sanctions for bad-faith arbitration conduct.
- The case was remanded with instructions to confirm the arbitration award in full, including the fee-and-cost award.

## Legal Principles

- Under FAA § 10(a)(4), an arbitral award may be vacated only if arbitrators exceeded their powers; the key inquiry is whether the award “draws its essence” from the parties’ agreement.
- A broadly worded arbitration clause can confer broad remedial authority, including authority to impose sanctions when reasonably grounded in the agreement.
- A contractual provision allocating arbitration expenses to each party generally sets a default rule for good-faith arbitration and does not necessarily bar sanction-based fee shifting for bad-faith conduct.
- The implied covenant of good faith and fair dealing informs interpretation of arbitration agreements and may support sanction remedies to enforce good-faith participation.
- Courts must give substantial deference to arbitrators’ contract interpretations; an award should be upheld if the arbitrators’ reading is at least colorably based on the agreement.

## Conclusion

The Second Circuit concluded that, despite a default clause requiring each party to bear its own attorney’s fees and arbitrator expenses, arbitrators acting under a broad arbitration clause may award those amounts as sanctions for bad-faith conduct, and such an award is not vacatur-worthy under FAA § 10(a)(4) when it is grounded in the parties’ agreement.


ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Co., 564 F.3d 81 (2d Cir. 2009)