Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
AAA Roster of Neutrals
Reinsurance and Insurance Dispute Resolution Services Consultant

When Declaratory “Final Awards” Clash With the Functus Officio Doctrine

It is not unusual for an arbitration award to declare the respective rights and duties of the parties without providing for a specific monetary award, essentially leaving it up to the parties to apply the panel’s rulings and to determine for themselves exactly what amounts are ultimately due. In a rescission action, for example, neither party at the time of the hearing may have calculated the exact amount of premium, claims payments, and other amounts that must be reversed if such relief were granted, particularly when the accounting is complex and spans several underwriting years. To address this quantification problem, some panels will bifurcate the arbitration so that the merits of the dispute are decided first, and depending on the ruling, a separate hearing will be held later to determine the specific monetary award flowing from the panel’s declaratory rulings. But declaratory awards in non-bifurcated proceedings can raise special concerns about the functus officio doctrine (i.e., the legal principle that arbitrators are prohibited from reconsidering or amending an award once a final decision is rendered)

A recent Illinois federal district court action involving a non-bifurcated arbitration considers some of the pitfalls of issuing a declaratory award without including a specific monetary amount and highlights the tension between the functus officio doctrine and the panel’s ability to “clarify” or otherwise transform its declaratory award into a specific amount to be paid to the prevailing party. In this case, a reinsurer initiated an arbitration on the ground that its cedent had breached the terms of certain aggregate stop loss reinsurance contracts issued in 2000 and 2001. Following a hearing, the arbitration panel issued an award declaring that the 2000 and 2001 excess of loss treaties inured to the benefit of the aggregate stop loss treaties and defining how subject premium and subject loss should be calculated under the contracts. The panel also required the cedent to restate its past reinsurance reports consistent with the declaratory award and retained jurisdiction for 30 days “in order to clarify any issues that may arise from the wording of the Award.”

In the wake of this initial “Final Award,” the cedent requested that the panel issue a “clarification” confirming the cedent’s understanding of the subject premium and subject loss definitions as well as its application of that interpretation to the its damages calculation, which showed that the reinsurer immediately owed it nearly $28 million. The panel declined to adopt the cedent’s proposed “Amended Final Award” but issued a second “Final Award,” in which it confirmed that the cedent’s methodology for calculating the subject premium and subject loss was “conceptually consistent with the [first] Final Award issued by the Panel” and refused, again, to include a specific monetary amount because it expected that “the parti[e]s can determine the appropriate financial result flowing from the Award once the methodology used by [the cedent] to recast amounts due from [the reinsurer] is considered.”

The cedent then petitioned the federal district court to confirm both of the panel’s declaratory “Final Awards” as well as its claim, based on its interpretation of those awards, that the reinsurer owed it nearly $28 million. The reinsurer also sought confirmation but only of the first award, arguing that that one had resolved all the disputed issues between the parties, that the functus officio doctrine therefore applied, that the panel no longer had jurisdiction to “reconsider” its initial award, and that the second award was not part of the panel’s “final judgment” and had simply “affirmed” the first one.

The court observed that the functus officio doctrine was jurisdictional and acknowledged that the arbitrators’ authority is entirely terminated by the completion and delivery of an award. It also acknowledged one “well-established” exception – that arbitrators have the authority to issue a supplemental award clarifying or explaining the original award. In this case, the court found that the second “Final Award” did clarify the first within this allowable exception and ruled that it was properly part of the panel’s final decision.

Focusing next on the parties’ cross-petitions to confirm the panel’s Final Awards, the court addressed the cedent’s contention that confirmation meant that the court could direct the reinsurer to pay the nearly $28 million calculated as being due pursuant to the panel’s declaratory awards. The reinsurer objected to any such order because it claimed that the cedent had neither rendered the required restated past reports nor submitted subsequent reports consistent with the panel’s initial award. Also, the cedent had failed to demonstrate that certain reinsurance funds withheld accounts had been exhausted such that the reinsurer’s payment obligation was triggered under the contracts.

Observing that its function in confirming arbitration awards was “severely limited,” and that it “must not review the merits of the arbitration panel’s decision,” the court found both awards to be “unambiguous” when they twice directed the parties to determine any amounts due in accordance with its declaratory rulings. Therefore, the order for specific monetary relief sought by the cedent would constitute a modification, not confirmation, of the awards because such relief was never expressly ordered by the panel. In short, any amounts due would have to be calculated by the parties as the panel intended.

This case raises interesting questions about how a panel ought to approach disputes when the specific economic implications of its rulings are unknown at the time the declaratory award is issued. If, as in the foregoing district court case, a declaratory “final award” is issued and the parties are ordered to sort out its financial repercussions on their own, arbitrators should be mindful that the functus officio doctrine could preclude further panel intervention if any subsequent awards aimed at quantifying the exact amounts due are deemed to be “modifications” of the initial award rather than strictly “clarifications.” One way to avoid this quandary is to bifurcate the arbitration and ensure that the parties understand at the outset that any interim declaratory award is just the first step in the dispute resolution process and that the panel retains jurisdiction for the purpose of adjudicating the financial implications of its rulings in subsequent proceedings.

In non-bifurcated arbitrations, the choreography can be trickier, and careful case management and award drafting are critical. For example, the panel might want to have an on-the-record dialogue with the parties in advance of any award to sort out exactly what role they want the panel to play in translating declaratory rulings into a specific monetary amount. Also, the panel may need to craft provisions in its initial declaratory award to make it clear that it is not relinquishing jurisdiction over the arbitration until such time as all the economic ramifications have been definitively quantified. Such measures ought to reduce, but may not completely eliminate, the risk that subsequent panel awards intended to convert declaratory rulings into exact amounts to be paid will be challenged as modifications of a prior “final award” violating the functus officio doctrine.

Continental Casualty Co. v. Scandinavian Reinsurance Co., Ltd., No. 05 C 2349, 2005 U.S. Dist. LEXIS 18995 (N.D. Ill. Aug. 30, 2005).

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