Arbitrators Can’t Rewrite Contracts

March 29, 2012

     An unpublished opinion from New Jersey\’s Appellate Division on March 28, 2012 serves to remind arbitrators of their proper role in resolving contractual disputes. It also debunks a common complaint by detractors of arbitration that it offers no meaningful right of appeal.

     Knecht v. 225 River Street (A-4793-10T3) involved a contract by which Knecht agreed to purchase a luxury condo from 225 River Street. The contract required Knecht to pay a deposit of $299,250 towards a purchase price of $1,995,000, and included a mortgage contingency period of 90 days. Knecht did not obtain a mortgage commitment within 90 days, but did not then terminate the contract. Upon completing the project, 225 River Street called for a closing, and Knecht did not appear. 225 River Street kept the deposit money, and Knecht initiated arbitration as required by the parties\’ contract.

     The arbitrator ruled in favor of Knecht and ordered the return of her deposit on the basis of the following:

(1) “both parties knew or should have known that financing could not be finalized in the ninety (90) day time limit”;

(2) [Knecht] “used her reasonable best efforts, but failed to obtain a mortgage commitment” when the time came for closing;

(3) market conditions had changed; and

(4) both parties acted in good faith.

     225 River Street filed a motion to vacate the arbitrator\’s award. The trial judge concluded that the arbitrator had exceeded the scope of his powers by disregarding the clear terms of the parties\’ contract, and accordingly, vacated the arbitrator\’s award.

     On appeal, Knecht contended that a court\’s power to overturn an arbitrator\’s award is very limited. The Appellate Division generally agreed, but after a recitation of the limited grounds to do so, found that vacatur of the arbitrator\’s award in this case was proper. Specifically, the Court said:

“An arbitrator exceeds the scope of his powers when he disregards the terms of the parties\’ contract or rewrites the contract for the parties.”

     It is noteworthy that the Appellate Division did not question any of the four underpinnings of the arbitrator\’s award set forth above, all of which were essentially findings of fact. Further, the Appellate Court did not challenge whether the outcome under the arbitrator\’s award was fair.

     The message is clear. Parties should expect arbitrators to enforce their contract as written, and judicial review can assure that result.

[Image: D.W. Griffith, Mary Pickford, Charlie Chaplin (seated) and Douglas Fairbanks at the signing of the contract establishing United Artists motion picture studio in 1919. Lawyers Albert Banzhaf (left) and Dennis O\’Brien (right) stand in the background. From the New York World-Telegram & Sun collection.]