‘Gap Filling’ by Arbitrators

Professor Alan S. Rau, Mark G. and Judy G. Yudof Chair in Law at the University of Texas School of Law, has published ‘Gap Filling’ by Arbitrators, International Council for Commercial Arbitration, Congress Series, 2014, Forthcoming.   In his paper, Professor Rau discusses recent Supreme Court precedent and the role of arbitrators when a contract omits a disputed term.

Here is the abstract:

The notion of a contractual “gap” is an evanescent one, which can — and often does — mean everything and nothing. It could perhaps be said that the very notion of a “gap” is simply incoherent — for once we are satisfied that the parties have entered into a “contract,” there can by definition be no “gaps.” Indeed, by its legal definition a “contract” cannot be incomplete. Or perhaps it could be said that, by contrast, there are nothing but “gaps” — that unless the parties have taken the pains to construct an infinite agreement, mapping onto every conceivable state of the world, likely or unlikely, known or unknown — then courts must be free to reconstruct or interpolate.

When we are working through problems like this in the context of arbitration, the difficulties become far more acute — for here our ordinary concerns aimed at giving effect to contractual intention, if we can locate it, intertwine with our concerns aimed at giving effect to the choice of private decisionmakers — that is, at preserving the powers that the parties (and thus the state) have entrusted to them.

A failure of agreement may at times be fatal in the sense that — as in some low-budget horror film — the cracks spread so widely as to swallow up any pretense of a contract. On the margins of contractual behavior, or at its outer limits, we may find it impossible to construct any story at all with respect to what the parties have agreed to — in which case neither has any right to impose duties on the other.

Here, though, a rather naive “contract/no contract” dichotomy is infinitely less interesting than two related points: that (a) such challenges must not be taken to impair any contractual duty to arbitrate—and so they should be entrusted to the arbitrators themselves for decision; and (b) the parties may have contemplated that any “gaps” that present themselves — however fatal they would otherwise be — could be filed in by the arbitral tribunal itself: In a sense then an arbitrator’s decision, being itself an “instance of contractual gap-filling, just is a term of the parties’ contract.” It is thus a familiar proposition that what might otherwise be a fatal “uncertainty” of terms can be cured simply by adding an arbitration clause.

The Supreme Court has recently grappled with the problem of omitted terms — phrased in terms of “silence” — in three recent cases all involving classwide proceedings. It is hard to know just where the Court has left us in our attempt to assess the power of arbitral tribunals to “fill gaps” in apparently “silent” agreements. One may well be forgiven for thinking that the result-oriented “reading” indulged in by the arbitrator in Oxford Health — in which the Court apparently saw itself obligated to acquiesce — has set courts on the path of leaving future arbitrators quite at large.

A number of things, though, can be asserted with at least some degree of confidence. 1. The results reached by the arbitral tribunal in Oxford Health — and by those in succeeding cases — seem to be perfectly in line with the expansive “gap filling” authority that I have argued should be presumptively attributed to arbitrators. This is at least as broad as — and indeed considerably exceeds — the authority that a “common-law court” is assumed to possess. 2. The Court’s refusal in Stolt- Nielsen to allow arbitrators themselves to devise appropriate default rules in the absence of some demonstrable “agreement,” may perhaps have rested on considerations peculiar to classwide proceedings — concerns that seemed to justify the intrusion of some supervening federal common-law default rule that arbitrators are bound to respect. But whether in that context or otherwise, there is inherent in the Court’s opinion a vision of arbitral adjudication that is cramped indeed — and which in consequence creates obvious incentives for private decisionmakers to be somewhat less than candid with respect to the true rationale of their awards, in the interest of avoiding the risk of vacatur. This cabined view of what is permissible (finding a “contractual basis”) and what is not (creating “sound policy”) promotes disingenuousness and so denatures the arbitral task, which — precisely as is true for state tribunals themselves — should embrace both.

This and other scholarly articles authored by Professor Rau may be downloaded without charge from the Social Science Research Network.