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Massachusetts SJC Issues Important Decision Curtailing The Availability Of Attorney's Fees In Arbitration

In Beacon Towers Condominium Trust v. Alex, 473 Mass. 472 (2016) ("Beacon Towers"), the Massachusetts Supreme Judicial Court decided that an arbitral tribunal had overstepped the bounds of its authority when it awarded attorney's fees pursuant to the Commonwealth's frivolous claims statute. The SJC ultimately vacated the arbitral tribunal's fee award, despite noting that arbitration awards enjoy an exceptionally narrow scope of judicial review.

The SJC transferred Beacon Towers from the Appeals Court on its own motion - suggesting that the Commonwealth's highest court had a particular interest in clarifying existing law on this issue. Section 10 of the Massachusetts Uniform Arbitration Act states that attorney's fees may not be awarded in arbitration unless otherwise provided in the parties' arbitration agreement. Thus, the rule in the Commonwealth has been that arbitrators could not award attorney's fees except in two specific circumstances: (1) where a statute requires the imposition of fees on the losing party (Massachusetts' consumer protection statute, Chapter 93A, immediately comes to mind), and (2) where, pursuant to its authority to oversee discovery, a tribunal imposes monetary sanctions for discovery violations. The second exception was established in a 2006 SJC case entitled Superadio Limited Partnership v. Winstar Radio Prods., LLC, 446 Mass. 330 (2006) ("Superadio").

In Beacon Towers, the arbitral tribunal awarded attorney's fees based on G.L. c. 231, § 6F, which authorizes the award of reasonable attorney's fees where a claim or defense is wholly insubstantial, frivolous, and not advanced in good faith. On appeal, the claimant offered two alternative bases for the arbitral tribunal's authority to award attorney's fees. 

First, the claimant argued that Rule 47(a) of the agreed arbitration rules (the American Arbitration Association's Commercial Arbitration Rules) permitted the tribunal to "grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties." By agreeing to use the AAA Rules, the claimant argued, the parties agreed that the arbitral tribunal could award any relief it deemed "just and equitable," including fees. 

The SJC rejected this argument, despite having relied on effectively identical language to confirm an arbitral tribunal's imposition of discovery sanctions in Superadio. In Superadio, the SJC noted the broad authority granted to the arbitral tribunal pursuant to AAA Rule 47(a) (then numbered differently within the AAA rules) and the absence of any limitation on that authority within the parties' arbitration agreement: 

"The rules, construed together, and supported by the broad arbitration provision in the agreement and the absence of any limiting language prohibiting a monetary sanction for discovery violations, authorized the panel to resolve discovery dispute by imposing monetary sanctions."

In Superadio, the SJC held that, by adopting the AAA Rules in their arbitration agreement, the parties impliedly assented to the imposition of monetary sanctions for discovery violations. By contrast, in Beacon Towers, the SJC looked to the parties' arbitration agreement for affirmative authorization to impose attorney's fees, but found none:

"[Claimant] points to no provision of the parties' agreement that authorizes the award of attorney's fees."

Thus, in Beacon Towers, the SJC held that absent proactive, express authorization in the parties' arbitration agreement, the arbitral tribunal was not permitted to award attorney's fees. In so holding, the Court focused on the second half of AAA Rule 47(a):"The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties." (Emphasis added.) The SJC cited Superadio extensively in Beacon Towers but did not address the apparent tension between the two decisions. 

One possible reason for the SJC's seemingly inconsistent result is that Superadio dealt with per diem monetary sanctions for discovery violations, whereas Beacon Towers treats an award of attorney's fees. Though the concepts are similar and are treated interchangeably in parts of the Beacon Towers decision, AAA Rule 47(d)(ii) sets forth specific instances in which an arbitral tribunal's award of attorney's fees is appropriate: "The award of the arbitrator(s) may include:...(ii) an award of attorneys' fees if all parties have requested such an award or it is authorized by law or their arbitration agreement."

The claimant relied on the language of AAA Rule 47(d)(ii) to make his second argument, which claimed that G.L. c. 231, § 6F specifically authorizes an award of fees where, as here, defenses were advanced in bad faith. However, Section 6F states that a "court" has the authority to impose attorney's fees on parties who advance frivolous claims or defenses, and the SJC seized upon the legislature's use of the word "court" to hold that Section 6F does not empower an arbitral tribunal to award attorney's fees. While the SJC's interpretation of the statute is almost certainly correct (which would necessarily make the arbitral tribunal's interpretation wrong), the arbitral tribunal's misinterpretation of Section 6F would appear to be an "error of law," which is not a basis for overturning an arbitral award in Massachusetts. See Beacon Towers, 473 Mass. 472, 42 N.E.3d 1144, 1147 ("We do not review an arbitration award for errors of law..."); Northland Inv. Corp. v. Goodwin Procter LLP, 82 Mass. App. Ct. 272, 274 (2012) ("...an error of law does not provide a basis for a court to vacate an arbitration award").

Given the SJC's intense focus on the language of the AAA Rules and, to a lesser extent, the parties' arbitration agreement in Beacon Towers, it is unclear how much precedential value the case will have going forward. What is clear, however, is that Beacon Towers invites a spike in applications to vacate arbitral awards imposing attorney's fees on the losing party. 

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