Strict Adherence to Contractual Arbitration Procedures Required: Vacatur of Unilateral Two-Member Arbitration

Introduction

John Nelson Patrick McEachern and his company, Blue Dealer Services, Inc. (together “Plaintiffs”), entered into “Agent Agreements” with E.R.J. Insurance Group, Inc. d/b/a American Heritage Insurance Services and related entities (“Allstate”). Those agreements contained detailed procedures for resolving any contract disputes by three-member arbitration panels under the American Arbitration Association’s commercial rules. In 2020, Plaintiffs initiated arbitration, selecting two arbitrators and proceeding despite Allstate’s objections, neither waiting for a district court ruling on Plaintiffs’ motion to compel arbitration nor following the three-arbitrator appointment process. The arbitrators awarded Plaintiffs $3,494,401.17. Allstate moved to vacate the award in a new federal action. The district court granted vacatur on two independent grounds: first, arbitration commenced while the district court still had before it Plaintiffs’ motion to compel arbitration; second, the two-member proceeding directly conflicted with the contract’s arbitration procedures. Plaintiffs appealed.

In an opinion issued January 31, 2025, the Eleventh Circuit affirmed the vacatur, holding that arbitration is strictly a matter of contract under the Federal Arbitration Act (FAA), and that parties and arbitrators must follow the precise appointment and procedural terms they negotiated. Arbitration that occurs prematurely or in a manner contrary to an unambiguous agreement exceeds the tribunal’s powers under 9 U.S.C. § 10(a)(4) and must be vacated.

Summary of the Judgment

The panel, per curiam, reviewed the district court’s order vacating Plaintiffs’ $3.49 million arbitral award. The appellate court confirmed:

Arbitration before only two arbitrators contravened the Agent Agreements, which unambiguously required three arbitrators and a specific “drawing lots” mechanism for choosing the third.
Even if one side’s arbitrator refused to participate, Plaintiffs should have awaited a district court decision on their pending motion to compel arbitration instead of unilaterally proceeding.
Allstate repeatedly and timely objected to each step in the two-member process and did not waive its rights under the FAA.
Under Section 10(a)(4) of the FAA, a court must vacate an award where arbitrators “exceeded their powers.” By ignoring the parties’ agreed arbitration mechanism, the two arbitrators so exceeded their powers, triggering vacatur.

The Eleventh Circuit therefore affirmed the district court’s vacatur in full.

Analysis

Precedents Cited

The court relied heavily on binding Eleventh Circuit and Fifth Circuit (pre-1981) authority interpreting the FAA’s vacatur provisions:

Szuts v. Dean Witter Reynolds, Inc., 931 F.2d 830 (11th Cir. 1991): Vacatur of a two-member panel award when the contract required “at least three arbitrators.” Even though a majority could award under the AAA rules, the panel violated the agreement by hearing evidence and deciding without a full panel.
Sam Kane Packing Co. v. Amalgamated Meat Cutters, 477 F.2d 1128 (5th Cir. 1973) (pre-Bonner binding): Vacatur of a unilateral arbitration award where the contract called for each party to appoint an arbitrator, and one party’s arbitrator refused to participate. The Fifth Circuit held that the opposing party should have sought a court order compelling the agreed-upon process rather than proceed alone.
AT&T Tech., Inc. v. Communications Workers of Am., 475 U.S. 643 (1986), and Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468 (1989): Confirming that arbitration is a matter of contract and that courts must enforce arbitration agreements according to their terms.

These precedents establish that arbitrators derive their authority solely from the parties’ agreement, and exceeding that authority—even in procedural matters—mandates vacatur under 9 U.S.C. § 10(a)(4).

Legal Reasoning

The Eleventh Circuit’s reasoning proceeds in three steps:

Contractual Foundation: Under the FAA, arbitration is a creature of contract. The Agent Agreements spelled out a three-member panel, sequential appointment, and a “drawing lots” tie-breaker. Neither party nor the AAA rules could override those terms.
Procedural Compliance Required: Because both Plaintiffs and Allstate selected initial arbitrators, the Agreements required the two appointees to choose a third—or, failing mutual agreement, each party would strike a name and the third would be chosen by lot. By seating only two arbitrators and pressing forward, Plaintiffs ignored the “three arbitrator” requirement and the drawing-lots provision.
FAA Vacatur Standard: Section 10(a)(4) authorizes vacatur where arbitrators “exceeded their powers, or so imperfectly executed them that a . . . award . . . was not made.” A panel that usurps the parties’ agreed process by holding a two-member hearing plainly exceeds its contractual mandate.

The court rejected Plaintiffs’ arguments that the clause allowing one side to select both arbitrators if the other “failed to select” applied here (it did not, since Allstate timely named its arbitrator), and that AAA Rule 44(a)’s majority-rules provision could be read to validate a two-member award (previous decisions foreclose that reading when the agreement specifies three decision-makers).

Impact

This decision reinforces key principles for arbitration practitioners:

Strict Enforcement of Procedures: Parties and tribunals must follow the exact methods for selecting and constituting panels set out in arbitration agreements. Any deviation risks vacatur.
Premature Arbitration: When a motion to compel arbitration is pending, parties should not proceed unilaterally—even if the other side appears recalcitrant—without first obtaining a court ruling.
FAA Section 10(a)(4) Vigilance: Courts will not hesitate to vacate awards when arbitrators exceed their contractual powers, even in procedural matters.

Future disputes under the FAA will cite McEachern for the proposition that arbitration is not a free-floating dispute resolution forum but is bounded by and must adhere to the procedural compass set by the parties’ own agreement.

Complex Concepts Simplified

Vacatur: A court’s cancellation of an arbitral award. Under 9 U.S.C. § 10, vacatur is limited to narrow scenarios, including when arbitrators “exceeded their powers” granted by the parties’ contract.
FAA Section 10(a)(4): Specifically authorizes vacatur if arbitrators act beyond the scope of their charter. This could be deciding issues not submitted to them or ignoring mandatory procedural requirements.
Arbitrator Appointment Clause: The written contract term that describes exactly how each arbitrator is chosen. Courts treat these clauses as binding rules; failure to follow them invalidates the process.

Conclusion

McEachern v. E.R.J. Insurance Group underscores the paramount importance of following the letter of an arbitration agreement. By proceeding with only two arbitrators and before a court had ruled on a motion to compel arbitration, Plaintiffs violated unambiguous procedural terms. The Eleventh Circuit’s affirmation of vacatur reaffirms that arbitration is controlled by contract: arbitrators derive no inherent power beyond what the parties have agreed, and courts will vacate awards whenever arbitrators exceed that defined scope. This decision will guide practitioners and tribunals to ensure that every stage of arbitration—from panel selection to hearing schedules—aligns precisely with the parties’ contractual blueprint.