Background
Prospect Capital Management L.P. and Stratera Holdings, LLC jointly launched the Priority Income Fund and divided administrative fees generated by share distributions. Stratera’s subsidiary, Provasi Capital Partners LP, initially served as the Fund’s wholesaler. In 2018, Destra Capital Managers LLC became sub-wholesaler under a new fee arrangement. A dispute arose when Prospect excluded dividend-reinvestment-program shares from its calculation of fees owed to Stratera and Destra.
Stratera and Destra commenced arbitration. The panel’s initial interim award found that Prospect breached the parties’ contract by excluding DRIP shares tied to shares for which Destra served as sub-wholesaler, but other portions of the award and accompanying opinion suggested that the ruling also covered DRIP shares tied to Provasi’s earlier wholesaling activity. The panel issued a revised interim award clarifying that both categories were covered, then entered a final award requiring Prospect to pay approximately $11 million in unpaid fees, interest, and attorneys’ fees.
Prospect petitioned the District of Delaware to vacate the revised and final awards under Section 10(a)(4) of the Federal Arbitration Act, arguing that the panel violated the functus officio doctrine by revisiting a final liability determination. The district court denied Prospect’s petition and enforced the award, concluding that the revision fell within the doctrine’s ambiguity exception.
The Court’s Holding
The Third Circuit affirmed. It first held that the interim award was final as to liability even though the panel reserved damages for later determination. Under the court’s precedent, functus officio attaches to an arbitral decision that finally resolves a submitted issue; an arbitration need not be complete in every respect. The court also rejected Stratera’s argument that the Supreme Court’s decision in Morgan v. Sundance had displaced functus officio, explaining that the doctrine is a longstanding arbitration-specific common-law rule rather than an arbitration-favoring variation of a generally applicable federal procedural rule.
The court nevertheless held that the panel could revise the interim award under the ambiguity exception to functus officio. Although the opinion’s designated “Holding” section appeared to cover only Destra-related DRIP shares, the operative “Interim Award” referred more generally to the “above-described DRIP Shares.” Other portions of the opinion discussed both claimants, DRIP shares generally, and contractual provisions encompassing shares issued before Destra became sub-wholesaler. Taken together, the award and opinion were reasonably susceptible to both Prospect’s narrower interpretation and the panel’s broader interpretation.
Because the parties adopted American Arbitration Association rules authorizing the arbitrators to interpret rules governing their own powers, the court afforded broad deference to the panel’s application of functus officio. The revised interim award was at least a rational clarification of an ambiguous award rather than an impermissible reconsideration of the merits, so the arbitrators did not exceed their authority under Section 10(a)(4).
Key Takeaways
- An interim arbitration award that finally resolves liability may trigger functus officio even when damages remain undecided.
- An arbitrator may clarify an award that is reasonably susceptible to more than one interpretation without improperly revisiting the merits.
- Courts may examine an award’s accompanying opinion when the operative award incorporates or refers to matters described in that opinion.
- Adopting AAA rules can require substantial judicial deference to an arbitrator’s interpretation of the rules defining the arbitrator’s authority.
Why It Matters
The decision distinguishes a permissible clarification from an impermissible post-award change of position. Even when one section of an arbitral opinion appears clear, ambiguity in the operative award and conflicting indications elsewhere in the opinion may permit the arbitrators to clarify the relief they intended to grant.
The ruling also confirms in the Third Circuit that functus officio remains viable after Morgan v. Sundance and can apply issue by issue before an arbitration is fully complete. Parties drafting arbitration provisions should therefore consider both the finality of partial awards and the authority conferred through incorporated arbitral rules.