"When an arbitrator is commissioned to interpret and apply the collective bargaining agreement, he is to bring his informed judgment to bear in order to reach a fair solution of a problem. This is especially true when it comes to formulating remedies. There the need is for flexibility in meeting a wide variety of situations. The draftsmen may never have thought of what specific remedy should be awarded to meet a particular contingency. Nevertheless, an arbitrator is confined to interpretation and application of the collective bargaining agreement; he does not sit to dispense his own brand of industrial justice. He may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement. When the arbitrator's words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award." (emphasis added.)

In the Honold case, which followed in the wake of Enterprise, resolution of the issues made it necessary for this Court to elucidate upon the general principles announced in Enterprise, and thus to define still more sharply the general principles governing the scope of federal judicial review of an arbitrator's award. Judge Aldisert did so, inter alia, in the following terms:

"[A] labor arbitrator's award does 'draw its essence from the collective bargaining agreement' if the interpretation can in any rational way be derived from the agreement, viewed in the light of its language, its context, and any other indicia of the parties' intention; only where there is a manifest disregard of the agreement, totally unsupported by principles of contract construction and the law of the shop, may a reviewing court disturb the award."11

Honold was, like Enterprise, a labor arbitration case; however, in his discussion of the scope of federal judicial review of an arbitrator's award, Judge Aldisert did not limit himself to labor arbitration cases, drawing upon precedent in the commercial arbitration field as well:

"Although we are quick to recognize that cases involving commercial arbitration disputes under the Federal Arbitration Act are not controlling authority, an examination of standards applied by reviewing courts is invited."

He then went on to recite principles of review concededly applicable in commercial arbitration cases:

"[I]t has been held that a 'mere error in the law or failure on the part of the arbitrators to understand or apply the law' will not justify judicial intervention, and that the courts' function in confirming or vacating a commercial

award is 'severely limited' . . .;" and:

"[T]he interpretation of . . . arbitrators must not be disturbed as long as they are not in 'manifest disregard' of the law. [Wilko v. Swan, 346 U.S. 427, 436, 74 S. Ct. 182, 98 L. Ed. 168]."

A careful reading of Honold indicates that the principles governing labor and commercial arbitration cases are similar, and we therefore consider the principles of Honold with respect to the authority of the arbitrator to fashion an award and the scope of judicial review to be applicable in commercial arbitration cases as well. However, even though the principles are similar, there are differences in the rigor of judicial review, depending upon whether we are dealing with a labor or commercial arbitration case.

In United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 578, 80 S. Ct. 1347, 1351, 4 L. Ed. 2d 1409 (1960), the Court explained the different policy considerations applicable to commercial and labor arbitration cases:

"In the commercial case, arbitration is the substitute for litigation. Here arbitration is the substitute for industrial strike. Since arbitration of labor disputes has quite different functions from arbitration under an ordinary commercial agreement, the hostility evinced by courts toward arbitration of commercial agreements has no place here. For arbitration of labor disputes under collective bargaining agreements is part and parcel of the collective bargaining process itself."

"Our reference to the area of commercial arbitration has been deliberate, even though we recognize that identical considerations do not apply to the labor field. To the extent that these cases reflect the judicial attitude toward the concept of arbitration, however, they are singularly important in determining the correct standard for the judicial review of labor awards. We are aware of the strong public policy of encouraging the peaceful settlement of industrial disputes by means of the device of arbitration. We are also aware of what has been called the 'hostility evinced by courts toward arbitration of commercial agreements.'

Bearing this in mind and perceiving that the Supreme Court's announced standards in reviewing commercial awards call for the exercise of judicial restraint, we must conclude that such a philosophy of restricted review compels even less judicial interference in matters arising from labor arbitration. . . ."

We note too that the role of arbitration in our national labor policy has become even more firmly entrenched since Honold was announced. See Boys Markets, Inc. v. Retail Clerk's Local 770, 398 U.S. 235, 90 S. Ct. 1583, 26 L. Ed. 2d 199 (1970).

The facts of this case require that we highlight one additional principle of review that emanates from Honold. For, in holding that an arbitrator's award does not draw its essence from the agreement if the arbitrator's interpretation cannot be rationally derived therefrom, Honold has, in addition to limiting the arbitrator's authority to fashion relief, also established that an award may not stand if it does not meet the test of fundamental rationality. The New York Court of Appeals, whose opinions are the source of much instruction in this field, has held that an award of an arbitrator is not subject to judicial revision unless it is "completely irrational," Lentine v. Fundaro, 29 N.Y.2d 382, 328 N.Y.S.2d 418, 278 N.E.2d 633 (1972). We consider this formulation to be a fair rendering of Honold. In any event, it is an accurate statement of the law.

At this juncture, we must turn to the application of the principles of Honold to the facts at bar, keeping in mind that while our scope of review is limited, it is not as limited as in a labor arbitration case. We will first examine the question of the authority of the arbitrator to award a cash or surety bond as a form of relief, then the question of the inherent rationality or irrationality of the terms of the award, and finally, the appropriateness of the award of counsel fees.

As we have already noted, the threshold question in the case is the extent of the arbitrator's authority to fashion relief. It is, of course, fundamental that the authority of the arbitrator springs from the agreement to arbitrate. The arbitration clause in the Agreement in question (Sec. 14.08) is the standard AAA arbitration clause:

"Section 14.08. Arbitration. Any controversy or dispute arising under this Agreement shall be settled by arbitration in accordance with the rules of the American Arbitration Association. . . ."

This clause in turn invokes Sec. 42 of the AAA rules which provides:

"SCOPE OF AWARD-The Arbitrator may grant any remedy or relief which he deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract. . . ."

In our preliminary statement, we summarized the provisions of the Agreement providing for Botany's obligations to Swift in the event it owes federal taxes or has certain liabilities or commits breaches of covenant. Neither in those provisions nor elsewhere in the Agreement is there mention of a bond as a form of remedy in the event of breach. It is apparent that the parties never contemplated a bond as the means of making an aggrieved party whole. Swift, nonetheless, submits that, far from limiting the power of the arbitrator to consider the question of a bond, the adoption in the Agreement of the AAA rules, thereby invoking Rule 42, constitutes an articulation of the power of the arbitrator to award "any remedy or relief" including a bond. Swift also notes that Sec. 14.04 of the Agreement provides:

"It is not intended that the rights of Swift under . . . Sec. 12.02 . . . shall be its exclusive remedy for the breach of any . . . warranties,"

and argues that the presence of this section reinforces a conclusion as to the efficacy of Rule 42 in this case. At this juncture, reversing the coin, as it were, Swift adds that, in any event, the Agreement contains no provision excluding the consideration of the bond from arbitration and that, since the AAA clause is a so-called "broad" arbitration clause under the umbrella of which every controversy or dispute is included unless, by express language, the particular dispute is excluded, see Boston & Maine Corp. v. Illinois Central RR, 396 F.2d 425 (2d Cir. 1968), the arbitrator's award of the bond was proper.

Needless to reiterate, Botany dissents from these propositions; hence it is necessary to discuss those aspects of the Agreement which shed light on the question of the authority of the arbitrator to award a bond. Before doing so, it is important to place the nature of the arbitrator's award in perspective. In our view, the arbitrator's alternative award is tantamount to a $6 million cash bond. At oral argument, Swift placed heavy accent on that portion of the arbitrator's award that provided for the posting of a surety bond in lieu of cash, intimating that a bond premium (of approximately $17,800 per year) was the full extent of Botany's liability. However, under interrogation by the Court, Swift conceded that surety companies do not idly issue six million dollar bonds upon the mere payment of premium, but indeed require in addition a demonstration of immaculate credit standing or else the encumbering of viable assets (perhaps to the extent of $6 million). At that juncture in the case it was apparent that the award was in fact tantamount to a $6 million cash bond. Although it does not influence our decision, Botany's recently acquired status as a Chapter XI debtor (see n. 2) underscores this conclusion.

The Agreement provides that, in the event of a breach of warranty, Botany will pay to Swift in cash an amount equal to "all losses, liabilities and expenses incurred or suffered by Lincoln, Allegheny or Swift by reason of any of the events specified. . . ." (emphasis added). Botany asserts that no party, including Lincoln, Allegheny, or Swift, has yet, within the meaning of the Agreement, incurred or suffered any liability, expense, or loss as the result of the asserted tax deficiencies. We agree. The pending tax claim is clearly not an expense or loss. The question then is whether it is a liability in the legal sense. Within the 90-day period following issuance of the Statutory Notice of Deficiency,12 the matter was appealed to the Tax Court, where it now resides as an open matter to be determined by that court. The Statutory Notice of Deficiency does not constitute an assessment of liability; it constitutes the assertion of the government's claim. While responsible auditors may deem it necessary to note the issuance of the Statutory Notice on a financial statement, what they do is to note it, not list it as a legal liability, which it is not. This conclusion is unaltered by the fact that the Commissioner's determination is considered to be presumptively correct,13, for the burden of proof is still upon the government. See Psaty v. United States, 442 F.2d 1154 (3d Cir. 1971).14

Swift and Botany have always concurred that the Agreement conferred upon the arbitrator the power to declare whether or not Botany might be liable to Swift for any tax deficiency with which Lincoln and Allegheny might ultimately be charged. What Botany has questioned is whether there may be drawn from the Agreement the authority to award what is tantamount to a six million dollar cash bond to cover a liability which has not only not yet been "incurred or suffered," but which may or may not ever accrue (or which may accrue only in part). Botany points to the absence from the Agreement of any provisions which would secure either party against breaches of warranty by the other.15 Such provisions are frequent in agreements of this type, and we cannot assume that their absence was accidental. Botany contends that the absence of security provisions means that the parties were relying on each other's general credit with respect to repairing any breach, and certainly we cannot gainsay that this is so.

We have sought to distill from the Agreement the essence of the arbitrator's authority. Whatever that authority may be, it is clear to us that it does not include the authority to award a six million dollar cash bond to cover a liability which contrary to the requirements of the applicable breach of warranty clause, has not yet been (and may not be) "incurred or suffered," in a situation where the parties did not provide for such security in their agreement, although they might have done so.16 In our view, to award, as an adjunct to declaratory relief, a form of prejudgment execution which the Agreement by its lack of reference to security seems to exclude rather than to intend, is to eclipse the framework of the agreement and to venture onto unprotected ground. We subscribe to the observations of the Enterprise court that the draftsmen may be unable to perceive in advance what specific remedy should be awarded to meet a particular contingency and that in arbitration flexibility is important. But the principle of flexibility of relief cannot be permitted to obscure or to effect a metamorphosis of the claim itself. That untoward event would occur if we were to permit the arbitrator's award to stand in this case. Cf. Truck Drivers and Helpers Local 784 v. Ulry-Talbert Company, 330 F.2d 562 (8th Cir. 1964).

Having reviewed the Agreement in the light of its language, its context, and the parties' apparent intent, and in terms of the question of the arbitrator's authority to fashion relief, we conclude that the arbitrator's award of a six million dollar cash surety bond does not draw its essence therefrom and that it is in manifest disregard thereof and must be set aside.

Assuming, arguendo, that the arbitrator had authority to award a bond, Botany nonetheless attacks the award on a second basis: that its terms are completely irrational. We approach this allegation cautiously, for, although the complete irrationality of an award is a basis for setting it aside, the irrationality principle must be applied with a view to the narrow scope of review in arbitration cases. The basis of Botany's "irrationality" attack is the Sharing Agreement.

The Sharing Agreement was executed by the then solvent former subsidiaries of Premier after receipt of the 30 day letter. Its purpose was to provide for the orderly prosecution of the Premier tax controversy, to arrange in advance a fair allocation of and a fund for defraying its costs, and to determine in advance a fair allocation of the deficiencies finally determined to be due. In schedule B attached to the agreement, the respective deficiency shares for the years in question were set forth.

As noted above, Lincoln and Allegheny were included in the Premier consolidated return in 1960 and 1961.

The schedule B provision for those years is as follows:

Member                                           Deficiency 1960  Share 1961
E.C.Publications, Inc. and E.C.Creations, Inc.*  32.555%          37.686%
Airco Supply Company, Incorporated               21.087%          10.001%
Lincoln Homes Company                            None             33.444%
Allegheny Mortgage Corporation                   9.676%           None
Horsman Dolls, Inc.                              None             13.007%
Globe Products Corporation                       36.682%          5.862%

The tax deficiency asserted by the government was $1,019,619.60 for the year 1960 and $2,783,698.17 for the year 1961. Thus, under the sharing agreement, the maximum tax liability of Lincoln and Allegheny exclusive of interest would be $98,658.04 for 1960 and $930,979.65 for 1961 for a total of $1,029,637.69. With interest, the maximum tax liability of Lincoln and Allegheny would be approximately $1.5 million, and then only if Premier were unsuccessful in all of its contentions before the Tax Court. Can a $6 million cash bond award be deemed rational in view of a maximum $1.5 million liability under the Sharing Agreement? We think not.

Swift argues in reply that it is conceivable that Lincoln and Allegheny might be responsible for the full amount of the liability-if all of the other subsidiaries became insolvent. In this regard, however, we note the uncontroverted affidavit filed with the District Court by Edward C. Wallace, a member of the New York law firm of Weil, Gotshal and Manges, general counsel to Botany. In the affidavit, Mr. Wallace sets forth that E. C. Publications Inc. and E. C. Creations Inc., two parties to the sharing agreement, are subsidiaries of Kinney National Services Inc. ("Kinney"), and that subsequent to the signing of the Sharing Agreement, Kinney had guaranteed in writing the obligations of its two subsidiaries under the sharing agreement. We take judicial notice of the fact that, prior to its acquisition by Warner Communications Inc.,17 whose shares are traded on the New York Stock Exchange, Kinney's shares were, in their own right, traded on that exchange. The E.C.-Kinney obligation is far more substantial than the Lincoln-Allegheny share-totaling some 32.5% of the 1960 deficiency and 37.68% of any 1961 deficiency. The fact of the Kinney guarantee strongly militates against Swift's rejoinder that it is conceivable Lincoln and Allegheny might have to bear the full $6 million liability despite the Sharing Agreement. And while, in the absence of record facts, we cannot and do not make a definitive finding of Kinney's financial strength, it was certainly capricious for the arbitrator to fail to investigate and consider the Kinney financial situation before making a six million dollar award.

We therefore hold that there is a second ground supporting Judge Weber's action in setting aside paragraph B of the Award-its complete lack of rationality.

In his paragraph C, the arbitrator awarded to Swift the sum of $100,492.36 to reimburse it for attorneys' fees and costs which it had actually expended in connection with both the tax deficiency proceedings and the arbitration proceedings. Botany does not dispute that award insofar as it relates to sums expended by Swift in connection with the tax deficiency proceedings; it does however vigorously contest the award insofar as it orders Botany to pay Swift's fees for the arbitration proceedings. We must therefore apply the principles which we have set forth above, and determine whether the award of Swift's counsel fees for the arbitration proceedings may be drawn from the essence of the Agreement.

The award of fees has its basis in Secs. 12.02(d) and (h) of the Agreement, which provide for payment in cash by Botany to Swift if "Lincoln or Swift shall incur any expense in respect of any liability" described, inter alia, in Sec. 12.02 (b) or (p) (the tax provisions of the Agreement). Before determining independently whether the arbitrator's award of counsel fees for the arbitration itself draws its essence from the Agreement,18 we must first consider whether that award is tainted by the same defects which invalidated the award of the bond.

Sections 12.02(d) and (h) with which we are here concerned are operative only with respect to expenses "incurred or suffered." Inasmuch as we have found that the tax deficiency has not yet become a liability and that it has not yet been incurred or suffered, does not the claim for counsel fees in the arbitration proceeding run afoul of the same problem as Swift's breach of warranty tax deficiency claim? We think not. First of all, in contrast to the tax deficiency claim, the obligation of Swift to its attorneys for counsel fees in the arbitration proceeding has been "incurred or suffered"-in fact, it has been paid. But there is another vital factor which serves to distinguish the counsel fee claim; it relates to the question of what event(s) need occur before the right to reimbursement for counsel fees accrues.

The arbitrator found that the Agreement comprehends reimbursement for counsel fees incurred in connection with the arbitration proceedings. The purpose of the arbitration proceedings was to determine whether or not Botany was liable to Swift for such deficiency as might ultimately be assessed against Premier for which Lincoln and Allegheny might be held liable under the Sharing Agreement. In this regard, it is important to note that, although in this Opinion we have not (because of the lack of an appeal on the point) dealt with paragraph A of the arbitrator's award which constituted a declaration that Botany was liable to Swift for any tax deficiency ultimately determined to be due, that issue was hotly contested before the arbitrator. Botany asserted (unsuccessfully) a host of arguments with which it sought to persuade the arbitrator that the Agreement did not impose liability upon Botany regardless of whether the tax deficiencies assessed against Lincoln and Allegheny should ultimately be sustained. Against this background, it seems reasonable to construe the Agreement to mean that when Swift's counsel achieved a declaration from the arbitrator (which is final by reason of nonreview) to the effect that Botany was ultimately liable to Swift for the deficiency (in whatever sum it might be finally determined), there was nothing more that could or need be done in this regard and the right to reimbursement for counsel fees had thereupon accrued.

Having determined that the claim for counsel fees may be viewed in a different light from the tax deficiency claim, we turn to the question of whether the arbitrator's counsel fee award draws its essence from the Agreement on the one hand, or whether it is in manifest disregard thereof, on the other. On this point we agree with Judge Weber who confirmed the counsel fee award. Judge Weber found that what was involved in the fee award was a matter of contract construction well within the authority of the arbitrator. See Bernhardt v. Polygraphic Co., 350 U.S. 198, 203, 76 S. Ct. 273, 100 L. Ed. 199 (1956). In view of the analysis which we have applied to distinguish the counsel fee situation from the tax situation, we cannot conclude that the fee award was in disregard of the Agreement. Hence, it may not be disturbed by this court.

The judgment of the District Court will be affirmed.