The U.S. Court of Appeals for the Third Circuit recently upheld an arbitration award in a case involving a fee dispute between Prospect Capital Management L.P. and Stratera Holdings LLC. This ruling, filed on August 4, 2026, clarifies how arbitration panels can revise their decisions, particularly in cases where ambiguity exists. The outcome affects the financial responsibilities of the parties involved and sets a precedent for future arbitration disputes.
The case, docket number 24-3291, originated from a disagreement over the distribution of administrative fees from the sale of shares in a jointly owned management fund known as the Priority Income Fund. Stratera Holdings and Destra Capital Managers, LLC, which had taken over certain responsibilities from Prospect, argued that Prospect had improperly excluded specific shares from their fee calculations. This led to a lengthy arbitration process, which ultimately resulted in a significant financial ruling against Prospect.
In 2018, Stratera's subsidiary, Provasi Capital Partners LP, served as the wholesaler for the Priority Income Fund. The fee structure was complex, with fees split between the parties based on how shares were issued—either through initial offerings or through a dividend reinvestment program (DRIP). Prospect Capital, however, excluded DRIP shares from its calculations, prompting Stratera and Destra to seek arbitration under the terms of their contract.
The arbitration panel conducted an eight-day hearing and issued an interim award that found Prospect had breached the contract by excluding DRIP shares from the fee calculations. However, the panel's initial decision did not clarify how it applied to all categories of disputed shares, leading to further confusion. After the parties raised this issue, the panel issued a revised interim award, which Prospect argued violated the functus officio doctrine—a legal principle that prevents arbitrators from revisiting their prior decisions.
The District Court for the District of Delaware ruled that the revised award was valid under the ambiguity exception to the functus officio doctrine. The court found that the arbitration panel had the authority to clarify its earlier decision, and thus, it denied Prospect's petition to vacate the revised award and enforced the final award, which ordered Prospect to pay approximately $11 million in fees and interest.
On appeal, the Third Circuit, led by Circuit Judge Porter, affirmed the District Court's ruling. The court emphasized that the functus officio doctrine is a default legal rule but can be modified by the parties involved. The judges noted that the arbitration panel's revised award fell within the ambiguity exception, allowing for clarification of the initial award.
The court ruled, "Because the parties bargained for the arbitrator’s construction of their agreement, an arbitral decision even arguably construing or applying the contract must stand, regardless of a court’s view of its (de)merits," reinforcing the importance of respecting arbitration decisions.
The impact of this ruling extends beyond the parties involved. It emphasizes the importance of clarity in arbitration agreements and the potential for arbitration panels to revise their decisions when ambiguity arises. This case sets a precedent for how similar disputes may be handled in the future, particularly regarding the interpretation of contractual language and the authority of arbitration panels.
Looking ahead, the ruling can potentially be appealed to the U.S. Supreme Court, although it is unclear if the parties will pursue that route. Additionally, there may be related cases involving arbitration disputes that could further explore the boundaries of the functus officio doctrine and its exceptions.