Vacating an Arbitration Award: An Uphill Battle

February 29, 2016

In Zurich Am. Ins. Co. v. Team Tankers A.S., No. 14-4036-CV, 2016 WL 336078 (2d Cir. Jan. 28, 2016), the Second Circuit Court of Appeal recently upheld a decision by the United States District Court Southern District of New York denying the petition of a shipper of a chemical cargo to vacate an arbitration award under the provisions of the U.S. Federal Arbitration Act (“FAA”).

The underling arbitration proceeding was conducted according to the Society of Maritime Arbitrators Rule of Arbitration (“SMA Rules”) and involved a claim by a shipper/charterer against the owner of the vessel for alleged breach of a charter party contract for contamination of a chemical cargo.

The panel, composed of three arbitrators, issued an award in favor of the owner of the vessel and held that: (1) the shipper/charterer failed to establish its prima facie case that the chemicals were damaged while on board of the owner’s vessel, (2) that even if the shipper had established a prima facie case, the owner had shown due diligence in transporting the cargo, and (3) that the shipper failed to prove its damages.  The shipper moved to vacate the arbitration award before the Southern District of New York. The shipper argued that the panel: (1) manifestly disregarded the provisions of the Carriage of Goods by Sea Act (“COGSA”); and (2) that the panel chairman was guilty of corruption or misbehavior for failure to disclose to the parties that he was diagnosed with brain cancer during the course of the proceeding and contrary to his duty under the SMA Rules.  The District Court not only disagreed with both of the shipper’s arguments but also awarded to the owner the fees and costs they incurred in defending the district court proceeding.   The shipper appealed to the Second Circuit.

On appeal, the Second Circuit revisited the high bar to vacate an arbitration award.

Manifest disregard of the law

A court has the power to vacate an arbitration award on the ground of manifest disregard of the law by the arbitration panel.  However, the party seeking the remedy bears the heavy burden of showing that: (1) the panel knew of a governing legal principle yet refused to apply it and ignored it all together, and (2) the law that the panel ignored was well defined, explicit and clearly applicable to the case.

The shipper argued that the panel manifestly disregarded the U.S. Carriage of Goods Act (“COGSA”) by failing to apply COGSA’ burden-shifting scheme and instead required the shipper to prove the cause of the damage to the chemicals.   The Second Circuit (and the District Court before it) disagreed.  The majority of the arbitration panel determined that the shipper did not provide sufficient evidence that the contamination of the chemicals took place while the cargo was in the owner’s custody and therefore failed to satisfy its initial burden under COGSA.  Basically, the panel found that the shipper did not establish its prima facie case – i.e., provided cargo in good order and received the cargo back damaged.  The Second Circuit further reasoned that, while it could be argued that the same evidence could have supported the opposite conclusion, this alone does not constitute a manifest disregard of the provisions of COGSA.

The allegations of corruption or misbehavior against the Chairman of the panel

The shipper also argued an award can be vacated when (1) there is evidence of partiality or corruption on the part of the arbitrators, or (2) the arbitrators are guilty of any misbehavior by which the rights of any party have been prejudiced. Specifically, the shipper argued that the panel chairman’s failure to disclose his condition constituted corruption or misconduct under the FAA and in violation of the SMA Rules requiring arbitrators to disclose any circumstance which could impair their ability to render an unbiased award based solely upon an objective and impartial consideration of the evidence presented to the panel, prior to the first hearing or initial submissions. Moreover, the shipper contends that brain cancer causes profound changes in cognitive function such that it could impair the ability of the chairman to do his job.  Failing to disclose the condition deprived the parties of their right to make a determination on whether or not to continue with him on the Panel.

As there is no case law establishing a standard to determine the corruption of an arbitrator, the shipper contended that the “evident partiality” standard should be adapted to the circumstances –  “If “evident partiality”…will be found where a reasonable person would have to concluded that an arbitrator was partial to one party to the arbitration  corruption will be found where a reasonable person could conclude that an arbitrator was corrupt.”  Under this logic, a reasonable, prudent person would conclude that an arbitration panel chairman acted corruptly, for his personal benefit, and to the detriment of the shipper, if (a) the arbitrator had the obligation to make certain disclosure to the parties according to the SMA Rules, (b) the arbitrator learned of his  mentally debilitating condition during the course of the arbitration, (c) the arbitrator did not disclose his condition, and (4) despite these facts, the arbitrator signed the arbitration award so that he could collect his fees.

The Second Circuit agreed with the District Court and rejected the shipper’s argument. In doing so, the Second Circuit pointed out that a violation of a private arbitral rule – such as the SMA Rules – is akin to a breach of a contractual provision and would improperly expand the scope of vacatur warranted under the FAA.  Failing to recognize this principle would impermissibly allow the parties to expand by contract the FAA grounds for vacating an arbitration award.

Legal fees

The Second Ciruit did disagree with the  District Court’s decision to award the owner the legal fees and costs incurred in opposing the shipper and ultimately confirming the award.  The Second Circuit found that the charter party terms provided that fees could be recovered against the party that breaches the contract.  In this case however, there was no showing that the shipper breached the charter party.  Owner argued that that while the shipper might have not breached the contract as far as transportation of the cargo is concerned they nonetheless breached the understanding between the parties to be bound by the panel’s decision by seeking to vacate the award.  The Second Circuit disagreed  and, instead, held that the parties  agreement to arbitrate also includes the agreement to having a court of competent jurisdiction review the resulting award and confirm that the award meets the FAA standards.

The Second Circuit also dismissed owner’s alternative argument that, under 28 USC Section 1927, fees can be awarded against any attorney who in bad faith take actions so meritless as to require a finding that such action have been taken for the sole purpose to delay the proceeding.  The Second Circuit found that the shipper’s arguments did not rise to that level.