Arbitration Process Issues

Supreme Court of Wyoming Confirms Arbitration Award

February 17, 2023 by Brendan Gooley

The Supreme Court of Wyoming recently rejected claims by a party that had largely prevailed in arbitration, but asserted that it should have received its fees, and that the arbitrator incorrectly decided several issues.

Fork Road, LLC owned part of a building that it purchased from JAMD, LLC. Mountain Business Center, LLC (MBC) was a tenant in that building. JAMD requested, on behalf of Fork Road, that MBC provide information about subtenants. MBC provided certain information, but withheld other information. Fork Road and MBC ended up in arbitration over that withholding and various other issues related to MBC’s lease. The arbitrator ruled in favor of MBC on certain claims and Fork Road on other claims, but ultimately awarded MBC nearly $24,000. MBC argued that it was the prevailing party and sought its fees, but the arbitrator declined to award them because this was a “mixed outcome” case, in which both parties prevailed on certain claims.

MBC challenged the award, arguing that the arbitrator had exceeded his authority because one of Fork Road’s witnesses had “waived” certain claims by Fork Road, but the arbitrator had nevertheless decided those claims. MBC also argued that it was the prevailing party and therefore entitled to fees and that the arbitrator erred by not applying the “first to breach rule” and holding that Fork Road had been the first to materially breach the lease.

The Supreme Court of Wyoming rejected MBC’s claims noting, “MBC cite[d] no authority that testimony by a lay witness on the substantial acts at issue may be used by party to limit its opponent’s claims.” It also held that the arbitrator did not have to award MBC fees even if it was true, as MBC argued, that MBC had prevailed on the “central issue” in the case. The court also held that the arbitrator did not commit manifest error by not applying the “first to breach rule,” where MBC had stayed in the building after Fork Road allegedly breached the lease.

Mountain Business Center, LLC v. Fork Road, LLC, No. 2-22 WY 147 (Wyo. Nov. 23, 2022).

Fifth Circuit Affirms Judgment Confirming Award Despite Concluding Lower Courts Erred by Not Considering Claim That Dispute Could Not be Arbitrated

February 15, 2023 by Brendan Gooley

The Fifth Circuit affirmed judgments confirming an arbitration award despite concluding that the lower courts should have considered one of the party’s claims that a dispute decided by the arbitrator was beyond the scope of arbitration.

Attorney Jon Amberson represented his then father-in-law, James McAllen, a rancher, in litigation related to an oil company burying toxic chemicals on McAllen’s ranch. Amberson’s engagement letters included arbitration clauses. Disputes arose about Amberson’s representation, and Amberson and McAllen arbitrated those disputes, as required by the engagement letters.

A controversy also arose about a separate transaction involving Amberson and McAllen (Cannon Grove Transaction). McAllen purportedly used an entity Amberson created (ANR) for a transaction in which McAllen transferred $4.5 million to ANR. McAllen later asked for his money back, but Amberson refused, claiming that the money had been a gift.

Amberson moved to compel arbitration of all the claims between him and McAllen except for the Cannon Grove Transaction dispute. A Texas state court ordered Amberson and McAllen to arbitrate all their disputes, including the Cannon Grove Transaction Dispute.

Amberson and McAllen then arbitrated all their disputes. McAllen prevailed and moved to confirm a substantial award in his favor. While McAllen’s motion to confirm was pending, Amberson and ANR filed for bankruptcy. McAllen then sought to confirm the award in bankruptcy court. The bankruptcy court concluded that it could not consider Amberson’s argument that the Cannon Grove Transaction dispute should not have been arbitrated. On appeal, a federal district court affirmed the bankruptcy court judgment.

Amberson then appealed to the Fifth Circuit, which affirmed, albeit on different grounds. The Fifth Circuit concluded that the bankruptcy court erred by holding that it could not consider Amberson’s argument that the Cannon Grove Transaction dispute should not have been arbitrated. It explained that the Texas General Arbitration Act “allows a party to renew arguments in a motion to vacate that were rejected prior to arbitration about the scope of the arbitration agreement.” Thus, the Fifth Circuit held that “Amberson was entitled . . . to have the argument,” “that the arbitrator had exceeded his powers in resolving the Cannon Grove claim” “considered” by the bankruptcy and district courts. Nevertheless, the Fifth Circuit rejected Amberson’s arguments that the Cannon Grove Transaction dispute was not arbitrable on the merits. The Fifth Circuit therefore affirmed the judgments confirming McAllen’s award.

In the Matter of: Jon Christian Amberson, No. 21-50960 (5th Cir. Nov. 18, 2022).

Second Circuit Rejects Application of the Functus Officio Doctrine and Affirms District Court’s Order Denying Petition To Vacate Arbitration Award and Granting Cross-Petition to Confirm Award

February 8, 2023 by Kenneth Cesta

In Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Ltd., et al., the Second Circuit affirmed the district court’s order denying Smarter Tools, Inc.’s (STI) petition to vacate an arbitration award and granting Chongqing Seni Import & Export Trade Co. Inc. and Chongqing AM Pride Power and Machinery Co., Ltd.’s (collectively, SENCI) cross-petition to confirm the award.

STI is engaged in the business of buying and selling tools and power products. SENCI produces and sells gas-powered generators. STI and SENCI entered into contracts for STI’s purchase of thousands of generators from SENCI. The purchase orders for the generators included an arbitration provision “providing that any dispute arising from the contracts would be resolved by arbitration, to be conducted in New York City under the International Commercial Dispute Resolution Procedure of the American Arbitration Association.” After disputes arose between the parties regarding the generators, SENCI initiated arbitration to collect amounts due from STI. STI filed a counterclaim contending that several of the generators were defective and failed to comply with applicable state and federal regulations, resulting in damages to STI. The parties agreed the arbitrator should provide a reasoned award. After the hearing, the arbitrator rendered an award, which (i) included a brief description of the proceedings, (ii) excluded the testimony of STI’s expert witness and five exhibits related to that testimony, and (iii) included two findings. The arbitrator awarded SENCI approximately $2.4 million and denied all of STI’s claims against SENCI.

STI filed a petition to vacate the arbitration award contending it was not a “reasoned award” as required, and that the arbitrator “manifestly disregarded the law.” SENCI filed a cross-petition to confirm the award. The district court found the arbitrator’s award did “‘not meet the standard for a reasoned award because it contains no rationale for rejecting STI’s claims’” and “‘the arbitrator exceeded his authority in issuing an award that does not meet the standard of a reasoned opinion.’” The district court remanded the matter to the arbitrator for clarification of his findings. The arbitrator then issued a final amended award providing the same relief for the parties, but also including a further explanation of why STI’s counterclaims failed. STI again moved to vacate the amended award, and SENCI moved to confirm the award. The district court found the arbitrator’s amended award provided sufficient details to constitute a reasoned award and granted SENCI’s cross-petition to confirm the award and denied STI’s petition to vacate.

In affirming the district court’s order, the Second Circuit first noted the opinion in Porzio v. Dresdner, Kleinwort, Benso, N. Am., LLC, 497 F.3d 133 (2d Cir. 2007) confirming the “extremely deferential standard of review” that should be applied in reviewing arbitral awards “[t]o encourage and support the use of arbitration by consenting parties.” The court noted “‘[o]nly a barely colorable justification for the outcome reached by the arbitrators is necessary to confirm the award.’” The court then rejected STI’s argument that the doctrine of functus officio barred the district court from remanding the matter to an arbitrator for a reasoned award. The doctrine of functus officio provides “once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreement by the parities, to redetermine those issues”. The court found “where, as here, a district court determines that the arbitrator failed to produce an award in the form agreed to by the parties, remand for a properly conformed order is a permissible choice. It simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued after the hearing.”

The court also rejected STI’s argument that vacatur was mandated under the FAA. The court held that “applying the strong presumption in favor of enforcing an arbitration award, the arbitrator’s failure to render a reasoned award does not fall within a narrow reading of Section 10(a)(4) and did not require vacatur of the original award.” The court found “where, as here, the parties agree that the arbitrator will produce a reasoned award, the failure to provide one renders the award ‘imperfect in matter of form not affecting the merits of the controversy.’ 9 U.S.C. §11(c).” Finally, the court rejected STI’s claim that the district court also erred in not finding the arbitrator acted in “manifest disregard of the law” finding those claims groundless.

Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Inc., et al., No. 21-724 (2d Cir. Jan. 17, 2023)

Arbitration Provision Treated as Standalone Contract for Purposes of Determining Parties Capable of Compelling Arbitration

February 2, 2023 by Benjamin Stearns

The Ninth Circuit Court of Appeals reversed a district court decision and compelled arbitration based on its determination that one of the litigants, Experian, was a party to the arbitration provision, despite the fact that Experian was not a party to the wider agreement that contained the arbitration provision.

Elettra Meeks filed a putative class action against Experian under the Fair Credit Reporting Act. Ms. Meeks entered into a contract for credit monitoring services provided by Experian Consumer Services, an affiliate of Experian. The contract between ECS and Meeks contained an arbitration provision that defined ECS to include affiliates, such as Experian. However, the definition of ECS for purposes of the wider contract, separate and apart from the arbitration provision, did not include affiliates, such as Experian.

The district court found that Experian did not have a right to compel arbitration because it was not a party to the agreement. The Ninth Circuit reversed, relying on U.S. Supreme Court precedent that holds arbitration provisions to be “severable” from the larger contracts that contain them. Based on the precedent, the Ninth Circuit analyzed the parties to the arbitration provision as though it was a standalone contract, even though it was contained within a wider “Terms of Use Agreement.” Because the definition of ECS for purposes of the arbitration provision included its affiliates, Experian was considered a party to the arbitration agreement, irrespective of whether it was a party to the wider contract. Therefore, Experian had the power to compel arbitration.

Meeks v. Experian Information Services, Inc., Nos. 21-17023, 22-15028 (9th Cir. Dec. 27, 2022).

D.C. Circuit Affirms Denial of Stay of International Arbitration Award Enforcement

January 27, 2023 by Brendan Gooley

The D.C. Circuit affirmed the denial of a stay regarding the enforcement of an international arbitration award under the New York Convention.

In 2010, the country of Moldova allegedly failed to pay energy bills to Energoalliance, a Ukrainian company. LLC SPC Stileks acquired Energoalliance’s claim against Moldova and initiated arbitration in Europe. In 2013, an arbitration tribunal in Paris ruled against Moldova and Stileks moved to confirm the award in the United States under the New York Convention.

Proceedings in Europe continued while Stileks’ U.S. motion to confirm was litigated. The decision in Stileks’ favor was reversed by a French court, then reinstated, then appealed again. That appeal remains pending and further proceedings in Europe are likely after the appeal.

In the proceedings in the United States, the district court confirmed Stileks’ award and the D.C. Circuit affirmed (except for an issue regarding the currency of the judgment). Moldova then moved for a stay of proceedings in light of the uncertainty regarding the underlying proceedings in Europe. The district court denied the stay and Moldova appealed.

The D.C. Circuit affirmed, noting that the two most important factors in its decision were supporting “the expeditious resolution of disputes and the avoidance of protracted and expensive litigation” and “the status of the foreign proceedings and the estimated time for those proceedings to be resolved.” Both of those factors weighed against a stay. The underlying dispute had been ongoing for more than a decade and there was no immediate timeline for an end to the European actions.

The D.C. Circuit also affirmed — on the alternate basis — that the law of the case doctrine precluded a stay because the D.C. Circuit had denied a stay in a prior ruling upholding the award.

LLC SPC Stileks v. The Republic of Moldova, No. 21-7141 (D.C. Cir. Dec. 21, 2022).