On November 13, 2006, with respect to an NASD arbitration, a District Court entered an order remanding an arbitration award to the panel for a new damage award, finding that the award was in manifest disregard of law, and shocking to the conscience of the court. On April 9, 2007, the Court entered an Order denying a motion for reconsideration. Apparenly upset with the passage of time with no progress, the Order provides that if the panel does not enter a new damage award within 30 days, the court will issue an Order to Show Cause why the panel should not be held in contempt. Strobel v. Morgan Stanley Dean Witter, Case No. 04-1069 (S.D. Cal.).
Confirmation / Vacation of Arbitration Awards
District Court rejects challenge to arbitration award on "manifest disregard of law" basis
Westra Construction, Inc. (“Westra”), a subcontractor, sought payment from Alexander Construction, Inc. (“ACI”), the construction manager, for work performed on a Pennsylvania Turnpike Commission project. ACI rejected Westra’s claims as unsubstantiated. Westra subsequently filed a demand for arbitration. Four days before the arbitration hearing, Westra provided ACI with thousands of pages of documents in support of its claims. The hearing that ensued spanned eighty-five hearing days. At the conclusion of the hearing, an arbitration award in Westra’s favor was issued. Westra then commenced an action in the U.S. District Court for the Middle District of Pennsylvania against United States Fidelity & Guaranty Company (“USF&G”), ACI’s surety, to collect the arbitration award. Due to the fact that ACI had declared bankruptcy and could no longer challenge the validity of the award, the District Court permitted USF&G to file a motion to vacate the arbitration award in ACI’s stead.
As grounds for the motion to vacate, USF&G contended that: (1) the arbitrators so imperfectly executed their powers that they were unable to reach a final and fair disposition of the matter; and (2) the arbitrators manifestly disregarded the law. The District Court denied the motion to vacate, holding that procedural irregularities cited by USF&G did not rise to the level of imperfect execution of powers where the arbitrators resolved only those issues that had been properly presented to them and rationally derived the award from the parties’ submissions and arguments. The Court rejected the manifest disregard argument on the basis that support for the arbitral award could be found in the hearing transcripts and in the parties’ post-hearing submissions, there was no evidence that the arbitrators were “fully aware” that their interpretations of relevant agreements were improper, and it could not be proven that law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. Westra Construction, Inc. v. United States Fid. & Guar. Co., Case No. 1:03-CV-0833 (M.D. Penn. Mar. 29, 2007).
Minnesota Court of Appeals affirms vacation of arbitration award procured by "undue means"
Cincinnati Insurance Company (“CIC”) brought a subrogation action against Tyco Fire Products (“Tyco”), alleging that Tyco negligently designed, manufactured, and installed a sprinkler system that malfunctioned, causing property damage to CIC’s insured. The parties agreed to submit the matter to binding arbitration by Arbitration Forums, Inc. (“AF”). AF’s rules provide, among other things: (1) that an arbitration is commenced by the filing of a completed P-Form; (2) that a respondent answers by filing its materials with AF and all other involved parties; and (3) that “personal representation will not be allowed in cases when an answer has not been filed as outlined above.” Despite submission of an incomplete P-Form by CIC (neglecting to “x” the boxes requesting notice of and attendance at the arbitration hearing) and failure by Tyco to provide CIC with copies of its answer, AF, contrary to its own rules, concluded that CIC had waived notice and appearance and allowed Tyco to be represented at the hearing. The arbitration proceeded without attendance of CIC’s counsel and a decision favorable to Tyco was issued. Thereafter, CIC petitioned the Minnesota District Court to vacate the arbitration award under Minn. Stat. § 572.19, subd. 1(1) (2004), as procured by “other undue means.” The District Court granted the petition and Tyco appealed.
The Minnesota Court of Appeals affirmed the District Court’s decision, concluding that Tyco’s failure to provide its arbitration documents to Cincinnati resulted in Tyco having an ex parte communication with the neutrals in the case and constituted procurement of an award by “other undue means.” The Court of Appeals reasoned that, even if CIC could be said to have waived notice of and appearance at the hearing, CIC never waived its right to receive copies of Tyco’s submissions or its right to amend its own submissions in response. Additionally, the Court concluded that the arbitration award should be vacated under Minn. Stat. § 572.19, subd. 1(4), on the alternative ground that the hearing was conducted without due process, in violation of Minn. Stat. § 572.129(a), requiring that the arbitrators have notification of the arbitration hearing served on the parties “personally or by certified mail not less than five days before the hearing.” In re Arbitration Cincinnati Ins. Co. v. Tyco Fire Prod., f/k/a Cent. Sprinkler Co., Case No. 82C806001071 (Minn. Ct. App. May 1, 2007).
Courts rule on arbitration awards
Three recent decisions addressed whether arbitration awards should be confirmed or vacated:
- In Hudson v. ConAgra Poultry Co., No. 06-2596 (USCA 8th Cir. Apr. 4, 2007), the Court affirmed a District Court judgment, which compelled arbitration of tort claims and denied a motion to vacate an arbitration award, finding that the claims of the party were barred by res judicata. The arbitrability of the tort claim was based upon the language of the agreement containing the arbitration clause, and both state and federal law, while the Court rejected the contention that the arbitration award amounted to manifest disregard of law.
- In Riddle v. Wachovia Securities, No. 06-1177 (USCA 8th Cir. Mar. 30, 2007), a very short opinion, the Court affirmed a District Court decision holding that a party had failed to carry its burden to support vacature of an arbitration award on the ground that the arbitration panel was guilty of misconduct in failing to postpone the final hearing. While the opinion does not disclose the reason for the Panel's action, it appears from the District Court filings that the request was based upon the last minute attempted withdrawal of counsel for Riddle, which Wachovia contended had occurred in two prior arbitrations as a delaying tactic. While denying Riddle's motion to vacate the award, the District Court dismissed the action, denying Wachovia's motion to modify the Order to confirm the award, because Wachovia had not moved for confirmation of the award within the time provided in the Federal Arbitration Act.
- In State Farm Ins. Co. v. Penn. Mfgr's Assn. Inc. Co., Index 8923/05 (NY Supreme Court, App. Div. Mar. 27, 2007), the Court vacated an arbitration award as being against public policy, because the claim for contribution was barred by a prior settlement and releases, and General Obligations Law section 15-108.
INVESTOR LOSES APPEAL TO VACATE ARBITRATION AWARD
After losing several million dollars in high-risk investments, Michael Lessin filed a statement of claim alleging misrepresentation and negligent supervision against his broker, Brett Bernstein and investment firm, Merrill Lynch. A panel of three NASD arbitrators heard evidence over a six-day period and found Merrill Lynch, but not Bernstein, liable to Lessin for compensatory damages of $32,975. Lessin sought to vacate the arbitration award on the basis that the arbitration panel refused to hear one of his expert witnesses and demonstrated a manifest disregard of the law in awarding compensatory damages.
The D.C. District Court affirmed the arbitration award and Lessin appealed to the D.C. Circuit Court of Appeals. Lessin argued that the arbitration panel engaged in misconduct by refusing to hear pertinent evidence from one of his two designated expert witnesses. Lessin proffered two expert witnesses to show that certain notes regarding his investments stored in a Merrill Lynch computer system were fabricated after the fact. While the Court of Appeals recognized that the experts were testifying to different aspects of the computer system (one on personal observation/testing and the other on methodology), the court concluded that “[e]very failure of an arbitrator to receive relevant evidence does not constitute misconduct requiring vacatur of an arbitrator’s award.” The Court of Appeals also rejected Lessin’s claim that the panel manifestly disregarded the law because Lessin was unable to demonstrate that the panel acted beyond its authority or that the award violated an explicit public policy.
This is yet another, in a long line of cases, demonstrating the limited judicial review of arbitration awards, and the limited success that parties have in overturning arbitration awards. Lessin v. Merrill Lynch, Case No. 06-7067 (D.C. Cir. Mar. 16, 2007).