Confirmation / Vacation of Arbitration Awards

Arbitration Award Against HGTV Designer Confirmed Due to Failure to Raise Fairness Objections During Arbitration

December 5, 2018 by Michael Wolgin

The case involved an award in excess of $800,000 against a home designer and some affiliated companies for a renovation project that went bad. One of the affiliated companies brought an arbitration proceeding against the homeowners for nonpayment, and after appointment of the arbitrator, the homeowners sought to join the home designer pursuant to Construction Industry Arbitration Rules R-7.

The designer’s participation in the arbitration was limited. He did not file an answer to the homeowners’ claims against him and failed to appear at the hearing. After the arbitrator issued a final award holding the designer and other companies jointly and severally liable, the designer moved the federal district court for vacatur.

The district court held that, under the FAA, the appointment of the arbitrator prior to the designer’s participation in the arbitration did not result in a proceeding that was “not fundamentally fair,” distinguishing a case under the New York Convention that had held otherwise because the Convention specifically provides a defense based on “improper composition of the arbitral tribunal.” Under the FAA, the requirements for a “fundamentally fair hearing” are “notice, opportunity to be heard, and to present relevant and material evidence and argument before the decision makers, and that the decision makers are not infected with bias.” There was no indication that those requirements were not met here.

The Tenth Circuit confirmed the district court’s ruling, and denied the designer’s appeal on the additional ground that the designer failed to object to the arbitrator and failed to invoke CIAR R-7(c), which provides an opportunity for the arbitrator to “establish a process for selecting arbitrators for any ongoing or newly constituted case” after the joinder of additional parties. The designer’s failure to invoke CIAR R-7 was fatal to his claim to have been denied due process through the pre-joinder selection of the arbitrator. Gidding v. Fitz, No. 18-1106 (10th Cir. Nov. 6, 2018).

This post written by Benjamin E. Stearns.

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Federal District Court Declines to Rule on Arbitration Award, Finding No Independent Basis for Jurisdiction

December 4, 2018 by Michael Wolgin

Following arbitration, the parties filed cross-motions to confirm and vacate the arbitration award. The District Court for the Southern District of California issued an order to show cause why the case should not be dismissed for lack of subject matter jurisdiction because the FAA does not independently confer jurisdiction, and the parties did not adequately plead a jurisdictional basis that would permit the court to rule. Golub, moving that the award be vacated, argued that the court had jurisdiction because (1) she was denied a fair arbitral hearing, and (2) the award was in manifest disregard of federal law. The court rejected both arguments, reasoning that federal question jurisdiction to enforce or vacate an arbitration award exists only when ultimate disposition of the matter by the federal court necessarily depends on resolution of a substantial question of federal law, such as when the petition alleges that the arbitrator manifestly disregarded federal substantive law. The court went on to warn that “even in those cases where the arbitrator manifestly disregarded federal substantive law, courts are reluctant to find jurisdiction.” Last, the court stated that the allegation that the arbitrator denied a party a fair opportunity to present its case by refusing to compel production of documents, does not raise a “substantial question of federal law.” The court was “aware of no case … stating that failure to follow federal procedure in an arbitration can give rise to federal question jurisdiction.” BOFI Fed. Bank v. Golub, Case No. 3:18-cv-00816 (USDC S.D. Cal. Nov. 8, 2018).

This post written by Gail Jankowski.

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$100 Million Arbitration Award Supported by “Even a Barely Colorable Justification” Upheld Under the FAA

December 3, 2018 by Michael Wolgin

A $100 million arbitration award against NutraSweet was reinstated by a New York state appellate court due to the “emphatic federal policy in favor of arbitral dispute resolution embodied in the FAA, a policy that applies with special force in the field of international commerce.” NutraSweet’s acquisition of a Korean aspartame producer went sour, and the two companies proceeded to arbitration. The arbitration panel ruled against NutraSweet on all of the issues and rendered an award in excess of $100 million to Daeseng Corp. However, when Daeseng petitioned a New York trial court for confirmation of the award, the court reversed and remanded, finding the arbitrators had “manifestly disregarded the law and had misconstrued the procedural record.”

On appeal, the New York appellate court held the reversal to be in error, stating that “ordinary errors” of law are insufficient to constitute the required “manifest disregard of the law” necessary to overturn an arbitration award. The doctrine of manifest disregard of the law is “severely limited” and is a “doctrine of last resort limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.” To modify or vacate an award on that ground, a court must find that “the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.”

Under this demanding standard, even if the court held the arbitrators had made a mistake in their application of the law, that would not be sufficient to set the award aside where the issue was “far from obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.” The court walked through each of NutraSweet’s arguments, and, without deciding that the arbitrators’ decisions were correct, nevertheless found that there was at least a “barely colorable justification” for each of them, and therefore they must be upheld. In re Daeseng Corp. v. NutraSweet Co., Case No. 2018 NY Slip Op. 06331 (NY. Sup. Ct. App. Div., Sept. 27, 2018).

This post written by Benjamin E. Stearns.

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The Third Circuit Affirms District Court’s Confirmation of Arbitration Award, Finding That the Panel Did Not Exceed its Powers or Manifestly Disregard the Law

November 26, 2018 by John Pitblado

The complete procedural background of this “not precedential” case can be found here. In sum, this case stems from a 2007 lease agreement between Ross Dress for Less, Inc. (“Ross”) and VIWY, L.P. (“VIWY”) for Ross to be a tenant in VIWY’s shopping center. The lease included a provision which required VIWY to maintain a minimum amount of tenants in the shopping center, and allowed Ross to pay a reduced rent if the provision was not satisfied. In March 2011, Ross wrote to VIWY, claiming that the provision had not been met, it had overpaid its rent for two years and that VIWY must refund the excess rent payments, to which VIWY refused. In response, Ross paid a reduced rent from March 2011 until September 2011, at which time VIWY terminated the lease. In January 2012, Ross filed a lawsuit in Pennsylvania federal court against VIWY, alleging that VIWY breached the lease causing Ross to overpay rent (the “overpayment claim”). VIWY counter-claimed that Ross had improperly offset its rent from March 2011 to September 2011 (the “offset claim”), and moved to compel arbitration and dismiss the complaint. The Pennsylvania district court denied VIWY’s motion and stayed the offset claim, pending resolution of the overpayment claim. VIWY appealed to the Third Circuit, which vacated the order and remanded the matter to the Pennsylvania district court. The Third Circuit found that the terms of the lease required arbitration of the offset claim, but did not require arbitration of the overpayment claim. However, because the claims were “inextricably linked,” the Third Circuit held that arbitration of both claims was appropriate. On remand, the Pennsylvania district court stayed the litigation pending the completion of the arbitration. Thereafter, in March 2015, Ross demanded arbitration. VIWY raised a statute of limitations defense, arguing that because Ross had filed its demand more than four years after the alleged breach, his overpayment claim was untimely under Pennsylvania’s four-year statute of limitations. The Arbitration Panel rejected this argument, finding that Ross’s filing of its complaint had suspended the running of the limitations period, assuming the statute of limitations applied to arbitration proceedings (which the Panel noted was unsettled under Pennsylvania law). The Panel also concluded that VIWY breached the lease agreement, awarding Ross over $1.8 million. Ross then moved in the Pennsylvania district court to confirm the arbitration award, and VIWY cross-moved to vacate, arguing that the Panel exceeded its powers under the Federal Arbitration Act, or alternatively acted in manifest disregard of Pennsylvania law. The district court denied VIWY’s motion to vacate, and granted Ross’s motion to confirm. VIWY appealed to the Third Circuit.

First, in reviewing VIWY’s contention that the Panel exceeded its powers when it allegedly misapplied Pennsylvania’s statute of limitations, the Third Circuit noted that the Arbitration Panel assumed the statute of limitations applied to arbitration proceedings and analyzed whether tolling was warranted. Thus, the Third Circuit noted that Ross’s complaint asserting the overpayment claim — which was filed well within the four-year statute of limitations — tolled the limitations period. The Third Circuit also noted that, in any event, an erroneous ruling that Ross’s lawsuit tolled the statute of limitations does not amount to an excessive abuse of the Panel’s power. In its analysis, the Third Circuit also noted that VIWY previously took the position that an arbitrator should resolve Ross’s overpayment claim. Thus, according to the Third Circuit, resolution of Ross’s overpayment claim necessarily included determining how Pennsylvania law, and in particular Pennsylvania’s statute of limitations, affected the parties’ rights under the lease. Thus, the Court found that because the Panel’s interpretation “went against” VIWY does not now give VIWY the right “to rerun the matter in a court.” As to VIWY’s alternative argument that the arbitration award should be vacated because the Panel acted in manifest disregard of the law when it allegedly misapplied Pennsylvania’s statute of limitations, the Third Circuit noted that the Panel did not “willfully flout” Pennsylvania’s statute of limitations and its tolling jurisprudence. The Third Circuit held that because the answer to the tolling question was not obvious, it could not say that the Panel manifestly disregarded Pennsylvania’s law concerning the statute of limitations. Thus, the Third Circuit affirmed the Pennsylvania district court’s decision.

Ross Dress for Less Inc. v. VIWP, L.P., et al, No. 17-3145 (3rd Cir. Oct. 24, 2018).

This post written by Jeanne Kohler.

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Court Invalidates Modified Arbitration Award Because it Exceeded Panel’s Authority Under the Functus Officio Doctrine

November 13, 2018 by Michael Wolgin

An insured and its insurer were fighting over whether the insured’s settlement payment in separate litigation was a covered loss and whether there was a duty to defend in the separate litigation. During arbitration, the parties agreed the panel would issue an immediate decision on the insurer’s liability under the policies and subsequently determine the amount of defense costs. The panel issued a “partial final award” finding the insured was entitled to defense and indemnification on the claims at issue in the separate litigation, but also finding the settlement payment itself was not a covered loss; thus, the panel ordered an evidentiary hearing on the calculation of defense costs. The insured requested reconsideration of the partial final award and the panel issued a “corrected partial final award.” The insurer sought relief in court to vacate the corrected award and confirm the original award, and while that proceeding was pending the panel issued a “final” award calculating the appropriate defense costs. The court denied the insurer’s motion to vacate.

On appeal of the lower court’s denial of the motion to vacate, the appellate court vacated the corrected and purported final awards and confirmed the original award because the panel exceeded its authority in reconsidering the “partial final award.” Specifically, the court relied upon the common law doctrine of functus officio that prevents arbitrators from changing a previously-rendered, final award except in limited technical circumstances. During the arbitration, the parties agreed the panel would make an immediate and final determination as to liability before proceeding to a second evidentiary hearing on the calculation of defense costs. Once the panel exercised its authority to make a final decision on liability and issued the “partial final award,” its authority ended and it could not revisit the issue of liability. The court dismissed the panel’s statement in the corrected awards that the “partial final award” was not in fact “final” because that would eviscerate the purpose of functus officio to allow a panel to regain authority by stating its prior award was not final. Am. Int’l Specialty Lines Ins. Co. v. Allied Capital Corp., Case No. 656341/16 (N.Y. App. Div. Oct. 25, 2018).

This post written by Thaddeus Ewald .

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