Confirmation / Vacation of Arbitration Awards

Southern District of New York Dismisses Petition to Confirm $145M Foreign Arbitration Award for Lack of Personal Jurisdiction

August 4, 2023 by Brendan Gooley

The Southern District of New York recently dismissed a petition to confirm a $145 million arbitration award rendered in Hong Kong based on lack of personal jurisdiction.

Zhongzhi Hi-Tech Overseas Investment Ltd. obtained a $145 million arbitration award in Hong Kong against Dr. Vincent Wenyong Shi related to Dr. Shi’s and another company’s alleged failure to make contractually required payments.

Hi-Tech moved to confirm that award in the Southern District of New York. Dr. Shi moved to dismiss, claiming a lack of personal jurisdiction. The court granted the motion, holding that New York’s long-arm statute was not met and that jurisdiction did not comport with due process.

Hi-Tech argued that New York’s long-arm statute was met based on Dr. Shi’s (1) execution of a contract providing that New York law would govern that contract, (2) Dr. Shi’s defense of a lawsuit pending in the Southern District, and (3) Dr. Shi’s role as an executive of a company listed on the New York Stock Exchange. The district court rejected these arguments.

First, it noted that the contract had been amended and that its choice-of-law provision had been replaced by a new clause providing that Hong Kong law would govern. The original choice-of-law provision therefore provided no basis for jurisdiction, and Hi-Tech conceded that a choice-of-law provision “does not equate to consent to jurisdiction” in any event.

Second, Dr. Shi was involved in defending a suit in the Southern District against a company he was involved in, but “a party’s consent to jurisdiction in one case extends to that case alone” and therefore did not provide a basis for jurisdiction against Dr. Shi in this case.

Third, although a company Dr. Shi was a leader in had been listed on the New York Stock Exchange, having a company listed on the NYSE is not sufficient to confer jurisdiction. Even if it was, the company had been delisted and there was thus no basis for jurisdiction.

With respect to due process, the court noted that New York and the United States had little interest in the dispute and that Dr. Shi had little or no reason to expect to be hailed into court there.

Zhongzhi Hi-Tech Overseas Investment Ltd. v. Wenyong Shi, No. 1:22-cv-06977 (S.D.N.Y. July 17, 2023).

New Hampshire Supreme Court Vacates Arbitration Award Based on “Plain Mistake” of Law

July 20, 2023 by Benjamin Stearns

The city of Portsmouth terminated a police officer in the wake of a bequest made to the officer by a 92-year-old woman he had met while on duty. The officer had assisted the woman in finding an attorney to draft a new will leaving the majority of her estate to him, which she executed months before her death. Afterward, the city convened a task force to conduct an independent inquiry into the officer’s relationship with the decedent. The task force concluded that the officer’s actions violated the Portsmouth Code of Ethics and the Portsmouth Police Department Duty Manual, and the city terminated him based on the task force’s recommendation.

The beneficiaries of the decedent’s prior will had also initiated an action to contest the new will. That action resulted in a probate decision that concluded the new will must be invalidated due to undue influence by the officer. The probate decision was issued approximately one month after the city had already terminated the officer.

Meanwhile, the police union had filed a grievance under the collective bargaining agreement, which had been referred to arbitration. The city notified the union that it intended to introduce the probate decision at the arbitration hearing to justify the termination and as mitigating evidence relative to any remedy. After litigation of the issue, the probate decision was admitted as “after-acquired evidence” for purposes of determining the appropriate remedy but was not admitted to supply the “just cause” for the termination itself.

The arbitrator found that the officer’s misconduct was “severe” but nevertheless determined the city wrongfully terminated the officer due to its failure to correctly enforce its own rules and to properly supervise him. The arbitrator awarded the officer back pay from the date of his termination to the date the arbitrator held the firing to be unsupported by just cause. The city challenged the award in the New Hampshire Superior Court, arguing the arbitrator had made a “plain mistake” of law in determining the period of back pay, based in part on her rulings related to the introduction of the after-acquired evidence. The superior court confirmed the award.

On appeal, however, the New Hampshire Supreme Court reversed. The court noted that the “after-acquired evidence” doctrine applies to evidence of an employee’s misconduct — discovered by the employer after it has terminated the employee for an unlawful reason — which is so severe that the employer would have terminated the employee on those grounds alone had it known of the misconduct at the time of the discharge. After-acquired evidence may be introduced to bar or limit an employee’s recovery, but it may not be introduced to provide a basis for the termination itself.

Here, the arbitrator held that the city had not complied with due process requirements (imposed by Cleveland Board of Education v. Loudermill) to provide notice to an employee of the grounds for termination and an opportunity to be heard. However, the Loudermill requirements do not apply to after-acquired evidence, which concerns the calculation of damages resulting from a wrongful termination as opposed to the basis for the termination itself. As such, the city was not required to comply with the Loudermill notice requirements when it sought to introduce and rely on the after-acquired evidence in support of its argument to limit the officer’s recovery. The Supreme Court held that the arbitrator had committed a plain mistake of law, and vacated the lower court’s confirmation and directed it to remand the case to the arbitrator to reconsider the back pay award.

City of Portsmouth v. Portsmouth Ranking Officers Association, NEPBA, Local 220, No. 2021-0511 (N.H. June 7, 2023).

Seventh Circuit Affirms District Court’s Order Denying Application to Vacate Arbitration Award

May 24, 2023 by Kenneth Cesta

Donald Kinsella was an employee of defendant Baker Hughes Oilfield Operations LLC. In June 2013, he suffered a work-related injury resulting in his disability and receipt of disability benefits for three years. Baker Hughes’ human resources department worked with Kinsella to look for jobs at the company that would meet his accommodation request and physical limitations. Months later, Kinsella received a termination letter from Baker Hughes citing a failure to apply for a position. He eventually filed an action in federal court alleging failure to accommodate his disability, discriminatory discharge, and retaliation under the Americans with Disabilities Act. Kinsella’s employment agreement included an arbitration clause, and the district court granted the parties’ joint motion to stay the federal action pending arbitration. The district court then dismissed the action without prejudice with leave to reinstate within seven days of the arbitration ruling.

The matter proceeded to arbitration, and the arbitrator issued an award granting summary judgment for Baker Hughes on all claims. Kinsella filed an application with the district court to reinstate his case and to vacate the arbitration award with regard to his failure-to-accommodate claim. He sought to vacate the award under section 10 of the Federal Arbitration Act contending that the arbitrator exceeded his powers by requiring illegitimate elements of proof on the failure-to-accommodate claim. The district court reinstated Kinsella’s action, but it denied the application to vacate the award and entered a judgment of dismissal. In affirming the district court’s denial of vacatur, the Seventh Circuit Court of Appeals first noted that under section 10(a)(4) of the FAA, an arbitration award may be vacated “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” The court rejected Kinsella’s contentions that the arbitrator incorrectly interpreted the ADA and exceeded his authority by introducing “an extra element of proof into a claim.” The court found the arbitrator did not exceed his powers and affirmed the district court’s denial of Kinsella’s application to vacate the award.

Kinsella v. Baker Hughes Oilfield Operations, LLC, No. 22-2007 (7th Cir. May 8, 2023).

Second Circuit Affirms Order Denying Application to Adjourn Enforcement of Arbitration Award Pending Outcome of Parallel Foreign Proceeding

May 3, 2023 by Kenneth Cesta

In Iraq Telecom Ltd. v. IBL Bank S.A.L., defendant IBL appealed an order from the district court that denied its application to stay the enforcement of a $3 million arbitration award rendered in favor of plaintiff Iraq Telecom. Without going into the underlying facts or procedural history, the court focused on whether the district court erred in its application of the factors set forth in Europcar Italia v. Maiellano Tours, 156 F.3d 310 (2d Cir 1998), for considering a request to stay enforcement proceedings pending the outcome of a parallel foreign proceeding. The court held the district court did not err in determining that the factors set forth in Europcar, on balance, weighed against staying enforcement of the award despite a pending Lebanese annulment action.

The court first noted that under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a district court may, if it considers it proper, adjourn the decision on the enforcement of the award if an application for the setting aside or suspension of the award has been made in the jurisdiction in which the award was made. Applying the factors set forth in Europcar, the court noted that it reviews a district court decision in these matters for abuse of discretion, including (1) basing its decision on an error of law or wrong legal standard; (2) basing its decision on a clearly erroneous factual finding; or (3) reaching a conclusion that, “though not necessarily the product of a legal error or a clearly erroneous factual finding, cannot be located with the range of permissible decisions.”

Applying this standard of review, the court found the district court properly applied the Europcar factors in denying the application to stay the enforcement proceedings pending the outcome of the parallel foreign proceeding. The court noted the district court’s determination that the two most important factors (the general objectives of arbitration and the status of the foreign proceeding) weighed against staying enforcement of the foreign award was reasonable. With regard to these factors, the court rejected IBL’s arguments that the district court erred by not considering future delay and the ramifications for international comity should the award be annulled in Lebanon, declining to disturb the district court’s findings on these factors. The court also concluded that the district court’s determination of the other Europcar factors was reasonable, including the conclusion that the balance of the possible hardships to each of the parties weighed against IBL’s request for a stay, and the district court did not abuse its discretion in determining that IBL was not likely to succeed in its Lebanese annulment action. The court affirmed the judgment of the district court, rejecting IBL’s application for a stay.

Iraq Telecom Ltd. v. IBL Bank S.A.L., No. 22-832 (2d Cir. Apr. 17, 2023)

Court Enforces Nine-Figure Chinese Arbitration Award, Finding Notice Requirements of New York Convention Were Satisfied

May 1, 2023 by Benjamin Stearns

The U.S. District Court for the Southern District of New York recently denied a motion to reconsider its prior confirmation of a “multihundred-million-dollar” arbitration award by a Chinese arbitration panel. In the underlying arbitration, the China International Economic and Trade Arbitration Commission (CIETAC), the Chinese arbitral authority, issued the award after attempting three separate times to provide notice of the arbitration to the respondent. Mailed notice was sent to three different addresses, including the address designated in the relevant agreement, as well as two other addresses known to be associated with the respondent. Ultimately, the respondent appeared at the arbitration, which yielded a large award against it.

In a prior ruling, the court granted summary judgment in favor of the petitioner confirming the Chinese arbitration award pursuant to the provisions of the New York Convention. The respondent moved for reconsideration under Federal Rule of Civil Procedure 60(b), which permits “a party to seek relief from a final judgment, and request reopening of his case, under a limited set of circumstances,” including where the judgment is based on “mistake, inadvertence, surprise, or excusable neglect.” The respondent argued the judgment should be set aside because he never received proper notice of the arbitration.

The court declined the respondent’s invitation. While the New York Convention permits non-enforcement of a foreign arbitral award where proper notice was not provided, the notice does not have to meet the requirements of the federal rules. Instead, notice is required only to be sufficient to afford due process. “Because the due process inquiry is limited to determining whether the procedure used was fundamentally unfair, it often demands less than” the federal rules or the applicable arbitration agreement.

Here, the court found the procedures used by CIETAC to provide the respondent with notice were reasonable under the circumstances and sufficient to afford due process. This finding was buttressed by the fact that the respondent actually participated in the arbitration despite the reported difficulties in obtaining service. The arbitration panel’s attempts to provide service via multiple mailings to addresses known to be associated with the respondent met “the relatively low burden imposed by due process.”

Huzhou Chuangtai Rongyuan Investment Management Partnership v. Qin, No. 1:21-cv-09221 (S.D.N.Y. Mar. 31, 2023).