Confirmation / Vacation of Arbitration Awards

A court has granted a petition to confirm an arbitration award despite the defendant’s argument that the arbitrator acted in manifest disregard of the law. While acknowledging questions regarding the continuing viability of manifest disregard for the law as a basis for vacating arbitration awards, the court decided the case assuming that it is still the law, but found that the developer had not met the heavy burden of showing “that the arbitrator knew the applicable law, and yet chose to ignore it.”

The case arose from a claim by the plaintiff, an architect, that the defendant, a developer, failed to pay for the architect’s services and used its drawings without authorization. The defendant argued that five decisions of the arbitrator showed manifest disregard for the law: (1) awarding damages for debts incurred before the developer was formed, in contravention of the developer’s operating agreement; (2) awarding lost profits, despite a contractual waiver of consequential damages; (3) awarding copyright damages despite a lack of evidence that the drawings were copyrightable; (4) awarding two sets of copyright damages for the same drawings; and (5) deciding the copyright question despite it being outside the scope of the arbitration clause.

The court found that the defendant failed to meet its burden regarding the third and fourth decisions regarding copyright damages because it failed to raise these issues during arbitration. Regarding the award for debts incurred before the developer’s formation, the court found that it was not clear whether the arbitrator’s decision was based on veil piercing, a finding that a contract other than the operating agreement was controlling, or concessions by the defendant in testimony, and thus manifest disregard for the law had not been shown. As to the award of lost profits, the court found that the contract that contained the waiver of consequential damages contained other provisions suggesting that this waiver did not apply to lost profits. Finally, regarding the arbitrator’s authority over copyright infringement claims, the court found the contract language was broad enough and the case law cited by the parties was unclear enough to make it impossible to say that the arbitrator’s decision showed manifest disregard for the law.

The Knabb Partnership v. Home Income Equity, LLC, Civil Action No. 17-373 (E.D. Pa. April 19, 2017)

This post written by Jason Brost.

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A federal district court in Washington, D.C. recently confirmed a $1.2 billion arbitral award in favor of Crystallex International Corp. against Venezuela after the country’s Ministry of Environment denied a necessary permit to allow Crystallex to develop gold deposits in the country. Canada—Crystallex’s home country—and Venezuela have a bilateral investment treaty (“BIT”) to give “fair and equitable treatment” to investments by investors of the respective nations, which includes the countries’ unconditional consent to international arbitration of disputes brought under the BIT. After the Ministry informed Crystallex that it was prepared to “hand over” the relevant permit, the company announced it had fulfilled the requirements to receive the permit. However, the Ministry delayed and eventually denied the permit allowing the government to exploit the gold deposits instead. Crystallex initiated arbitration proceedings against Venezuela claiming the country breached the BIT by denying fair and equitable treatment of the company’s investments and expropriating those investments. The arbitral panel found that Venezuela breached the treaty, and awarded Crystallex $1.2 billion. Crystallex filed suit to confirm the award under the New York Convention.

At the outset, the court held that it had jurisdiction over the case as one filed against a foreign state to confirm an award made pursuant to the BIT, and that a deferential standard of review applied. Next, the court considered Venezuela’s substantive challenges to the award: that the arbitrators exceeded the scope of Venezuela’s consent to arbitrate, the award was contrary to public policy, and the arbitrators manifestly disregarded the law.

First, the court rejected the contention that the award exceeded the scope of Venezuela’s consent to arbitrate because the claims based on breach of contract and because the panel’s valuation methods departed from the BIT’s instructions. The court reviewed the panel’s conclusions deferentially and declined to disturb its finding that that Crystallex’s claims were for a violation of the BIT’s fair and equitable treatment requirement rather than a violation of the underlying agreement with Venezuela. Further, the court declined to disturb the panel’s methodology for calculating damages over objections.

Second, the court rejected the contention that confirming the award would violate United States public policy because the rejection of the permit was intended to protect Venezuela’s environment. Venezuela failed to meet the demanding threshold showing that the award would violate the “most basic notions of morality and justice” because the panel doubted how seriously Venezuela’s environmental concerns motivated the rejection and because the award would not interfere with the country’s environmental rules; it would only compel compensation.

Finally, the court rejected the contention that the panel acted with manifest disregard for the law. Assuming the doctrine of manifest disregard is still a valid basis to challenge an arbitral awrd, the court found it inapplicable here because the principles of law underlying Venezuela’s arguments were not well-defined, explicit, or clearly applicable, and the panel engaged and considered the case law supporting those positions. With no viable reason to vacate, modify, or correct the award, the court confirmed it.

Crystallex Int’l Corp. v. Bolivarian Republic of Venez.a>, Case No. 16-0661 (USDC D.D.C. Mar. 25, 2017).

This post written by Thaddeus Ewald .

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In a dispute between a construction company hired by New York State to replace a portion of the Whitestone Bridge and a steel company regarding the timeliness of certain deliveries related to the project, the Second Circuit Court of Appeals affirmed the confirmation of the roughly $6.5 million net arbitration award in favor of the construction company. The steel company contended that the arbitrator committed a “manifest disregard of the law” by disregarding an order issued by a New Hampshire court in a related action. The order contained statements suggesting that the steel company was not liable in the instant dispute. The Second Circuit, however, rejected the steel company’s argument, agreeing with the lower court that there was “ample support for the arbitrator’s ruling” that the cited language from the New Hampshire court’s order was only dicta.

The steel company also argued that the arbitrator manifestly disregarded the terms of a “Letter Agreement” between the parties, but the court found that there was insufficient evidence to conclude that arbitrator had no “colorable justification” for finding that the alleged agreement was never finalized and was not binding. The court also rejected an argument from the steel company that the arbitrator erroneously imposed liability on the company for a time period that was not covered by the parties’ agreements. The court held that the steel company failed to show beyond speculation why the arbitrator decided to award certain percentages of the claims at issue. The court also held that to the extent the steel company was arguing that the arbitrator manifestly disregarded the evidence, the Second Circuit “does not recognize” that reason as “a proper ground for vacating an arbitrator’s award.” Tully Construction Co., Inc. et al. v. Canam Steel Corp., Case No. 16-1324-cv (2d Cir. Mar. 23, 2017).

This post written by Michael Wolgin.

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