Confirmation / Vacation of Arbitration Awards

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).

New Jersey District Court Vacates Arbitrator’s Final Award Finding Bias and Deprivation of Fair Hearing

April 14, 2023 by Kenneth Cesta

Citing the Federal Arbitration Act (FAA), and recognizing the specific standards set forth in the FAA for vacating an arbitrator’s decision, the U.S. District Court for the District of New Jersey vacated an arbitrator’s final award, finding several reasons to vacate the award. The case involved a claim brought by defendant International Painters and Allied Trades Industry Pension Fund against plaintiff Allied Painting and Decorating Inc. for “withdrawal liability” of more than $400,000. As noted in the opinion, withdrawal liability is a “statutorily created liability wherein an employer is responsible for its allocable share of unfunded vested benefits after withdrawing from a plan.” Allied allegedly withdrew from the relevant plan in 2005 and resumed work in approximately 2007. It was alleged the fund was aware of Allied’s withdrawal obligation by October 2011 but did not notify Allied of its obligation until July 20, 2017, “which included a Withdrawal Liability Worksheet noting Allied defaulted on July 31, 2005.” The arbitrator concluded that Allied was not prejudiced by the fund’s delay in notifying Allied of the withdrawal liability, and entered an award in favor of the fund for $427,195. Thereafter, an action was filed in federal court by Allied. The fund filed a motion to confirm the award, and Allied filed a motion to vacate the award.

The court first noted that in “reviewing an arbitrator’s award of withdrawal liability, a district court must presume that the arbitrator’s factual findings are correct unless they are rebutted by a clear preponderance of the evidence” and that “an award is presumed valid unless it is affirmatively shown to be otherwise, and the validity of an award is subject to attack only on those grounds listed in Section 10 of the FAA”. After confirming this standard of review, the court went on to find the arbitrator’s award would be vacated for several reasons. The court rejected the arbitrator’s finding that Allied was not prejudiced by the fund’s delay in notifying Allied of its withdrawal obligation, finding the arbitrator’s rationale that the delay economically benefited Allied because Allied had interest-free use of the money “does not comport with the case law” and the arbitrator “does not cite to any witnesses’ testimony to support the purported economic benefit.” The court also found the arbitrator’s assumption of a fact to “undermine a determination of prejudice is not supported by case law” and the arbitrator’s determination regarding Allied’s search for relevant records was arbitrary and “definitively and clearly against the evidence as a whole.” Finally, the court found the standards the arbitrator used to show lack of prejudice were not consistent with the standards applicable in the Third Circuit, and the arbitrator’s failure to explain his decision that Allied was bound to a collective bargaining agreement was arbitrary. The district court concluded that the “cumulation of the above events amounts to a reasonable appearance of bias against Allied and results in deprivation of a fair hearing.”

Allied Painting & Decorating, Inc. v. International Painters & Allied Trades Industry Pension Fund, No. 3:21-cv-13310 (D.N.J. Mar. 1, 2023).

Arizona District Court Confirms Arbitration Award, Denies Cross-Motion to Vacate

April 10, 2023 by Kenneth Cesta

Relying on the Federal Arbitration Act (FAA) and noting that the FAA “enumerates limited grounds on which a federal court may vacate, modify, or correct an arbitral award,” the U.S. District Court for the District of Arizona granted defendants UBS Financial Services Inc. and UBS Credit Corp.’s motion to confirm an arbitration award and denied the plaintiff’s motion to vacate that award.

The plaintiff was employed as a financial adviser for UBS and obtained loans from UBS during his employment through a financial adviser loan program. As part of the loan process, the plaintiff signed promissory notes, which set forth the terms of repayment and included a choice-of-law provision and an arbitration clause or agreement. In addition to the notes, the plaintiff also signed “transition agreements,” which provided UBS would pay the plaintiff “‘on an annual basis in the amount totaling the loan principal and accumulated interest due under the associated note’” while the plaintiff was employed with UBS. All of the arbitration agreements also provided that arbitration of covered claims would be “conducted under the auspices and rules of FINRA in accordance with the FINRA Code of Arbitration for Industry Disputes.” Upon the termination of the plaintiff’s employment, the loans became due and payable and UBS initiated proceedings with FINRA alleging that the plaintiff failed to repay the loans and misappropriated UBS’ confidential customer information. The plaintiff filed various counterclaims against UBS regarding the notes and his employment, including breach of contract, fraud, constructive discharge, and violation of the Fair Labor Standards Act, among other claims. The FINRA arbitration panel issued a final award in part for UBS and in part for the plaintiff. The panel concluded that the plaintiff was liable for repayment of the notes but also found for the plaintiff on his negligent misrepresentation and constructive discharge claims. UBS filed a motion to confirm the award and the plaintiff filed a motion to vacate part of the award.

After rejecting UBS’ arguments that the plaintiff’s motion was procedurally deficient, the district court addressed the substantive issues raised by the parties, including whether the panel’s finding that the plaintiff was liable for the notes constituted “manifest disregard of the law,” whether the panel exceeded its powers in issuing an “irrational award,” and whether one of the arbitrators showed “evident partiality” against the plaintiff. First, the court noted the standard for manifest disregard of the law “affords an extremely limited review authority” and requires a showing that the arbitrators “knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.” The court concluded that the panel’s findings were not in manifest disregard of the law. Second, the court rejected the plaintiff’s contention that the panel exceeded its powers in issuing an “irrational award,” noting the “completely irrational” standard for setting aside an award under the FAA is satisfied “only where the arbitration decision fails to draw its essence from the agreement.” Finally, the court rejected the plaintiff’s argument that one of the arbitrators showed “evident partiality” against the plaintiff, concluding that the plaintiff did not establish specific facts showing actual bias or partiality. The court also concluded that the plaintiff waived his evident partiality argument by not raising it in a timely manner.

Paynter v. UBS Financial Services Inc., No. 2:21-cv-02024 (D. Ariz. Mar. 2, 2023).

Arizona Permits Unilateral Modifications of Standard Consumer Contracts Upon Reasonable Notice and Opt-Out Opportunity

April 6, 2023 by Benjamin Stearns

In October 2018, Eva Cornell opened checking and savings accounts with Desert Financial Credit Union. In so doing, Cornell agreed to terms and conditions, including an agreement that Desert Financial could “change those terms and conditions from time to time.” In addition, Cornell also consented to the electronic delivery of all future communications from Desert Financial, including all disclosures, notices, and account statements. Notably, at the time Cornell opened the accounts, the parties’ contract did not include an arbitration clause.

In February 2021, Desert Financial updated its terms, adding a mandatory arbitration clause. The updated terms specified that agreement to the arbitration clause was not a mandatory condition of the customer maintaining an account with Desert Financial and that clients could opt out by providing notice by April 30, 2021, or 30 days after opening their account, whichever was later. Desert Financial did not directly contact its account holders regarding these updated terms. Rather, it posted on monthly account statements an orange-and-blue banner stating Desert Financial was making a “change-in-terms” and providing a link to the complete updated terms. Cornell received a notification from Desert Financial that her account statement was available for viewing but would only see the notice of the changed terms if and when she accessed the digital account statement.

Ultimately, Cornell never viewed or opted out of the updated terms. On May 5, 2021, Cornell filed a class action suit against Desert Financial alleging ambiguous and misleading language concerning overdraft fees. Desert Financial moved to compel arbitration. Cornell argued she never agreed to the updated terms and thus her agreement with Desert Financial did not include an arbitration clause. The District Court of Arizona certified a question to the Arizona Supreme Court as to whether Arizona law permits the unilateral modification of standard consumer contracts, and if so, what conditions must be satisfied to do so.

The Arizona Supreme Court answered the question in the affirmative, adopting Restatement Consumer Contracts § 3 in the process. The court found the Restatement “offers an effective modification procedure that fairly balances the public policies of economic efficiency and consumer protection.” The court summarized the requirements of Restatement § 3 as follows: “Consumers must (1) receive express and reasonable notice of the business’s right to unilaterally modify the agreement; (2) receive reasonable notice of new terms and the opportunity to opt out without penalty; and (3) upon receiving actual or constructive notice of new terms, continue the business relationship past a reasonable opt-out period.”

Per the court, adoption of the Restatement’s approach permits businesses to readily update their terms, facilitating economic efficiency in the context of standardized contracts, while simultaneously subjecting such changes to several safeguards designed to protect consumers from unfair exploitation.

Cornell v. Desert Financial Credit Union, No. CV-22-0071-CQ (Ariz. Mar. 2, 2023).

Fifth Circuit Refuses to Vacate Arbitration Award, Holds That Party’s Arguments Merely Ask for Merits Review

March 28, 2023 by Brendan Gooley

The Fifth Circuit Court of Appeals recently rejected a claim that an arbitration award should be vacated by holding that the challenging party’s arguments improperly asked the court to review the merits of the arbitration panel’s decision and noting that proving fraudulent inducement to sign a contract is not enough to evade arbitration because the fraud must relate to the arbitration clause itself.

Brendan Church of Old South Trading Company LLC and Joseph Agresti of Dream Medical Group LLC entered into a business arrangement whereby Old South supplied Dream Medical with personal protective equipment that Dream Medical then distributed. Dream Medical subsequently sent Old South a resolution agreement that contained an arbitration clause. Church initially refused to sign the agreement but later did so after Agresti purportedly told him that Dream Medical would never enforce the agreement. Dream Medical later sought to enforce the agreement to obtain a refund on a transaction, which led to arbitration when Old South refused to provide the full refund. Old South argued that it had been fraudulently induced to enter the agreement, but the arbitration panel rejected that argument and concluded in relevant part that Old South breached the agreement. Dream Medical applied to confirm the award and Old South moved to vacate it.

The district court confirmed the award and Old South appealed. It argued that the arbitrators violated section 10(a)(3) of the FAA “by not fully considering its fraudulent inducement claim” and violated section 10(a)(4) of the FAA “by failing to fully review Old South’s evidence of, and the applicable law regarding, fraudulent inducement.” The Fifth Circuit concluded that neither of these arguments warranted reversal. It explained that both arguments “functionally invite[d] [it] to reassess the merits of [the arbitration panel’s] fraudulent inducement claim and reach a different conclusion than the” panel, which was “not something [the court could] do.” Old South also argued “that it didn’t voluntarily consent to arbitration because it was fraudulently induced to sign the … Agreement,” but the Fifth Circuit rejected that claim, noting that “even if a contract had been induced by fraud, the arbitration clause is enforceable unless the plaintiffs were fraudulently induced into agreeing to the arbitration clause itself.”

Dream Medical Group, LLC v. Old South Trading Co., No. 22-20286 (5th Cir. Mar. 6, 2023).