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Confirmation / Vacation of Arbitration Awards

SECOND CIRCUIT UPHOLDS CONFIRMATION OF ARBITRATION AWARD FINDING THE PENALTY PROVISION IN CONTRACT DID NOT VIOLATE PUBLIC POLICY

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Although unable to revisit the arbitration panel’s fact-finding or legal reasoning behind an arbitration award, the Second Circuit Court of Appeals upheld confirmation of the award itself, as it did not violate public policy. The arbitration panel, which acknowledged the policy against contract penalties, nevertheless found the policy inapplicable because it construed the contract clause at issue as a termination provision, rather than as a liquidated damages provision. Petitioners pointed to no laws nor legal precedents indicating that the contract’s termination provisions “setting the terms for ending a joint venture are contrary to well defined and dominant public policy.” Thus, the Court upheld the Southern District’s confirmation of the award.

PDV Sweeny, Inc., et al. v. Conocophillips Co., et al., No. 16-170-cv (2d Cir. Nov. 7, 2016)

This post written by Nora A. Valenza-Frost.

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RECIPIENT OF ARBITRATION AWARD IN REINSURANCE DISPUTE PERMITTED DISCOVERY OF FUNDS WITHHELD ACCOUNT

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Plaintiffs secured an interim arbitration award in the amount of $7.8 million, plus interest, in what the court described as a complex insurance/reinsurance program. Seeking to collect on the award, plaintiffs served a subpoena on a third party which allegedly owed funds to the judgment debtor evidenced by a liability set up on its books in a funds withheld account. The recipient of the subpoena moved to quash the subpoena. The court held that the holder of the arbitration award was entitled to conduct discovery reasonably calculated to lead to the discovery of assets of the judgment debtor. The court found that it was undisputed that the funds listed on the books of the recipient of the subpoena were identified as a liability owed to the judgment debtor. The court enforced the subpoena, ordering the recipient of the subpoena to respond to the subpoena, and entered a “restraining notice” preventing the subpoena’s recipient from transferring the funds or taking them for its own use. The court did not find that the judgment debtor was entitled to the funds in the funds withheld account. That issue will be resolved later, if necessary. Amtrust North America, Inc. v. Preferred Contractors Insurance Co. Risk Retention Group, Case No. 15-7505 (USDC S.D.N.Y. Oct. 18, 2016)

This post written by Rollie Goss.
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REINSURANCE ARBITRATION AWARD STANDS IN FACE OF CHALLENGES TO RATIONALITY AND IMPARTIALITY OF DECISION

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Yosemite Insurance Co. (“Yosemite”) lost its challenge to an arbitration award that found Nationwide Mutual Insurance Co. (“Nationwide”) was not required to cover a share of Yosemite’s settlement with the State of California regarding pollution losses from the 1950s. After the arbitral board decided in Nationwide’s favor, Yosemite challenged the impartiality and rationality of the award.

In deciding Yosemite’s challenge, the court emphasized that the bases to vacate an arbitration award under the Federal Arbitration Act (“FAA”) are narrow and impose a steep burden on the challenging party. The dispute was based on whether an exclusion for “contamination and pollution” applied to any claims made or only where the party’s “main operations” related to “contamination and pollution.” The court found that while it believed the operative language was ambiguous, the arbitrators’ decision was “anchored” in the text of the agreement. Because the decision did not stray from an interpretation and application of the agreement, or exhibit a manifest disregard for the law, the court lacked authority under the FAA to second-guess the arbitral panel’s award.

Yosemite also challenged the arbitral panel’s impartiality because one of the three members failed to disclose that he had previously represented a client in a case adverse to Yosemite—a representation Yosemite’s counsel himself did not recall. The court applied a four-factor test borrowed from the Fourth Circuit to determine whether the inadvertent failure to disclose the representation would cause a reasonable person to conclude the arbitrator was biased. The court found there was no non-speculative suggestion of a conflict of interest, no suggestion of antipathy against Yosemite, and that the ten-year old adverse representation failed to impugn the impartiality of the arbitrator.

Despite rejecting Yosemite’s challenges, the court declined to award attorneys’ fees and costs to Nationwide because the claims were not objectively unreasonable. The court did however, “encourage” Yosemite’s counsel to review the strict and demanding showings required when seeking to vacate an arbitral award.

Yosemite Ins. Co. v. Nationwide Mut. Ins. Co., Case No. 16-5290 (USDC S.D.N.Y. Nov. 10, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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COURT GRANTS DEFAULT JUDGMENT CONFIRMING ARBITRATION AWARD, WITH A LESSON ON JURISDICTION

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Choice Hotels filed an application to confirm an arbitration award of over $247,000 for the alleged breach of a franchise agreement by two defendants, which failed to timely commence construction of a hotel. The defendants had not participated in or submitted any written materials for arbitration. However, the court denied Choice Hotels’ first motion for a default judgment because it failed to adequately establish subject matter jurisdiction and jurisdiction under the FAA. The Court explained that the FAA is not an independent source of jurisdiction, and further held that Choice Hotels’ failed to plead the requirements of diversity jurisdiction. Additionally, because there was no record in the application or the arbitration award itself that the arbitration occurred in Maryland, which was required by the arbitration agreement, the court could not determine that jurisdiction existed under the FAA. Choice Hotels filed a second motion for default judgment, which successfully alleged diversity jurisdiction and established that the case was within the scope of the FAA. The Court then granted the motion for default judgment and confirmed the award. Choice Hotels Int’l, Inc. v. HSL Inv., Inc., Case No. TDC-15-2386 (USDC D. Md. Oct. 20, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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SDNY CONFIRMS ARBITRATION AWARD FOLLOWING RESPONDENT’S DEFAULT

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On an unopposed petition to confirm an arbitration award, a New York federal court treated the petition and accompanying record as a motion for summary judgment. “Thus, like unopposed summary judgment motions, unopposed confirmation petitions must fail where the undisputed facts fail to show that the moving party is entitled to judgment as a matter of law.”

As the parties’ were in diversity and the amount in controversy was met for jurisdiction, the Court, pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9, reviewed the parties’ broad arbitration clause and, finding no grounds for vacatur or modification of the award, granted petitioner’s request.

McGroarty v. U.S. Rare Earths, Inc., 1:16-cv-02687 (USDC S.D.N.Y. Sept. 23, 2016)

This post written by Nora A. Valenza-Frost.

See our disclaimer.