Confirmation / Vacation of Arbitration Awards

Foundation Surgery Affiliate of Southwest Houston, LLC (“Southwest”), the owner of a surgical and imaging facility in Houston, entered into a purchase and sale agreement in 2008 with Rainier Capital Acquisitions, LP, which assigned its interest to Rainier DSC (together with the other related defendants-appellees, “Rainier”). Rainier DSC purchased the subject property and sold fractional tenant-in-common interests to Plaintiffs (the “Investors”), who each signed an agreement with Rainier DSC that contained an arbitration provision.  After several years, Southwest ceased making certain payments required by the agreement.  The Investors sued Southwest, Rainier and individual physician members of Southwest, among others, alleging various state law claims and violations of federal securities laws.  After the suit was removed, Rainier moved to compel arbitration.  The Investors ultimately agreed to arbitrate their claims against Rainier.

An arbitrator decided in favor of Rainier on all claims, and awarded Rainier over $500,000 in attorneys’ fees and expenses. A federal district court confirmed the award.  The Investors then appealed to the U.S. Court of Appeals for the Fifth Circuit, arguing that the arbitration award should be vacated because: (1) the district court’s failure to stay the underlying litigation of the non-arbitrating parties was “misbehavior” that prejudiced the Investors’ right to a fair arbitration against Rainier; and (2) the arbitrator purportedly refused to hear pertinent and material evidence.  Applying the standard set forth in Section 10 of the Federal Arbitration Act (“FAA”), the Fifth Circuit confirmed the arbitrator’s award.  First, the circuit court found that the Investors’ argument pertaining to the arbitrator’s misconduct was premised on purported misbehavior by the district court, and thus outside the scope of Section 10(a)(3) of the FAA, which provides that misconduct by “arbitrators” provides a basis for vacatur.  Second, the circuit court held that the arbitrator’s decision to admit into evidence the deposition testimony of certain witnesses who the arbitrator refused to subpoena to testify at the arbitration did not warrant vacatur of the award, as the Investors were allowed to depose the witnesses and had failed to provide the arbitrator with any basis as to why their testimony was required at the hearing. Rainier DSC 1, et al. v. Rainier Capital Management, L.P., et al., No. 15-20383 (5th Cir. July 7, 2016).

This post written by Rob DiUbaldo.
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A construction company appealed an order confirming an international arbitration award, which had denied the company’s demand for unpaid monies against an Antiguan medical school. The award also granted the medical school’s counterclaim, which had sought a refund of certain tax payments it had made to the company during the project that were earmarked for the company to pay the Antiguan and Barbudan tax authorities, but which the company never paid. In upholding the arbitration award, the Second Circuit rejected the company’s argument that the panel had committed a manifest disregard of the law by declining to apply res judicata and related claim or issue preclusion defenses due to a prior litigation between the parties. The court “correctly concluded that the arbitral panel ‘manifestly did not ‘ignore’ or ‘pay no attention to’ these doctrines; instead, it explicitly considered and rejected applying both doctrines, and in each case had more than ‘barely colorable justification.’” American University of Antigua-College of Medicine v. Leeward Construction Co., Ltd., Case No. 15-1595-cv (2d Cir. June 24, 2016).

This post written by Barry Weissman.

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In a divided opinion, the U.S. Court of Appeals for the D.C. Circuit reversed a district court ruling that dismissed a case against the Czech Republic on jurisdictional grounds. The Appeals Court revived the case, finding the conditions were satisfied for jurisdiction over a foreign arbitration award involving a sovereign: (1) there was a basis upon which the District Court could enforce the foreign arbitration award; and (2) the Czech Republic did not have sovereign immunity from the enforcement action.

The Court looked to the Foreign Sovereign Immunities Act (“FSIA”), which provides the “sole basis for obtaining jurisdiction over a foreign state” by the courts of the United States. The FSIA contains an arbitration exception to sovereign immunity. In order to fall within the exception, the Court must determine: (1) whether the parties had a defined legal relationship – whether contractual or not; and (2) whether the arbitration award “is or may be governed by a treaty or other international agreement in force for the United States.” The Appeals Court answered both questions in the affirmative. First, the agreement between the parties, though relatively informal, was enough to establish a legal relationship: the petitioner provided training, technology and coordination required for modernizing the Czech Republic’s plasma system, and the respondent, the Czech government, knew of and supported these efforts by providing necessary administrative permits.

Second, both the Czech Republic and the United States are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), 28 U.S.C. § 1605(a)(6), which provides jurisdiction to the district courts of the United States. However, the United States has adopted the commercial restriction to the enforcement of foreign arbitral awards, requiring the dispute to be “commercial in nature”. Looking to its treatment in the field of international arbitration, “commercial” was defined as a “matter of relationships, whether contractual or not, that arise out of or in connection with commerce.” Here, the parties were engaged in providing healthcare technology and medical services which the Court determined “has an obvious connection to commerce” and thus was “commercial in nature.” The fact the Czech Republic funded that technology “through a percentage of blood plasma collected rather than through an up-front payment does not change the commercial nature of the relationship, which turned in large part on the transmission of valuable commodities from one party to the other.”

As both a legal basis existed for the District Court to enforce the arbitration award, and the Czech Republic did not have sovereign immunity pursuant to the New York Convention and the nature of the parties’ agreement, the District Court’s sua sponte dismissal of the matter for lack of jurisdiction was reversed.

Diag Human v. Czech Republic Ministry of Health, No. 14-7142 (D.C. Cir. May 31, 2016)

This post written by Nora A. Valenza-Frost.
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