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You are here: Home / Archives for Arbitration / Court Decisions / Confirmation / Vacation of Arbitration Awards

Confirmation / Vacation of Arbitration Awards

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).

Filed Under: Arbitration / Court Decisions, Confirmation / Vacation of Arbitration Awards, Contract Formation

Ninth Circuit Recognizes Precedent Restricting Arbitration-Favoring Rules, Compels Parties to Arbitrate Anyway

March 16, 2023 by Benjamin Stearns

In litigation “bookended by two Supreme Court decisions on arbitration,” namely, Epic Systems Corp. v. Lewis and Morgan v. Sundance Inc., the Ninth Circuit recognized Morgan’s holding prohibiting courts from creating “arbitration-favoring procedural rules” but nonetheless found that the lower court correctly compelled the parties to arbitrate their wage and hour dispute over the plaintiff’s protest.

Teresa Armstrong sued Michaels Stores Inc., alleging violations of California wage and hour laws on behalf of a putative class of Michaels’ employees. Michaels answered and asserted its right to arbitration as an affirmative defense. Thereafter, the parties submitted a joint case management statement listing the legal issues in the case, including whether Armstrong agreed to arbitrate her claims. Michaels represented that it planned to move to compel arbitration after conducting discovery. Michaels subsequently served five interrogatories and required Armstrong to produce 28 pages of documents relevant to certain non-arbitrable claims. Neither party filed any discovery motions.

Michaels moved to compel arbitration in August 2018, approximately 10 months after Armstrong had originally filed suit. Armstrong opposed it, arguing that Michaels had waived its right to arbitration due to delay. The district court ruled in favor of Michaels and the arbitrator awarded summary judgment to Michaels. Armstrong appealed to the Ninth Circuit.

While the appeal was pending, the U.S. Supreme Court decided Morgan, which held that “the plain language of the Federal Arbitration Act restricts courts from creating arbitration-favoring procedural rules.” The Ninth Circuit noted that, before Morgan, “to give voice to the FAA’s policy favoring enforcement of arbitration agreements, we held that waiver of the right to arbitration was disfavored.” Like most other circuits, the Ninth Circuit had created “an arbitration-specific waiver test,” which imposed a “heavy burden” on parties arguing that the right to arbitrate had been waived. After Morgan, courts are now required to treat arbitration agreements just like any other contract and, as such, “may not devise novel rules to favor arbitration over litigation.”

In light of Morgan, parties asserting waiver must now demonstrate (1) knowledge of an existing right to compel arbitration and (2) intentional acts inconsistent with that existing right. Unlike before, parties no longer have to demonstrate prejudice to the person opposing arbitration caused by such inconsistent acts.

The Ninth Circuit applied the precedent to Michaels’ actions in the litigation and found that Michaels had not intentionally acted inconsistently with its right to compel arbitration. On the contrary, Michaels consistently stated its intent to move to compel arbitration. Further, Michaels did not actively litigate the merits of the case in the district court. Its limited discovery requests were related to Armstrong’s non-arbitrable claims. Finally, Michaels’ motion to compel arbitration was filed within a year of the lawsuit originally being filed against it. Even under the post-Morgan regime for analyzing waiver of the right to compel arbitration, the Ninth Circuit held Michaels’ actions in this case insufficient to waive its right.

Armstrong v. Michaels Stores Inc., No. 21-15397 (9th Cir. Feb. 13, 2023)

Filed Under: Arbitration / Court Decisions, Arbitration Process Issues, Confirmation / Vacation of Arbitration Awards

Tenth Circuit Affirms Refusal to Vacate Confirmation Despite Foreign Court’s Annulment of Underlying Arbitration Award

March 10, 2023 by Brendan Gooley

The Tenth Circuit recently affirmed a district court’s decision not to vacate a confirmation award even though the underlying arbitration award had been annulled by a Bolivian court following the confirmation. The Tenth Circuit agreed that public policy considerations, including concerns about encouraging endless litigation, rendered the district court’s decision not to vacate the confirmation as within that court’s discretion.

Compañía de Inversiones Mercantiles S.A. (CIMSA) and Grupo Cementos de Chihuahua S.A.B. de C.V. (GCC) entered into a shareholder agreement in which GCC purchased shares of a Bolivian company from CIMSA. The shareholder agreement included an arbitration clause and provided that CIMSA had a right of first refusal if GCC sought to sell its shares. CIMSA attempted to exercise that right when GCC moved to sell shares, but GCC purportedly claimed that CIMSA’s right was invalid and sold the shares to a third party. The sale triggered lengthy arbitration and court proceedings. In short, an arbitral tribunal in Bolivia awarded CIMSA approximately $34 million in damages plus $2 million in costs and fees, all subject to 6% interest. GCC moved to annul the award in Bolivia but lost. CIMSA then obtained an order from the U. S. District Court for the District of Colorado confirming the award. The Tenth Circuit affirmed that award. GCC then persuaded a different panel of the Bolivian court that had ruled against it to annul the arbitral award. With that annulment in hand, GCC moved to vacate the district court’s confirmation order. The district court denied GCC’s motion. GCC appealed that decision to the Tenth Circuit, which affirmed.

GCC initially  argued that a U. S. court cannot confirm an arbitral award that has been annulled by the primary jurisdiction. The Tenth Circuit disagreed, noting:

[W]hen a court has been asked to vacate an order confirming an arbitral award that has later been annulled, it may balance against comity considerations (1) whether the annulment is repugnant to U.S. public policy or (2) whether giving effect to the annulment would undermine U.S. public policy.

GCC nevertheless argued that the district court erred by considering in conjunction with that analysis not only whether the orders of the Bolivian court were repugnant to U.S. public policy, but “whether giving effect to those orders through vacatur of its Confirmation Judgment would offend U.S. public policy.” The Tenth Circuit disagreed, explaining that the district court properly considered whether giving effect to orders would violate public policy (and holding that it would because doing so would “encourage ‘proceedings without end’”) in addition to the question of whether the orders themselves were repugnant to U.S. public policy. The Tenth Circuit held that the district court did not abuse its discretion in concluding “that (1) giving effect to the [] Bolivian orders [annulling the arbitral award] would offend U.S. public policy and (2) GCC acted inequitably in the United States and Bolivian proceedings[:]”

The interests of the finality of judgments, respecting parties’ contractual expectations, and the U. S. policy favoring arbitral dispute resolution support the district court’s conclusion that vacatur of its Confirmation Judgment would violate U.S. public policy. These considerations correspondingly support the district court’s decision against extending comity to the [relevant] Bolivian orders.

The Tenth Circuit also rejected GCC’s arguments that the district court erred by ordering GCC to turnover property held abroad by third parties, and other challenges to turnover orders.

Compañía de Inversiones Mercantiles S.A. v. Grupo Cementos de Chihuahua S.A.B. de C.V., No. 21-1196 (10th Cir. Jan. 10, 2023)

Filed Under: Arbitration / Court Decisions, Arbitration Process Issues, Confirmation / Vacation of Arbitration Awards

SDNY Rejects Cross-Petition To Vacate Arbitration Award, Rejecting Claims of Manifest Disregard of Law and “Evident Partiality”

March 3, 2023 by Kenneth Cesta

 

Recognizing arbitration awards are subject to “very limited review” and should be confirmed, “so long as there is a ‘barely colorable justification’ for the outcome that the arbitrator reached,” the U.S. District Court for the Southern District of New York affirmed the arbitration award in favor of the petitioners, Telecom Business Solution, LLC, LATAM Towers, LLC, and AMLQ Holdings (Cay) Ltd., and denied the respondents, Terra Towers Corp., TBS Management, S.A., and DT Holdings, Inc.’s cross-petition to vacate that award.

The petitioners and respondent, Terra Towers Corp., entered into a shareholders agreement to co-own and operate a business engaged in the operation of telecommunications towers in Central and South America (Company). Terra was the majority shareholder of the Company, and the petitioners were the minority shareholders. The shareholders agreement provided that after five years, the petitioners could unilaterally initiate a sale of the Company, which it did two weeks after the expiration of the five-year period. Terra rejected the sale proposed by the petitioners and sought to buy out the petitioners’ shares of stock in the Company. The petitioners then commenced an arbitration alleging that Terra breached the shareholders agreement “by obstructing their proposed sale of the Company.” The petitioners sought damages from the respondents or specific performance. The petitioners and respondents each appointed one arbitrator who then appointed a third arbitrator to act as chair of the panel. Phase one of the arbitration was limited to the petitioners’ claim for specific performance related to the sale of the Company. After a hearing, the panel issued a First Partial Final Award (FPFA) ordering a sale of the Company. Further disputes developed between the parties after the entry of the FPFA, resulting in the entry by the panel of interim relief, including an injunction. The respondents claimed to the ICDR that there was “‘justifiable doubt’ about their party-appointed arbitrator’s impartiality.” After further submissions on the issue, the ICDR’s International Administrative Review Council denied the respondents’ challenge.

The petitioners filed a petition to confirm the FPFA, and the respondents sought “to vacate the FPFA, asserting that the panel violated “‘fundamental fairness’ by refusing to provide them with ‘a fair opportunity to be heard’ … that the Panel acted in ‘manifest disregard of the law’ … by granting specific performance to Petitioners,” and that there was “evident partiality” by two of the three arbitrators in favor of the petitioners. After noting the grounds on which an arbitration award may be set aside, the court rejected all of the respondents’ arguments and granted the petition to confirm the FPFA. The court found “[n]either the Panel’s decision to phase the arbitration nor the Panel’s denial of discovery in Phase 1 of the Arbitration constituted misconduct that rendered the Arbitration fundamentally unfair.”  The court also rejected the respondents’ contention that the FPFA issued was in “manifest disregard of the law,” finding a court’s review under this standard is “severely limited” and a “doctrine of last resort” limited to “rare instances where some egregious impropriety on the part of the arbitrators is apparent.” Finally, the court rejected the respondents’ claim of evident partiality concluding the “ICDR already has carefully reviewed and rejected all of Respondents’ evidence of a purported disqualifying conflict.”

Telecom Business Solution, LLC et al. v. Terra Towers Corp., et al., No. 22-cv-1761 (SDNY, Jan. 18, 2023)

Filed Under: Arbitration / Court Decisions, Confirmation / Vacation of Arbitration Awards

Wyoming Supreme Court Affirms Finding That Arbitrator’s Determinations Did Not Exceed Authority And Were Not Manifest Errors of Law

March 1, 2023 by Kenneth Cesta

Defendant Fork Road, LLC, is the owner of a floor of an office building, which it purchased several years earlier. Plaintiff Mountain Business Center, LLC (MBC) was a tenant in the building at the time of Fork Road’s purchase. In connection with the purchase, MBC was to provide an estoppel certificate listing, and among other things, subtenant identities and sublease rent payment information. MBC returned the estoppel certificate, but did not provide the requested information concerning the subtenants and sublease rental payments. Fork Road proceeded with the purchase without this information, gave notice to MBC to vacate the premises, and notified the subtenants that Fork Road would be taking over the subleases. MBC refused to vacate and Fork Road filed an eviction action in the Wyoming circuit court. MBC appealed to the district court, which ruled the parties were bound by an arbitration clause in their agreement.

The dispute proceeded to arbitration. MBC and Fork Road submitted a “Stipulated List of Issues to be Determined by the Arbitrator,” which the arbitrator then consolidated and summarized. The result was seven claims by Fork Road and eight claims by MBC, largely related to various alleged breaches of the underlying lease agreement. After a five-day hearing, the arbitrator issued a 47 page decision in which he decided all issues presented, and ruled “for and against both MBC and Fork Road” on their various claims. The arbitrator determined that MBC sustained damages of $35,750, and that Fork Road sustained damages of $11,752. Fork Road was permitted to offset MBC’s damages with the damages it had incurred, and in so doing, the arbitrator rejected MBC’s argument that the “first-to-breach rule” prevented the off-set. The arbitrator also decided MBC was not the prevailing party and not entitled to attorney’s fees. MBC appealed to the district court, which confirmed the award.

MBC then appealed to the Wyoming Supreme Court. First, MBC alleged the arbitrator exceeded his authority “by making factual and legal determination of issues not submitted to him.” The court disagreed, concluding that the arbitrator “properly relied on the stipulated list to determine the issues before him….” Second, the court also rejected MBC’s arguments that it was manifest error of law when the arbitrator determined (1) MBC was not the prevailing party and therefore not entitled to attorney’s fees; and (2) MBC was not entitled to the benefit of the “first-to-breach rule.” The court affirmed the district court’s order, concluding “the arbitrator did not exceed his authority in determining the issues presented to him…” and “did not commit manifest error in its prevailing party and first-to-breach rule analysis.”

Mountain Business Center, LLC v. Fork Road, LLC, Docket No. S-22-0090 (Supreme Court of Wyoming, Nov. 23, 2022)

Filed Under: Arbitration Process Issues, Confirmation / Vacation of Arbitration Awards

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