Second Circuit Court of Appeals Underscores Last Resort Character of Manifest Disregard Doctrine by Refusing to Vacate Admittedly Confusing Arbitration Award
September, 2003
by Kimbley A. Kearney and
In Duferco Int’l Steel Trading v. T. Klaveness Shipping A/S, 2003 AMC 1521, 333 F.3d 383 (2d Cir. 2003), the Second Circuit Court of Appeals refused to vacate an arbitration award based on manifest disregard of the law, even though the award appeared to be inherently contradictory.
Facts
Petitioner Duferco contracted with respondent Klaveness to charter a vessel to carry steel slabs from Taranto, Italy to New Orleans, Louisiana. The contract was a voyage charter providing that the cargo would be loaded onto Klaveness’ vessel at “one (1) safe port/safe berth Taranto.” Klaveness in turn chartered the M.V. ARISTIDIS. Klaveness’ contract with the ARISTIDIS’ owner, Lifedream Shipping Company, Ltd., was a time charter containing a safe berth warranty that required the vessel to trade via “safe port(s), safe berth(s), [and] safe anchorage(s).” While loading the cargo at Taranto, seasonal swells and back waves damaged the mooring equipment and caused Lifedream to incur extra costs for measures taken to keep the vessel stable.
Lifedream instituted arbitration proceedings in London to recover its damages. The London arbitrators found that Klaveness had breached the safe berth warranty and awarded damages plus interest. Klaveness moved to vouch Duferco into the arbitration to recover indemnification; Duferco declined to be vouched in. Klaveness then began arbitration in New York seeking full indemnification for the London award, as well as attorneys’ and arbitrators’ fees from both arbitrations. Duferco contended that it was not bound by the London arbitration under principles of collateral estoppel because the safe berth warranties in the voyage and time charters were not substantially identical.
The New York arbitrators found that the warranties of both charters were sufficiently identical for vouching in purposes, concluding that Duferco was bound by the London arbitration with respect to the damages portion of the award. Yet, the panel declined to award attorneys’ and arbitrators’ fees. Specifically, the panel stated that because the London arbitrators “did not consider the safe berth warranties of the voyage charter, as properly not before them, no ‘previous determination’ had been made, and therefore, Klaveness must not be permitted to now use the London award against Duferco offensively for vouching in or collateral estoppel purposes.” The Southern District of New York upheld the award.
Analysis
Although noting that the New York arbitrators’ precise rationale was “difficult to discern,” the Second Circuit Court of Appeals affirmed. The court initially explained that a petitioner bears a heavy burden of showing that an arbitration award should be overturned: petitioner must show a manifest disregard of the law amounting to intentional defiance of the law. Mere error in understanding or applying the law will not suffice. This highly deferential standard of review reflects courts’ reluctance to interfere with the arbitration process. Parties hire arbitrators to reach a result that conforms to industry standards and the arbitrators’ notions of fairness.
Applying this standard, the Second Circuit held that there was no manifest disregard of the law. Even though the arbitration award of damages, but not fees, appeared inconsistent, the court found that there was a plausible reading of the award. The arbitrators could have found that the safe port/safe berth warranties of the voyage and time charters were substantially identical as to damages but not as to attorneys’ and arbitrators’ fees because the two are separate issues and collateral estoppel is issue-specific.
Learning Point:
Successfully overturning an unfavorable arbitration award is extremely difficult given the very limited scope of appellate review and the fact that a court will strive to give an award any plausible reading possible. Absent an enumerated ground under the Federal Arbitration Act, amounting to fraud, corruption, or some other sort of misconduct, an award will be vacated only for an arbitrator’s intentional defiance of the law. Indeed, as Duferco noted, the Second Circuit has vacated arbitration awards for manifest disregard in only four of forty-eight cases since 1960. •
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