NS United Kaiun Kaisha Ltd. v. Cogent Fibre Inc., No. 15 Civ. 1784, 2015 U.S. Dist. LEXIS 91858 (S.D.N.Y. July 14, 2015) [click for opinion]

NS United Kaiun Kaisha, Ltd. (“NSU”), headquartered in Japan, provides international maritime transportation services for raw materials. Cogent Fibre Inc. (“Cogent”), a Canadian company, exports woodchips from U.S. producers to European and Turkish consumers. On May 28, 2008, the parties executed a five-year continuous-voyage contract (the “Charter”) whereby Cogent agreed to charter NSU’s cargo ship, the Daishin Maru. The Charter stated that the Daishin Maru would carry woodchips from Savannah, Georgia, to Igsas, Turkey, detailing loading time allowances at the port of origin and imposing penalties on Cogent for every day the ship would be delayed at port. The Charter also contained a dry-docking clause that gave NSU the option to dry-dock the Daishin Maru during the period covered by the Charter. Further, the Charter provided a dispute resolution clause under which “any dispute or difference [that] should arise under th[e] Charter” would be resolved through binding arbitration by “three parties in the City of New York[.]”

After more than 15 successful transatlantic voyages through February 2009, NSU notified Cogent that the Daishin Maru would need dry-docking in August and September 2011. A dispute then arose as to the dry-docking schedule for the ship. Over Cogent’s objection, NSU dry-docked the Daishin Maru from September 7, 2011 to October 16, 2011 in Sevastopol, Ukraine. Cogent thereafter refused to provide NSU with cargo, stating that no cargo would be available until late November or mid-December 2011 and recommending that NSU undertake mitigation voyages. NSU refused, and instead took the ship to Savannah on November 5, 2011, relying on the Charter’s clause permitting docking in Savannah absent any port declaration from Cogent. After multiple weeks in Savannah and six requests to Cogent for assurance that a cargo would be made available, NSU terminated the Charter on December 21, 2011 and withdrew the Daishin Maru. NSU then performed a total of 10 mitigation voyages in the Atlantic Ocean between December 27, 2011 and June 29, 2013, after which time NSU sold the ship.

In 2012, NSU initiated arbitration against Cogent. Each party appointed an arbitrator, who together selected a third. The parties engaged in extensive discovery, with more than 650 exhibits, 10 evidentiary hearings, and voluminous briefing. On January 23, 2015, the panel issued a 33-page decision unanimously ruling that Cogent breached the Charter in October 2011 when it refused to provide a cargo for the Daishin Maru. In addition, in a 2-1 ruling, the panel majority awarded $11,606,421.51 to NSU in damages, comprised of $9,933,900.60 from Cogent’s breach of the Charter, $571,389.15 in interest on those damages, $97,967.91 in NSU’s arbitration costs, $113,615.90 in arbitrator fees, and $889,547.95 in NSU’s arbitration-related legal fees. NSU subsequently moved to confirm the entirety of the award, plus interest to the date of judgment, in the U.S. District Court for the Southern District of New York (the “Southern District”). Cogent opposed, and cross-moved to vacate the award, arguing that the panel: (1) manifestly disregarded the law in awarding damages, (2) incorrectly awarded attorneys’ fees, and (3) conducted a fundamentally unfair arbitration procedure. The Southern District denied each of Cogent’s arguments and upheld the panel’s award in full.

The Southern District first rejected Cogent’s argument that the panel manifestly disregarded the law in awarding damages. The court observed that awards should be vacated under such standard “only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.” The Southern District explained that courts “should only vacate an award when a party demonstrates that the panelintentionally defied the law.” According to the Southern District, the panel did no such thing in this case with respect to either aspect of its damages ruling.

As for the $1,423,836 in damages for the October 16, 2011 to December 26, 2011 period, the panel—though not explicitly addressing NSU’s duty to mitigate—“indirectly addressed the issue in its discussion of liability.” In the court’s view, the panel reasonably concluded that NSU was permitted to wait until December 26, 2011 to begin mitigation efforts, taking account of Cogent’s failure to unilaterally terminate the charter before then, and instead offering vague assurance to NSU that cargo would eventually come. The court cited the 46.7-day average of a spot mitigation voyage, and concluded that the “arbitrators could have reasonably concluded that NSU did not have sufficient time to procure and conduct a mitigation voyage between October 19, 2011, when the ship left dry-dock, and late November, when Cogent indicated it expected to have cargo available; or between November 5, 2011, when NSU received notification of further delay, and mid-December, when Cogent had informed NSU that a cargo could be available.” The court added that “Cogent has not shown that any error by the panel majority was a willful misapplication of the law.” According to the court, “[a]lthough the panel may have misunderstood Cogent’s argument with respect to the mitigation efforts that NSU had a duty to undertake, it appears to have addressed what it perceived to be Cogent’s argument.” For the Southern District, this provided “more than a barely colorable justification for its decision,” under Second Circuit law, and did not rise the level of intentional defiance of the law sufficient to vacate under the manifest disregard standard.

As for the $8,609,064.60 in damages for December 27, 2011 to June 29, 2013 period, the court explained that the award “directly addressed the reasonableness of NSU’s mitigation efforts, including the propriety of leaving the ship in the Atlantic rather than seeking mitigation in the Pacific.” Although Cogent offered testimony at arbitration through a maritime law expert that “the consequences of a commercial decision of a non-breaching party fall on the non-breaching party,” that testimony “squarely contradicts with Second Circuit law.” As such, the award correctly “recognized, and applied, the established law” in determining that NSU’s mitigation efforts were reasonable. The court thus affirmed the $8,609,064.60 portion of the award as well.

With respect to Cogent’s second argument—whether the panel exceeded its authority in awarding attorneys’ fees—the court likewise declined to modify the award in Cogent’s favor. The court noted that in determining whether “an arbitration panel exceeded its authority, the question is whether the panel had contractual authority to reach a certain issue, not whether the panel correctly decided that issue.” Notably, the Charter was “silent as to the issue of attorneys’ fees.” However, the panel expressly relied on PaineWebber Inc. v. Bybyk, in which the Second Circuit held that arbitrators were empowered to consider attorneys’ fees applications where the arbitration agreement—even in the absence of any express limitation on ’attorney fees—provided for “any and all controversies” to be submitted to arbitration. The Southern District found that the arbitration clause in the Charter, mandating arbitration for “any dispute or difference” arising thereunder, was “equally broad”, and thus “it was within the power of the arbitrators to consider NSU’s application for attorneys’ fees.”

The Southern District further applied PaineWebber to hold that “the FAA takes precedence over state law and allows arbitrators to award attorneys’ fees when an agreement’s arbitration clause is sufficiently broad.” Although the Charter here was governed by New York law—which does limit or preclude attorneys’ fees where the contract does not expressly provide for it—the court concluded that the “arbitrators’ ability to grant attorneys’ fees was not limited by state law[.]” Quoting PaineWebber, the court explained that “a choice of law provision will not be construed to impose substantive restrictions on the parties’ rights under the Federal Arbitration Act, including the right to arbitrate claims for attorneys’ fees.” Here, the panel relied on PaineWebber to rule on attorneys’ fees, so its “decision was not made in manifest disregard of the law.”

In upholding the panel’s decision on attorneys’ fees, the Southern District also denied Cogent’s argument that the arbitrators were forbidden, under the “American Rule,” from awarding fees to the winning litigant. The court held that the “bad faith” exception to the American Rule was satisfied in light of Cogent’s “dealings with NSU under the Charter” and “in its conduct during the arbitration.” Acknowledging that the award was “less than a model of clarity” in finding Cogent’s bad faith, the court determined that it “certainly provides colorable justification for finding that Cogent acted in bad faith during the course of the [Charter] and during arbitration.” Accordingly, the court affirmed the entirety of the $889,547.95 in legal fees that NSU paid during the arbitration, though did not grant NSU the fees and costs it incurred through enforcement because “NSU has not pursued this application further in any of its briefs[.]”

Finally, the Southern District denied Cogent’s contention that the arbitration procedures were fundamentally unfair. The court observed that “[c]ourts typically do not review the procedures used by arbitrators” and noted that the basic inquiry for evaluating fundamental fairness is whether the arbitrators “complied with the requirements of due process.” The court then held that the panel in this case did so “[b]ecause Cogent has not identified any evidence indicating that it was denied an adequate opportunity to present its evidence or arguments at any point during the arbitration[.]” Accordingly, “procedural fairness does not provide a basis for the Court to vacate the Award.”

The Southern District thus confirmed the entirety of the arbitration award and directed the Clerk of the Court to close the case.

Kyle Olson of the Chicago office contributed to this summary.