After affirming, in short order, the district court’s confirmation of the arbitral award, the Second Circuit holds that a party who prevails in an arbitration is not entitled to recoup the fees and costs it incurred in seeking to confirm the arbitral award. Zurich American Insurance Co. v. Team Tankers A.S.,No. 14-4036-cv, January 28, 2016.
Petitioner-Appellant Vinmar (the “shipper”) chartered a ship from Respondent-Appellee Team Tankers ( the “carrier”) to move a chemical called ACN from Texas to South Korea. ACN is a raw material that is most valuable in its colorless form. If ACN comes into contact with other chemicals, it can ‘yellow’ which reduces its value. When ACN arrived in South Korea it was stored in on-shore tanks; six weeks later, it had yellowed. The shipper claimed that the vessel had been contaminated with a chemical that caused ACN to yellow.
Pursuant to the parties’ charter agreement, the shipper initiated an arbitration before the Society of Maritime Arbitrators, Inc. (“SMA”) for the alleged contamination of ACN. The arbitral panel held that the shipper was not entitled to relief because it had not made out a prima facie case that ACN had been damaged while onboard the ship, that even if it had been, the carrier had shown that it exercised due diligence and that the shipper had also failed to prove any damages.
Following the panel’s decision, the shipper petitioned the district court to vacate the award on the grounds that the panel had manifestly disregarded the law, the Carriage of Goods by Sea Act. Subsequently, the shipper learned that the panel chairman had died of a brain tumor which had been discovered during the arbitration. The shipper amended its petition to vacate the award to include a claim that the chairman’s failure inform the parties of his illness constituted ‘corruption’ or ‘misbehavior’ under the FAA.
The district court held that the panel had not manifestly disregarded the law and that the chairman’s failure to disclose his medical condition did not constitute ‘corruption’ or ‘misbehavior’ and confirmed the award. With regard to the carrier’s request for fees and costs incurred in confirming the award, the district court found that the arbitration agreement provided that damages for breach of contract shall include costs and fees and awarded the carrier its cost and fees incurred in connection with the district court proceeding.
The Second Circuit easily rejected the shipper’s argument that the arbitral panel had manifestly disregarded the law citing both the heavy burden a showing of manifest disregard entails and the lack of any such showing here.
Regarding the shipper’s argument that the chairman’s failure to disclose his illness constituted ‘corruption’ or ‘misbehavior’ because disclosure was required by the SMA Rules, the Second Circuit emphasized that “the shipper’s attempt to secure vacatur based on a violation of private arbitral rules runs headlong into the principle that parties may not expand by contract the FAA’s grounds for vacating an award.” While the parties may tailor many aspects of an arbitration in their contract, “if an arbitrator’s failure to comply with arbitral rules, without more, could properly be considered ‘corruption’ or ‘misbehavior,’ the FAA’s grounds for vacatur would be precisely as varied and expansive as the rules private parties might choose to adopt.”
The Second Circuit commenced its analysis of the award of fees and costs with the ‘bedrock principle known as the American Rule’ which is that each litigant pays its own fees unless a statute or contract provides otherwise. The Court found that the district court had erred because it awarded fees and costs under a provision of the charter agreement which provided: “[d]amages for breach of this Charter shall include all provable damages, and all costs of suit and attorney fees incurred in any action hereunder.” But the provision authorized a fee award against a party who breached the charter agreement and here there was no finding that the shipper breached the charter agreement.
The carrier argued that the award could be sustained because the shipper breached the agreement to be bound by the arbitral panel’s decision by resisting entry of judgment on the award. The Second Circuit rejected this argument on two grounds. First, the parties effectively incorporated FAA review into their contract so the claim that the shipper breached the contract by making arguments the FAA permits is unconvincing. Second, the Court held that to the extent the contract obligated the shipper to forbear from resisting the confirmation of the award, it would be unenforceable.
The Court also rejected the carrier’s argument in the alternative that the award could be confirmed under 28 U.S.C. § 1927 which authorizes a court to assess “costs, expenses, and attorneys’ fees “ against any attorney who “so multiplies the proceedings in any case unreasonably and vexatiously.” The Court found that an award under § 1927 is proper only when there is a finding of bad faith. While the shipper’s arguments here were unconvincing, its reasoning, however, flawed, was tied to recognizable legal concepts.