In Zurich American Ins. Co. v. Team Tankers A.S., petitioner Vinmar International Limited argued, among other things, that the failure of an arbitrator to disclose a serious medical condition, potentially affecting the arbitrator's cognitive capacities, constituted conduct, or misconduct, under the Federal Arbitration Act that justified a vacatur of the award. As petitioner failed to prove the applicable law was disregarded and that any prejudice resulted, the District Court for the Southern District of New York denied the petitioner's motion to vacate and determined that the arbitrator was not required to disclose his terminal medical condition.
Over the course of ten hearings and pursuant to the rules of the U.S. Society of Maritime Arbitrators ("SMA"), a panel of three arbitrator considered a dispute between charterers Vinmar International Limited, Inc. and its underwriter Zurich American Insurance Co. sought to recover from the ship managers, Team Tankers A.S., for alleged damage to a cargo of 3,500 metric tons of acrylonitrile ("ACN") transported pursuant to an Asbatankvoy charter party from Houston to South Korea aboard the M/V SITEAM EXPLORER. While testing on spec before loading and at delivery, the product showed signs of discoloration 42 days after arriving in South Korea, where it was held in shore tanks. Product samples taken from the same batch just after discharge in the shore tanks showed signs of discoloration as well, albeit not as strong. Other samples taken before loading in Houston showed no discoloration at all.
The arbitration award was rendered in favor of the respondents Team Tankers. The majority of the arbitral panel held that the petitioner Vinmar failed to prove that the contamination of the ACN cargo had taken place while on the M/V SITEAM EXPLORER. The majority decision went further to explain that, even if the contamination had occurred onboard the ship, Team Tankers would not have been held liable because it "exercised the statutory due diligence to make the ship seaworthy" and therefore remained within the exclusionary rule of COGSA § 4(1). Lastly, the majority found that petitioner Vinmar would not have been entitled to damages, in any event, because the sale price it obtained from the allegedly discolored ACN was within market range for unadulterated ACN (especially, in the context of a falling market), and did not reflect the sale of a distressed product.
THE MOTION TO VACATE THE AWARD
Petitioner Vinmar moved to vacate the award on the grounds of: (1) manifest disregard of the law; and (2) corruption and misconduct of one of the arbitrators.
In considering the allegation of manifest disregard of the law, the District Court determined that the panel majority did not erroneously apply COGSA. In dicta, the District Court cited the Second Circuit decision in Westerbeke v. Daihatsue and confirmed that in order to set aside an arbitration award, petitioners would need to show that "the arbitrators knew of the relevant principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it." As a consequence, a mere erroneous application of the law, short of knowing what the "correct law" was, and consciously deciding to not apply it, will not suffice to grant a vacatur. This represents, in the words of the District Court, an "extraordinary burden" to be overcome by the party that moves to set aside an arbitration award. As such, petitioner's claim of manifest disregard was denied.
Of the two arguments, the second challenge was the more creative in that petitioner alleged that the neutral arbitrator engaged in misconduct by failing to disclose a serious health condition, which was detected after the proceedings started, and that allegedly affected the arbitrator for several months during the pendency of the arbitration. This same condition resulted in the resignation of the arbitrator from another, contemporaneous panel and eventually to his passing.
Specifically, petitioner argued that the arbitrator's failure to disclose his condition constituted corruption under sections 10(a)(2) and 10(a)(3) of the Federal Arbitration Act ("FAA"). Section 10(a)(2) permits a court to vacate an arbitration award "where there was evident partiality or corruption in the arbitrators, or either of them." while section 10(a)(3) permits vacatur "where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced."
Petitioner further argued that the lack of disclosure also violated SMA Rule 9 requiring arbitrators " [p]rior to the first hearing or initial submissions ... to disclose any circumstance which could impair their ability to render an unbiased award based solely upon an objective and impartial consideration of the evidence presented to the Panel." According to petitioners a violation of SMA Rule 9 would constitute a misconduct in the sense required by § 10(a)(3) to justify vacate an arbitration award.
The District Court explained that under the FAA, an arbitrator has no duty to disclose medical conditions, as the parties only have a right to unbiased and uncorrupted arbitrators, but not to perfect arbitrators. Given that the nondisclosure of the medical condition did not amount to corruption or misconduct and even the petitioner agreed that during the course of the arbitration there was no evidence that the terminally ill arbitrator was incompetent, the District Court likewise dismissed petitioner's second claim as well. In essence, the argument sought "to transform a personal tragedy into a second chance for a parties (sic) disappointment with the outcome of their arbitration. Such a result would run counter to the twin goals of settling disputes efficiently and avoiding long and expensive litigation.