Smarter Tools Inc. v. Chongqing Senci Import & Export Trade Co., Ltd., No. 21-724-cv (2d Cir. Jan. 17, 2023) [click for opinion]

Smarter Tools, Inc. ("STI"), a Virginia-based corporation, entered into a series of contracts with China-based Chongqing SENCI Import & Export Trade Co., Ltd. and Chongqing AM Pride 20 Power & Machinery Co. Ltd. (collectively, "SENCI"), to purchase gas-powered inverter generators. SENCI sells multiple types of these generators, including one that is certified by the Environmental Protection Agency, but not by the California Air Resources Board ("CARB").

A dispute arose between the parties as to whether the generators STI ordered were to be CARB compliant. STI was fined $507,000 by CARB for selling non-compliant generators, prompting STI to pull out of the market and stop payment on $2,402,680.43 worth of SENCI generators for which it had already accepted delivery. SENCI then initiated an ICDR arbitration based on the arbitration clause in the generator purchase orders. The parties agreed that the arbitrator should issue a reasoned award.

When the award was issued, it set out only a brief description of the parties and the proceedings, excluded certain expert testimony and exhibits, and, without detailed reasoning, awarded SENCI $2,402,680.43 and denied all of STI's claims. STI sought to vacate the award in the United States District Court for the Southern District of New York, arguing that the award was not reasoned and that the arbitrator had manifestly disregarded the law. The court agreed that the award was not reasoned, and remanded to the arbitrator "for clarification of his findings."

The arbitrator subsequently issued an amended award that explained that STI's claims were rejected due to a lack of evidence that it actually ordered generators compliant with Californian regulations. STI again sought vacatur of the amended award, and SENCI sought to confirm it. The district court held that the award was reasoned and did not reflect a manifest disregard for the law, and accordingly confirmed the award.

STI appealed to the United States Court of Appeals for the Second Circuit, arguing that the district court's remand to the arbitrator controverted the functus officio doctrine and Sections 10(a)(4) and 11 of the Federal Arbitration Act (the "FAA"). STI argued that, after an award was issued, an arbitrator's revisions on remand must be limited to correcting ambiguities or minor clerical errors. Accordingly, once the district court held that the arbitrator exceed his authority by not issuing a reasoned award, the only possible remedy was vacatur—not remand. STI also argued that the amended award was still not reasoned and reflected a manifest disregard for the law.

The Second Circuit disagreed. It explained that remand is appropriate if the final award is ambiguous, the arbitrator's clarification does not substantively modify the award, and the clarification is in line with the parties' arbitration agreement. The court noted that it regularly applies this standard to remand for clarification of ambiguities that hamper enforceability or leave an arbitral award open to multiple interpretations.

The court found that a remand to correct an error in the form of an award—such as a failure to produce a reasoned award—does not violate the functus officio doctrine, as it does not reopen the merits of the dispute. Rather, the court found that such a remand is consistent with its standard for remand for clarification, as it seeks to have the arbitrator complete their duties consistent with the parties' arbitration agreement. Specifically, in this case, the court found that the arbitrator's amended award provided a reasoned award in line with the parties' expectations.

The court also rejected STI's argument that FAA Section 10(a)(4), which provides that awards may be vacated where the arbitrators exceed their powers, applies where an arbitrator fails to provide a reasoned award. The court explained that Section 10(a)(4) is to be read narrowly, and there was no question that the arbitrator had the power to reach the issues he addressed. Accordingly, Section 10(a)(4) did not require vacatur of the original award.

Instead, the court found that failure to provide a reasoned award best fit under FAA Section 11, which permits courts to order the modification or correction of an award where "the award is imperfect in matter of form not affecting the merits of the controversy." Consistent with its reasoning regarding remand of the award, the court determined that, under Section 11, the court's authority stems from giving effect to the parties' intent and promoting justice, and that a remand for a reasoned award served both of these ends.

Lastly, the court affirmed the district court's holding that the amended award was not made in manifest disregard of the law. An arbitration panel manifestly disregards the law only if "(1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well-defined, explicit, and clearly applicable to the case." Here, STI argued that the arbitrator failed to apply the provisions of the UN Convention on Contracts for the International Sale of Goods (the "CISG") pertaining to oral contracts and specification of goods by display of a model or exemplar. The court held that, as the district court aptly concluded, "[t]he arbitrator was free to determine that STI's evidence of an oral contract was not credible or was not enough to support an inference that SENCI agreed to product specifications not included in the purchase orders." Thus, even if the court disagreed on the merits, there was "a barely colorable justification for the outcome reached," such that there was no manifest disregard of the law.

Taylor LeMay of the Houston office contributed to this summary.