Case of the Day: Agility Public Warehousing v. Supreme Foodservice GmbH

We return today to Agility Public Warehousing v. Supreme Foodservice GmbH, which we first saw in my post of Jan. 23, 2012. Here was my statement of the facts:

Supreme wanted to bid on a US government contract to supply food to the troops in Afghanistan. It made a contract with Agility Public Warehousing and Professional Contract Administrators, firms that supplied food to troops in Iraq, Kuwait, and Jordan, under which APW and PCA were to provide food pricing and supply chains for use in Supreme’s bid.

Supreme won the contract in 2005, but as the war went on, the government asked Supreme to expand the scope of services and to provide food to forward operating bases. Supreme agreed, and it made a side agreement that provided for compensation for APW and PCA on account of the changed circumstances.

In 2007, Supreme learned that APW was being investigated for illegal procurement practices. APW and PCA refused to provide pricing information to Supreme, and Supreme terminated the agreement for material breach and ceased making payments—including some payments for services provided prior to the termination. APW and PCA commenced an arbitration in New York under the AAA rules, seeking the unpaid amounts, or in the alternative, seeking the contractually defined post-termination fee. While the arbitration was pending, a grand jury indicted APW for fraud. The basic allegation was that APW had misrepresented its buying power for food items in the Iraq/Kuwait/Jordan contract. Supreme then asserted, in the arbitration, that APW and PCA had fraudulently induced it to enter into the contract by “making promises that they intended to fulfill only by illegal means.” At the arbitration hearing, Supreme sought the testimony of several APW executives, but they refused to testify—though they did not formally invoke their Fifth Amendment privilege against self-incrimination. Supreme argued that the executives’ failure to testify was fatal to APW’s claims, because under New York law, where a claimant’s material witnesses invoke the Fifth Amendment, the claim should be dismissed. Supreme also asked the tribunal to infer from the refusal to testify that APW had in fact acted illegally. Finally, Supreme argued that APW could not recover, because a contract procured by fraud is unenforceable.

The tribunal entered an award for $41 million in favor of Agility. The district court confirmed the award, and Supreme appealed to the Second Circuit, which affirmed in a summary order.

The most interesting issue is the issue of the witnesses who refused to testify. Supreme claimed that under New York law, the refusal of the claimant’s witness to testify on Fifth Amendment grounds should lead to dismissal. The Second Circuit held that even if this were so, the award did not violate public policy under Article V(2)(b) of the New York Convention, because “Article V(2)(b) [ellipsis] is concerned with violations of basic, fundamental national policies, rather than with the policies of particular states within this country.” In any case, the problem was largely of Supreme’s “own making,” because Supreme had opposed Agility’s request to postpone the arbitration until after the conclusion of the criminal proceedings and had invited the arbitrators to draw inferences adverse to Agility as an alternative to dismissal. “Under such circumstances, the arbitrators’ decisions to draw adverse inferences from the executives’ absence rather than to dismiss Supreme’s claims did not violate basic notions of morality and justice.” The court similarly rejected the due process and other arguments Supreme made.

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