Case of the Day: Phoenix Bulk Carriers v. American Metals Trading

I have a guest post today from Andrew Jacobs, who recently joined Murphy & King’s litigation department following a clerkship for a federal judge in Miami.

I’m honored to have a brief moment in the limelight as guest poster of the case of the day.  As a former federal law clerk and a federal court practitioner before that, I have a particular interest in federal practice and procedure that includes the laws, conventions, and treaties governing international judicial assistance.  It’s true that I had to bribe Ted with the offer of doing light site maintenance (or maybe he suggested it as payment), but my post is not without precedent—you may recall previous guest posts by Charles Kotuby, Albéniz Couret, Chris Bray, Antonin I. Pribetić, or the space given to Noel Doran on the curious case of Anthony McIntyre.

Enough about why you are hearing from me…anchors away for the case of the day, Phoenix Bulk Carriers, Ltd. v. American Metals Trading, LLP (S.D.N.Y. 2013), which takes us to four continents and reminds us of the resilience of pesky foreign arbitration awards when their enforcement is challenged in U.S. courts.

Phoenix Bulk Carriers, Ltd. (a Liberian entity) was under contract with American Metals Trading, LLP (a British entity) to transport some unspecified, but apparently enormous, amount of pig iron from Brazil to the mighty Mississippi.  Phoenix evidently failed to nominate a vessel to carry the materials so that AMT could work with the dock operator to accept the ship.  For its part, AMT was evidently having problems with its dock operator, which obtained a local court order to permit it to cease dock operations.  Although the parties discussed alternative loading locations, communications broke down.  AMT subsequently declared Phoenix in breach and used another carrier at a rate roughly 25% higher.

An arbitration panel comprised of three maritime experts concluded that Phoenix had technically breached the contract by failing to timely designate a carrier vessel before the dock fiasco occurred.  Nevertheless, this was not a source of any damages, since a clause in the contract negated Phoenix’s duty to supply vessels if the parties could not confirm the loading with the dock operator, and the operator here had serious issues with the dock.  In the end, not only did AMT lose on its claim, but Phoenix was awarded $160,000 in arbitration costs and fees.

This award in favor of Phoenix and a motion by AMT for vacatur came before the esteemed Naomi Reice Buchwald of the Southern District of New York.  AMT argued that under Section 10(a)(4) of the Federal Arbitration Act, the panel exceeded its authority by manifestly disregarding the law – since no one consenting to arbitration in a contract agrees to a misapplication of the law.

(This is somewhat facetious.  The parties and Judge Buchwald actually treated “manifest disregard” as a judicially-created and distinct ground from exceeding authority under Section 10(a)(4) of the FAA, presumably following the Second Circuit decision in Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 93-95 (2d Cir. 2008).  Although not at issue in our case, the Supreme Court’s 2008 decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 585 (2008) casts doubt on that practice, since it held that “§§ 10 and 11 respectively provide the FAA’s exclusive grounds for expedited vacatur and modification.”  There is currently a circuit split of great interest to many observers, and many courts – most recently the First Circuit—have suggested that manifest disregard is no longer an independent ground for vacatur under the FAASee Bangor Gas Co., LLC v. H.Q. Energy Servs. (U.S.) Inc., 695 F.3d 181, 187 & n.3 (2012).)

Correctly, Judge Buchwald noted the “heavy burden” such challengers face in showing not just a “wrong call on the law,” but the complete absence of any “colorable justification for the outcome reached.”  Because longstanding principles of law require a party complaining of a breach to show that it was able to perform (as well as damages resulting from the other party’s non-performance), the panel properly applied the law to the facts of the case.  Nor could AMT claim that the panel exceeded its authority since the contract called for the arbitration of “any dispute” and the claims clearly stemmed from the parties’ contractual relationship.

This would have been a cinch for anyone, but especially the judge known for a 160 page order of dismissal in the LIBOR scandal.

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

U.S. military "meal ready to eat"The case of the day is Agility Public Warehousing Co. v. Supreme Foodservice GmbH (S.D.N.Y. 2011). 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 awarded damages to APW and PCA, finding that they were entitled to the payments relating to the pre-termination period Supreme had refused to make, and to the reduced termination payment rather than the greater regular payments that would have been due post-termination had the termination been improper. The tribunal also dismissed Supreme’s claims for rescission and fraudulent inducement. The total damages awarded to APW and PCA were more than $38 million. The tribunal rejected the argument that the witnesses’ failure to testify was fatal to the claim, though the tribunal did draw an inference against APW that led to the conclusion that APW had materially breached the agreement.

APW and PCA moved to confirm the award. Supreme moved to vacate the award under § 10(a)(3) and (4) of the FAA, which provides:

In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration:
* * *
(3) 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; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Supreme also argued for vacatur on the grounds that the award was in manifest disregard of the law, and it opposed confirmation on the grounds that the award was contrary to public policy, which is one of the grounds for refusing confirmation permitted by the New York Convention. (That is, the public policy point is a permitted ground for refusing confirmation. Manifest disregard is highly contested and is probably not a permitted ground).

Judge Marrero confirmed the award. He held that under New York law, dismissal was not a mandatory consequence of a claimant failing to produce its material witnesses to testify. Therefore, the tribunal did not violate public policy or manifestly disregard the law by refusing to dismiss the claim on that basis. The court did not really discuss the details of the § 10(a)(3) argument, other than to make the general point that it applies only when “fundamental fairness is violated”, and not in cases of ordinary errors in the admission of evidence. [N.B. I have a case on appeal now involving the Uniform Arbitration Act’s equivalent to § 10(a)(3) and so I am not going to give a detailed discussion of my views of the statute here].

Photo credit: foam (license)

Case of the Day: Verve Communications v. Software International

The case of the day is Verve Communications Pvt. Ltd. v. Software International, Inc. (D.N.J. 2011). Verve was an Indian company that had a contract to perform services for Software International. The agreement had an arbitration clause calling for arbitration “on the papers, with no live witnesses or appearances by any party”, under the AAA Commercial Arbitration Rules.

The parties had a dispute about unpaid invoices, and Verve demanded arbitration, alleging breach of contract, fraud, breach of the covenant of good faith and fair dealing, and unjust enrichment. Software International counterclaimed on theories of breach of contract, fraud, negligent misrepresentation, breach of the covenant of good faith and fair dealing, unjust enrichment, and unfair and deceptive trade practices.

The arbitrator directed the parties to engage in discovery for a limited time, with any discovery disputes that could affect the scheduling of the hearing to be reported to him “immediately.” The arbitrator granted one extension and stated that no further extensions would be granted absent good cause. After the parties submitted their initial briefs, Software International requested sixty additional days for discovery, in order to allow it to access a computer server owned by a firm known as Devix. Software International claimed that the information on the server would show that Verve had performed defective work. Software International asserted that without the evidence from the server, it would be “unable to adequately respond to Verve’s Initial Submission …, present an adequate defense or prosecute its counterclaim.” But the arbitrator refused to permit the additional discovery, noting that Software International could have raised the issue earlier and that it had not provided enough detail regarding its claim of defective services or what it hoped to find on the server. The arbitrator ruled in favor of Verve, awarding it more than $300,000 in damages, and he denied the counterclaim outright.

Verve brought an action to confirm the award in state court. Software International removed the action to the federal court and moved to vacate the award. It asserted that the arbitrator had exceeded his powers, or alternatively, that by refusing to permit the discovery he had refused to postpone the hearing for good cause shown or had refused to hear material evidence. Each of these is a basis for vacatur under Section 10 of the FAA.

The judge rejected the notion that the arbitrator had exceeded his powers, because the award was not completely irrational. Nor did the refusal to hear evidence deprive Software International of a fair hearing, which is the touchstone of the analysis where the defendant claims the arbitrator refused to hear material evidence.

Because the award was not set aside, the court confirmed it. This was the correct answer to a fairly easy and straightforward case.