Duferco v. Klaveness
DMC Category Rating: Confirmed
Case Note contributed by Isabel I. Baumgarten, attorney with the law firm Healy & Baillie LLP. Healy & Baillie are the International Contributors to the website for the USA.
In turn, pursuant to a submission agreement between Klaveness and Duferco, Klaveness commenced arbitration in New York for, among other things, indemnification from Duferco for the full amount paid to Lifedream in satisfaction of the London Award and related costs. As part of the New York Award, a Panel majority granted Klaveness’ claim for indemnity for the damages awarded to Lifedream in the London arbitration but declined to award Klaveness indemnity for the attorneys’ fees and expenses incurred in the London arbitration. In addition, the Panel awarded Klaveness US$120,000 as an allowance towards its attorneys’ fees and expenses incurred in the New York arbitration.
Shortly thereafter, Duferco filed a petition in the Southern District of New York to partially set aside the award to the extent it granted Klaveness indemnity for the damages portion of the London Award with interest and for half of the US$120,000 attorney’s fees allowance awarded. The district court denied Duferco’s petition and granted Klaveness’ cross-petition to confirm the award in its entirety, including the entire US$120,000 allowance. In finding that the Panel majority did not act in manifest disregard of the law, the court found that the Panel did not ignore or reject any acknowledged principles of controlling law with regard to vouching-in1 and collateral estoppel2.
The District Court confirmed the Panel majority’s finding that Klaveness properly "vouched-in" Duferco in the London arbitration. Moreover, the court found that the Panel majority applied collateral estoppel principles to the London arbitrator’s factual finding of an unsafe berth and then made its own independent finding regarding breach of the safe-berth provision under the voyage charter. Thus, the court found a plausible reading of the award and refused to set it aside. Duferco appealed the district court’s decision to the Second Circuit.
In applying the doctrine of manifest disregard of the law, the appellate court focused on three inquiries; 1) whether the law that was allegedly ignored was clear, and in fact explicitly applicable to the matter before the arbitrators; and if so; 2) whether the law was in fact improperly applied, leading to an erroneous outcome; and if so; 3) what was the knowledge actually possessed by the arbitrators. The appellate court explained that the third inquiry is a subjective element whereby only the knowledge of governing law identified by the parties to the arbitration can be imputed as the actual knowledge possessed by the arbitrator. Turning back to the purpose of arbitration, the appellate court focused on the reality that arbitrators are more often chosen for their commercial expertise and not for their knowledge of applicable law.
After finding that the applicable rules of law were clear and recognized by the arbitrators, the appellate court acknowledged that it had a bit more difficulty in determining the "precise rationale" used by the New York arbitrators when it applied the recognized law. It then addressed Duferco’s main evidence: what appeared to be a contradiction between the Panel’s application of the law in the portion of the award granting indemnification for the damages portion versus the portion of the award refusing to grant defense costs. Even though Duferco’s interpretation of the award "indicates a misapplication of laws that the arbitrators seem to have understood," the appellate court refused to vacate the award, relying instead on the "plausible reading" of the award advanced by the district court.
The appellate court held that it was of no consequence that the district court’s reading of the award did not reflect the arguments originally made before the Panel in the New York arbitration: "In construing an arbitral award we look to plausible readings of the award, and not to probable readings of it." It held that confirmation would be warranted as long as the court "independently found legal grounds to do so." Finding no grounds for vacating the award, the appellate court affirmed the district court’s decision to confirm the arbitration award.
2. Similarly, under the doctrine of collateral estoppel, a determination of facts litigated between two parties in a prior proceeding is binding on those parties in all future proceedings.
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