Duferco v. Klaveness

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DMC/SandT/03/35
Duferco International Steel Trading v. T. Klaveness Shipping A/S
United States Court of Appeals for the Second Circuit: Judges Feinberg, Cardamone, and Sack: 333 F.3d 383: June 24 2003
time charter: voyage charter: safe-berth warranty: indemnity Arbitration: Manifest disregard of the law: arbitration award: vacatur/set aside: vouching-in: collateral estoppel: plausible reading of the award: whether should also be ‘probable’
Summary
In this case, the Second Circuit affirmed a district court’s decision refusing to vacate (set aside) an arbitration award for manifest disregard of the law after finding a plausible reading of the award which resolved an apparent contradiction. The Petitioner, Duferco, argued that the arbitrators had acted in manifest disregard of the law when they rendered an award concerning Respondent’s, Klaveness’, indemnification claim for damages and attorney’s fees and costs incurred in a prior London arbitration. After an extensive review of the law on manifest disregard of the law and the award, the appellate court agreed with the "plausible reading" of the award advanced by the district court and affirmed its decision. In so affirming, the Second Circuit concluded that it was of no consequence that this plausible reasoning was not necessarily one which was advanced in the arbitration or readily apparent in the award.

Facts/Background
The underlying arbitration concerned disputes that arose under a voyage charter between Klaveness Shipping A/S ("Klaveness") and Duferco International Steel Trading ("Duferco") for a vessel to be nominated to transport a cargo of steel. By a time charter, Klaveness chartered the ARISITIDIS from the vessel’s registered owner, Lifedream Shipping Co., Ltd. ("Lifedream") and nominated the vessel to perform under the voyage charter with Duferco. Pursuant to an arbitration clause in the time charter, Lifedream commenced arbitration against Klaveness in London to recover extra costs incurred during loading operations due to unsafe berth conditions. Klaveness tendered defense of Lifedream’s claims to Duferco and sought to vouch-in Duferco (that is, make it a party) in the London arbitration. Duferco, however, declined Klaveness’ vouching-in demand. Klaveness thereafter defended the London arbitration itself. The London arbitrators held Klaveness in breach of the time charter and awarded Lifedream damages of US$150,000, plus additional interest. The London arbitrators also awarded Lifedream its attorneys’ fees and expenses and assessed their own fees against Klaveness.

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.

Judgment
Before reviewing the award for manifest disregard of the law, the court first reiterated the great deference given to arbitral decisions and the court’s reluctance to vacate (set aside) on this ground, specifically noting that in only four out of forty-eight such cases had the Second Circuit vacated some or all of an arbitration award. The court pointed out that all of these four cases involved arbitral decisions that exceeded the legal powers of the arbitrators and therefore provided an arguable basis for vacating under the Federal Arbitration Act. As explained, the Second Circuit rarely sets arbitration awards aside for manifest disregard of the law because it is a "doctrine of last resort", reserved for only "exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent, but where none of the provisions of the FAA apply." The court further explained that it is reluctant to interfere with the purpose of arbitration and the intent of the parties who agree to hire arbitrators to "reach a result that conforms to industry norms and to the arbitrator’s notions of fairness."

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.

Comment
This case reflects the Second Circuit’s continued reluctance to vacate arbitration awards for manifest disregard of the law. It also clarifies that as long as a court can find any interpretation – whether apparent or not from the arbitral decision – that yields a justifiable result that fits within the law, it will not vacate the award. On the other hand, the appellate court seemed to suggest that those seeking to vacate on this ground have a better chance of success if they can establish that the award in question exceeds the legal powers of the arbitrators.

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