DMC Category Rating: Developed

This case note has been contributed by Steven J.Hollander of Healy & Baillie, LLP in New York. Healy & Baillie are the international contributors to this website for the USA

Background
Two plaintiffs, Animalfeeds International Corp. and KP Chemical Corp. filed separate federal antitrust lawsuits against Stolt-Nielson SA ("Stolt") which were consolidated and transferred to the United States District Court for the District of Connecticut. Stolt then moved for arbitration based on the arbitration clauses present in the applicable charterparties with the plaintiffs. Following an appeal, the Second Circuit Court of Appeals agreed and referred the underlying claims to arbitration.

The two plaintiffs then filed a demand for Class Arbitration asserting claims on behalf of themselves and all other "direct purchasers of parcel tanker transportation services globally for bulk liquid chemicals, edible oils, acids and other specialty liquids from [Stolt]". Although neither the Vegoilvoy nor the Asbatankvoy charterparties expressly permitted class arbitration, the Arbitration Panel held that the arbitration clauses nevertheless permitted class arbitrations.

Stolt moved to vacate (set aside) the award in the United States District Court for the Southern District of New York on the grounds that the Arbitration Panel manifestly disregarded the law, which is one of the few grounds under US Federal law for overturning an arbitration panel’s ruling. In order to find that an arbitration panel manifestly disregarded the law, the court must find "both that (1) the arbitrators knew of a governing legal principle and ignored it or refused to apply it and that (2) the law that was not applied was well-defined, explicit and clearly applicable to the case."

Judgment
The District Court found that was the case here. It held that even though the Arbitration Panel and both parties had agreed that a particular United States Supreme Court decision controlled the issue, the decision in question was in fact not a controlling decision, and no agreement could allow an arbitration panel to base its decision on incorrect law. The District Court held that the Arbitration Panel failed to make a meaningful choice-of-law analysis and, because the arbitration clauses were a part of maritime contracts, that federal maritime law must apply.

Stolt argued that because the two charterparties in issue, or more specifically the two arbitration clauses, were standard in the shipping community and had never before been used as the basis for a class arbitration, the commercial maritime parties could not have intended these clauses to permit a class arbitration, and that therefore no such class action should be allowed. The District Court agreed and held that contract interpretation is significantly influenced by custom and usage in the maritime area due to the international nature of the business. Hence, the District Court held that the Arbitration Panel had acted in manifest disregard of the law, and its ruling must be reversed.

The District Court further held that the law of New York similarly supported the court’s ruling, noting that New York law also bases its decisions on "industry custom and practice". Because the Arbitration Panel did not perform a proper choice-of-law analysis as a basis for its decision, the Panel failed to acknowledge that New York law also supported Stolt’s position.

Comment
The District Court concluded that a charterparty containing an arbitration clause that is silent regarding class action arbitrations will not support a class action arbitration, in the absence of a clear indication to the contrary. It is not yet known whether this judgment will be appealed.

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