Undisclosed Medical Infirmity of Arbitrator Insufficient to Overturn Confirmation of Arbitral Award; Agreement to Forebear Confirmation of An Award Is Unenforceable

Undisclosed Medical Infirmity of Arbitrator Insufficient to Overturn Confirmation of Arbitral Award; Agreement to Forebear Confirmation of An Award Is Unenforceable

By: Kristen Legendre

Edited By: Brooke E. Michiels

Zurich American Insurance Co. v. Team Tankers A.S.No. 14-4036-cv, 2016 U.S. App. LEXIS 1390 (2d Cir. Jan. 28, 2016);No. 14-4063-cv, 2016 WL 336078 (2d Cir. Jan. 28, 2016) Zurich American Insurance Co. and Vinmar International (together “petitioner”) appeal the district court’s denial of their motion to vacate an arbitration award as well as their award of attorney fees and costs to respondent Team Tankers. The two primary issues presented to the Second Circuit on appeal is (1) whether the district court erred in confirming the arbitration award and (2) whether the party prevailing in arbitration was entitled to fees and costs in seeking to enforce the arbitration award.Vinmar chartered a ship from Team Tankers to transport a chemical (ACN) from Texas to South Korea. A dispute arose between the shipper and the carrier as to the quality of the ACN. According to an arbitration clause in the charter agreement, Vinmar initiated arbitration attempting to show it had delivered the ACN uncontaminated and that the ACN was contaminated when exposed to residual chemicals previously carried in the ship’s tanks.The arbitration panel held that Vinmar was not entitled to relief under COGSA because (1) it failed to make a prima facie case that the ACN was damaged on the ship, (2) Team Tankers had shown due diligence during transportation, and (3) that Vinmar failed to prove damages.Vinmar then moved to vacate the panel’s award under the Federal Arbitration Act, arguing that the panel disregarded COSGA in reaching its decision. During arbitration, the chairman of the panel was diagnosed with a brain tumor, which he failed to inform the rest of the panel about, and he later died. Vinmar argued that this failure constituted “corruption or “misbehavior” under the FAA. The district court held that the arbitration panel did not manifestly disregard COSGA, that the chairman’s failure to inform was neither corruption nor misbehavior, and under a provision in the charter agreement, awarded Team Tankers fees and costs. Petitioner appeals.First, the Second Circuit held that COSGA permits a shipper to make a prima facie case by establishing that it delivered quality goods to the carrier and the goods arrived damaged from transportation. The panel found that the shipper failed to satisfy this initial burden, and this was not a clear manifestation of disregard for the COGSA.Secondly, the Second Circuit held that an arbitrator’s failure to comply with the private rules of arbitration is not alone enough to constitute corruption or misbehavior under the FAA.Finally, the Second Circuit held that the district court erred in awarding attorney fees and costs to the respondent under a provision in the charter agreement providing for damages under breach. In this case, there was no finding that petitioner breached the charter agreement. Respondent argued that the shipper breached through its conduct in litigation and by resisting entry of judgment on the award. The court held that by agreeing to arbitrate the parties agreed that a federal court would have authority to confirm the award under the standards of the FAA. In addition, even if the agreement contained a provision forebearing confirmation of the award, that provision would be unenforceable. Under the American rule, each party pays its own attorney’s fees. The parties agreed to arbitrate under the charter agreement and consented to confirmation by a competent court (federal court); therefore the parties may not divest the courts of their authority to review either the substance of the awards or the arbitral process. Alternatively, while the petitioner’s arguments ultimately fail, because they are based on sound legal concepts, a finding of bad faith would be an improper basis for an award of fees and costs.In so holding, the Second Circuit affirmed the district court’s denial of petitioner’s motion to vacate the arbitral award but reversed its award of attorney fees and costs to the respondent.