On January 28, 2016, the Second Circuit Court of Appeals (Circuit Judges Carbanes, Parker and Lohier) decided on appeal two (2) Orders of the Southern District of New York (“SDNY”).  The first was whether the District Court erred in confirming an arbitration decision rendered by the Society of Maritime Arbitrators, Inc. (“SMA”).  The second was whether the party that prevailed in arbitration was entitled, by contract or statute, to recoup the fees and costs it incurred in seeking to confirm the arbitral award before the District Court.

The background of the Second Circuit’s decision begins in June 2008, when the appellant shipper chartered from the appellee carrier the M/T Siteam Explorer to move a large quantity of a chemical called acrylonitrile from Houston, Texas to Ulsan, South Korea.  Acrylonitrile is a raw material that is, in its most valuable form, colorless.  Contact with other chemicals can cause acrylonitrile to “yellow” which is evidence of a change in composition that reduces its value.  At the time of delivery, the acrylonitrile had not begun to yellow; however, upon testing six (6) weeks later, the material had yellowed beyond the appellant shipper’s quality standards.  Although testing of the samples kept aboard the Vessel also revealed yellowing, samples taken from the storage facility in Houston were of normal composition.

Pursuant to the parties’ charter agreement, the appellant shipper initiated arbitration before the SMA.  On August 26, 2013, applying the Carriage of Goods by Sea Act (“COGSA”),  the SMA panel majority held that the appellant shipper was not entitled to relief for three (3) reasons: (1), that the appellant shipper had not made out a prima facie case that the acrylonitrile had been damaged while aboard the Vessel; (2), that even had a  prima facie case been made, the appellee carrier had shown that it exercised due diligence in transporting the cargo; and (3), that the appellant shipper had in any event failed to prove damages.

Following the SMA panel decision, the appellant shipper petitioned the SDNY to vacate the award under the Federal Arbitration Act (“FAA”), and argued that the panel had manifestly disregarded COGSA.  Moreover, upon learning that the panel chairman had died during the arbitral proceedings as the result of a brain tumor, the appellant shipper argued that the undisclosed illness constituted “corruption” or “misbehavior” as defined under the FAA.   The District Court denied both of these arguments and, through  a provision in the charter agreement that provided that “[d]amages for breach of this Charter shall include all provable damages, and all costs of suit and attorneys [sic] fees incurred in any action hereunder,” awarded the appellee carrier the fees and costs it incurred in connection with the District Court proceeding.

On appeal to the Second Circuit, the appellant shipper argued that the District Court had erred on three (3) fronts: (1) in concluding that the arbitral panel did not manifestly disregard the law; (2) in concluding that the panel chairman had not been guilty of “corruption” or “misbehavior”; and (3) awarding attorney’s fees and costs to the appellee carrier.  The Second Circuit gave the first two arguments short shrift and affirmed the lower court’s holdings.

However, the three Circuit Judges reversed the SDNY Order awarding the appellee carrier fees and costs related to the SDNY proceeding.  In reversing the lower court, the Second Circuit interpreted the provision in the charter agreement – relied upon by the SDNY in granting an award for fees and costs –  to apply to the chartering of the Vessel itself, not the subsequent litigation which, in and of itself, the Court found was not a breach of the agreement.  In reaching this conclusion, the Second Circuit looked to the parties’ overall agreement to arbitrate in “any court of competent jurisdiction,” which it found granted a federal court the authority to confirm an arbitral award under the standards of the FAA.  A finding to the contrary, the Court stated, would be unenforceable, as it would at once authorize a federal court to confirm an arbitral award while effectively preventing that same court from ensuring that the award complied with the standards of the FAA.  Moreover, the Second Circuit also disagreed with the argument that the SDNY and Second Circuit proceedings initiated by the appellant shipper were made in bad faith and thus statutory liable for an award of costs and fees against its attorneys for unnecessarily extending the length of the proceedings.  The Court stated that, although the appellant shipper’s reasoning was flawed, its arguments were based in recognizable legal concepts and not a bad faith undertaking.  Finally, citing to the “American Rule” – i.e., that each litigant pay his own attorney’s fees, win or lose, unless a statute or contract provides otherwise – the Second Circuit reversed the order of the lower court that awarded the appellee carrier fees and costs.

To read a copy of the Second Circuit’s Opinion, click here.

For more information about the Court’s decision and how it may apply to specific facts and circumstances, please do not hesitate to contact us at info@chaloslaw.com