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Article: New York Federal Court Holds that Arbitrator’s Undisclosed Serious Health Condition Is Not Ground for Vacatur

Business Litigation Reports

There are several differences between court litigation and international arbitration, but two in particular stand out. First, whereas the losing party at trial can bring an appeal, the losing party in an arbitration can only seek limited review of arbitration awards, which impose high standards for setting aside the award. Second, whereas litigants in court proceedings are unable to pick their judge, parties in international arbitration get to select their party appointed arbitrator and often have some say in choosing the chair of a three-person tribunal. Especially because the award rendered by the arbitrators cannot be easily set aside, arbitrator selection is one of the most important decisions that a party must make. It is crucial for a party in an arbitration to choose arbitrators with appropriate legal and practical knowledge and who understand the business perspective of the appointing party. Less obvious but no less important, it is helpful to know if a potential arbitrator may have serious health issues that could jeopardize the conduct or outcome of the arbitration.

A recent decision of the United States District Court for the Southern District of New York (“SDNY”) highlights these two key characteristics of international arbitration and how they relate to each other. In Zurich American Ins. Co. v. Team Tankers A.S., 2014 WL 2945803 (S.D.N.Y. 2014), the SDNY denied a motion to vacate a 14 page-award for manifest disregard of the law and for arbitrator misconduct and corruption due to an arbitrator’s failure to disclose to the parties his diagnosis of an inoperable brain tumor.

The arbitration concerned a dispute between Zurich American Insurance Company, as subrogee of Vinmar International Ltd., a charterer, and Team Tankers A/S, a marine transportation company, over the contamination of 3,500 metric tons of Acrylonitrile (“ACN”), a liquid chemical that is a versatile raw material. In June 2008, Vinmar chartered the M/V Siteam Explorer from Team Tankers to transport the ACN from Houston, Texas to Ulsan, South Korea, where it expected to find a purchaser. Independent surveyors took samples of the ACN before it was loaded and after it was discharged. Some of these samples were tested immediately for quality control and test results showed the ACN remained on specification. Unfortunately for Vinmar, the ACN market tanked precipitously while the ship was at sea. Vinmar stored the cargo in the Ulsan shore tanks for several weeks whilst it sought a buyer, and directed an independent surveyor to retest the ACN samples. Test results showed that a sample taken from the vessel’s tanks before unloading in Ulsan had yellowed to an inacceptable level. And a sample from the shore tanks in Houston, which was never exposed to the vessel’s tanks, remained unchanged. Armed with these results, Vinmar informed the shipbroker that it held Team Tankers responsible for the ACN’s degradation. Unable to remediate the ACN, Vinmar eventually sold it at discounted prices.

The charterparty was governed by an arbitration clause providing that disputes be resolved by the Society of Maritime Arbitrators, Inc (“SMA”). Petitioners appointed Louis P. Sheinbaum as an arbitrator, Respondents appointed Anthony J. Siciliano, and in April 2011, Sheinbaum and Siciliano selected Donald J. Szostak as chairman. The panel held multiple hearings, took testimony from employees, experts and the vessel’s master. The parties also submitted extensive briefing and the panel received declarations and materials from the manufacturer of the ACN.

Vinmar argued that the ACN was contaminated by remnants in the ship’s tanks on its previous cargo, a chemical called pygas. Team Tankers argued that the yellowing was most likely caused by a combination of heat and the passage of time. On August 26, 2013, the panel issued a 2-1 decision in favor of Team Tankers, characterizing the dispute as “a classic case of well-qualified experts interpreting the results of highly technical test evidence differently.” Award at 6. Because Claimants had not shown the ACN was damaged aboard the ship, the majority denied their claim. It also held that even if Claimants had shown that the cargo was damaged aboard the ship, Team Tankers would not have been liable because it “exercised the requisite statutory ‘due diligence’ to make the ship seaworthy.” Award at 10, 12. Finally, the majority held that even if Claimants had prevailed in establishing liability, it would not be able to prove damages. Award at 12.

At some point in 2012, before the award was issued, Szostak was diagnosed with an inoperable brain tumor and never informed the parties of his diagnosis. In January 2014, he passed away.

Zurich American Insurance Company moved in the SDNY to vacate the award for manifest disregard of the law and for Szostak’s failure to disclose his diagnosis.

On the manifest disregard of the law ground, the court began its analysis by noting that the United States Court of Appeals for the Second Circuit (covering New York, New Jersey and Connecticut, hereinafter “Second Circuit”) “recognizes the viability” of the doctrine after Hall Street Associates, L.L.C v. Mattel, Inc., 552 U.S. 576, 584-85 (2008), a Supreme Court case which put into question the doctrine’s continued existence. Indeed, conflicting opinions have emerged since Hall Street. See e.g. Ramos-Santiago v. United Parcel Service, 524 F.3d 120, 124 n.3 (1st Cir. 2008)(noting, in dicta, that manifest disregard of law is not valid ground for vacating or modifying an award under the FAA); Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1281, 1283 (9th Cir. 2009)(noting that an arbitrator’s manifest disregard of the law remains a valid ground for vacatur in the form of a judicial gloss on the statutorily enumerated grounds in the FAA); Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 660 F.3d 281, 285 (7th Cir 2011)(accepting Quinn Emanuel’s argument that in the 7th circuit, “manifest disregard of the law is not a ground on which a court may reject an arbitrator’s award under the Federal Arbitration Act.”). Despite recognizing its viability, the court held that the doctrine is one of “last resort”, noting that “its use is limited only to those 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.” Zurich American, 2014 WL 2945803 at *4 (citing Duferco Int’l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d Cir. 2003). The court reviewed the award’s reasoning and held that Petitioners did not meet “their extraordinary burden of showing that the majority manifestly disregarded the law in finding that the Petitioners did not establish a prima facie case.” Zurich American, 2014 WL 2945803, at *8.

This holding is significant as it may allay concerns by some corporate counsel and commentators about the desirability of New York as a seat for international arbitration because, in their view, the doctrine renders the international awards issued in New York vulnerable to being set aside. See e.g. Henri Alvarez, Judicial Review of NAFTA Chapter 11 Arbitral Awards, in Emmanuel Gaillard & Fréderic Bachand (eds.), Fifteen Years of NAFTA Chapter 11 Arbitration, 161-62 (Juris Publishing, 2011)(likening the doctrine to other “domestic standards of review” that Canadian and Mexican courts apply to international arbitration awards, raising “the risk of producing uncertain results” and “compromising the finality and viability of awards.”). The decision also suggests that the doctrine’s threshold is extremely high.

Next, the court considered Petitioners’ second ground for vacatur, namely that Szostak’s failure to disclose his medical condition constituted corruption under FAA § 10(a)(2) and misconduct under § 10(a)(3). Under those sections of the FAA and applicable case law, vacatur is warranted “where there was evident partiality or corruption in the arbitrators”, FAA § 10(a)(2), or “where the arbitrators were guilty of misconduct . . . which amount[s] to a denial of fundamental fairness of the arbitration proceedings.” FAA § 10(a)(3); Roche v. Local 32B-32J Serv. Emps. Int’l Union, 755 F.Supp. 622, 624 (S.D.N.Y. 1991). Petitioners argued that Szostak’s failure to disclose his medical condition violated the SMA rules or ethics code, contending that the brain tumor affected the arbitrator’s cognitive functions and impartiality. Zurich Americans, 2014 WL 2945803, at *9. The court rejected this argument, holding that “a violation of arbitration rules or ethics codes is not a ground for vacating an arbitration award.” Id., at *9. Notably, the court held that under the FAA, “an arbitrator is under no duty to disclose medical conditions . . . Any number of matters—brain tumors, substance issues, marital problems, lack of sleep—might affect an arbitrator’s concentration or faculties. Parties are entitled to unbiased and uncorrupted arbitrators . . ., not perfect arbitrators.” Id., at *10 (emphasis added).

The decision indicates that New York courts will not allow parties to “transform a personal tragedy into a second chance for parties disappointed with the outcome of their arbitration.” Id., at *11. Thus, it highlights the care that needs to be taken in selecting arbitrators. If the Zurich American approach is widely adopted, arbitrators would not need to disclose serious health conditions that may impair the discharge of their arbitral duties. It would be even more crucial for clients to rely on experienced arbitration counsel, who may be familiar with the personal situations of prominent arbitrators. Such counsel can help identify risks of delays in the arbitration due to illness of an arbitrator, or of having to reconstitute a tribunal should an arbitrator resign due to ill health, or, as in Zurich American, of receiving an award drafted by an arbitrator whose “concentration or faculties” are impaired. With such knowledge, clients can be discretely steered in their selection of arbitrator in order to maximize efficiency and the likelihood of success in the arbitration.