Industrial Risk Insurers, Barnard and Burk Group, Inc., Barnard and Burk Engineers and Constructors, Inc., ISI, Inc., and American Home Assurance Company appealed a district court decision denying their motion to vacate an international commercial arbitration award. In a cross-appeal, M.A.N. Gutehoffnungshütte GmbH contested the denial of pre-judgment interest and separately challenged the imposition of sanctions under Federal Rule of Civil Procedure 11. The Eleventh Circuit affirmed the denial of the motion to vacate but vacated the denial of pre-judgment interest, remanding for reconsideration, and reversed the sanctions imposed.
The litigation, originating in 1985, involved a contract between Nitram, Inc. and Barnard and Burk Group for the installation of a tail gas expander in Nitram's Florida plant. Barnard and Burk Group subcontracted design and construction work to Barnard and Burk Engineers and Constructors and ISI, respectively. The tail gas expander was procured from M.A.N. Maschinenfabrik Augsburg-Nürnberg AG, with MAN GHH, its successor, responsible for its design, manufacture, and installation guidance. After installation, the expander suffered two significant failures during start-up, leading to extensive repairs, downtime, and financial losses for Nitram, which had obtained business risk insurance from Industrial Risk Insurers.
IRI denied payment to Nitram for losses from the first wreck, claiming the damages were due to poor design and defective piping by Barnard and Burk, thus falling outside the coverage of Nitram's business risk policy. While IRI did cover some losses from a subsequent wreck in March, they cross-claimed against Barnard and Burk for reimbursement. Nitram sued both IRI and Barnard and Burk in state court, asserting that either Barnard and Burk was liable for the wrecks, or the losses were covered by their policy with IRI. The case was removed to federal court based on diversity jurisdiction, with Barnard and Burk counterclaiming against Nitram for contract breaches. They also filed a third-party claim against MAN GHH, alleging that a faulty expander, not their design, caused the wrecks. After settling with IRI, Nitram's claims were dismissed, leading to IRI being subrogated to Nitram's claims against Barnard and Burk.
In April 1987, MAN GHH sought arbitration for Barnard and Burk's third-party claim, which the district court ordered in July. Nitram later amended its complaint to include claims against MAN GHH for defective design and manufacturing, with IRI also cross-claiming against MAN GHH. Arbitration was ordered for these claims as well. Following settlements between Nitram and Barnard and Burk, the arbitration focused on the cause of the wrecks. In May 1993, the arbitration panel ruled in favor of MAN GHH, finding that Barnard and Burk's design was responsible for the wrecks. Barnard and Burk's subsequent motion to vacate the arbitration awards was denied by the district court, which confirmed the awards.
Barnard and Burk appeal the denial of their motion, raising four key questions: (1) whether the arbitrators' failure to adhere strictly to the parties' agreement warranted vacating the arbitral award; (2) if the award should be vacated due to the late admission of a technical report and the testimony of an expert previously retained by IRI who opposed Barnard and Burk's interests; (3) whether the district court abused its discretion in concluding that the arbitration awards were not "arbitrary and capricious"; and (4) if the conversion rate and costs awards should also be vacated alongside the principal award. In a cross-appeal, MAN GHH contests the district court's refusal to grant prejudgment interest from the date of the last arbitral award until the district court's judgment confirming the award and challenges the imposition of Rule 11 sanctions by the district court.
The court must first ascertain the source of its jurisdiction, which is questioned sua sponte. The district court believed its jurisdiction stemmed from diversity, applying Chapter 1 of the Federal Arbitration Act (FAA) concerning domestic arbitration. However, it was determined that the case falls under Chapter 2 of the FAA, which governs international arbitration. This case raises a novel issue regarding whether the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards applies to an arbitral award granted to a foreign corporation by a panel in the U.S. applying American law. It is concluded that the New York Convention does apply. The Convention, established in 1958 and ratified by the U.S. in 1970, aims to promote the recognition and enforcement of international arbitral awards, providing an efficient alternative to litigation for dispute resolution while maintaining minimal standards for domestic judicial review.
The New York Convention is integrated into federal law through the Federal Arbitration Act (FAA), which governs the enforcement of arbitration agreements and awards in both federal and state courts. Specifically, Chapter 2 of the FAA (9 U.S.C. §§ 201-208) enforces the Convention, promoting a strong presumption in favor of arbitration for international commercial disputes and establishing federal jurisdiction over related actions, regardless of the amount in controversy (9 U.S.C. § 203). The Convention must be enforced as federal law, overriding inconsistent prior legal rules.
The Convention applies to two types of arbitral awards: those made in a different country from where enforcement is sought and those not deemed domestic in the enforcement country. The current arbitral award does not fit the first category but does fit the second. According to 9 U.S.C. § 202, arbitral awards arising from commercial relationships are covered by the Convention unless entirely between U.S. citizens. The interpretation aligns with other circuit courts, which hold that arbitration agreements and awards "not considered as domestic" include those governed by foreign law or involving parties from different jurisdictions. This broad interpretation supports the Convention's goal of fostering international arbitration recognition and enforcement. Notably, the Convention applies to commercial arbitral agreements unless they solely involve U.S. citizens, property in the U.S., and lack connections to foreign states, as illustrated by various case precedents.
Chapter 2 of the Federal Arbitration Act (FAA) requires enforcement of a written commercial arbitration agreement when one party is a non-American citizen. In this case, since MAN GHH is a German corporation and its arbitral award was made in the U.S., it is considered non-domestic under Section 202 of the FAA and Article 1 of the New York Convention, thus establishing federal subject-matter jurisdiction for the appeal. The arbitral award from the Tampa panel must be confirmed unless the appellants can demonstrate one of seven defenses against enforcement as outlined in Article V of the New York Convention. The burden of proof lies with the appellants, who may only invoke two relevant defenses: (1) lack of proper notice regarding the arbitration proceedings or inability to present their case, and (2) non-compliance with the parties' agreement or the law governing the arbitration process. Additionally, the recognition and enforcement of an arbitral award may be denied if the subject matter is not arbitrable under local law or if enforcement would contravene public policy. The New York Convention's listed defenses are exclusive. Relevant case law supports this interpretation, affirming that the arbitral procedure must align with the parties' agreement for enforcement.
Appellants contend that the Tampa panel's procedures deviated from their arbitration agreement, warranting non-confirmation of the award. They argue the panel improperly considered the TÜV report, received shortly before proceedings began, violating the American Arbitration Association (AAA) procedural rules. The appellants also challenge the admission of testimony from Donald Hansen, a piping expert previously retained by Respondent IRI, claiming it breached public policy regarding fairness and professional conduct. Additionally, they argue for vacating the arbitral award as "arbitrary and capricious," a defense not recognized under the New York Convention.
The court reviews de novo the district court's findings on procedural adherence, public policy violations, and the arbitral award's validity. It concludes that the TÜV report's admission complied with AAA rules, and Hansen's testimony did not contravene public policy. Furthermore, it states that no valid defense against enforcing an international arbitral award exists under the FAA based on claims of arbitrariness not specified by the Convention. The court notes that while the TÜV report was provided close to the arbitration's start, the appellants were allowed to cross-examine Hansen and introduce counter-expert testimony. The ruling emphasizes that arbitration does not require strict adherence to formal procedures, allowing for a fundamentally fair hearing as per established case law.
AAA Rule 3 emphasizes predictability and efficient information exchange in arbitration but does not impose a strict deadline for document submission. This allows arbitrators broad discretion regarding the timing and admissibility of evidence. In this case, the late submission of the TÜV report did not violate any agreement between the parties.
The appellants contend that the arbitration panel improperly allowed testimony from Hansen, an expert previously retained by IRI, asserting that this violated the principle against "side-switching." However, they failed to cite any procedural rules or case law establishing a blanket prohibition against such testimony. Existing cases relate primarily to attorney conduct regarding expert witnesses and do not create a rule against side-switching.
The panel’s admission of Hansen's testimony did not breach any confidentiality or privilege concerns, as he was called by the panel and did not disclose protected information. Moreover, even if there were grounds to challenge the testimony, vacating the award is only permissible under the specific grounds outlined in the New York Convention, which the appellants did not establish. The authority of arbitrators is contingent upon the arbitration agreement, which does not require adherence to a non-existent rule against side-switching.
The appellants failed to demonstrate that Hansen's testimony violated public policy, which is necessary for a defense under article V(b)(2) of the New York Convention. The court emphasized that domestic arbitral awards are unenforceable only when they breach a clearly defined public policy, discernible through laws and precedents rather than general public interest. This principle also applies to international arbitral awards, and the public policy defense should be interpreted narrowly. The appellants did not cite any relevant laws or precedents to support their claim regarding fundamental fairness and professional conduct.
Additionally, the appellants argued for vacating the arbitral award on the grounds of it being "arbitrary and capricious." This argument was rejected, as domestic arbitral awards can be vacated for six reasons, with "arbitrary and capricious" being one of two non-statutory defenses. However, the New York Convention does not recognize "arbitrary and capricious" as a valid defense against enforcement. The Convention's enumerated defenses are exclusive, and a federal court must confirm an international arbitral award unless one of the specified grounds for refusal is proven. Thus, the court reaffirmed that the grounds for relief under the Convention are limited to those explicitly stated.
In M. C Corp. v. Erwin Behr, the Sixth Circuit affirmed the enforcement of an international arbitral award, ruling that defenses against such enforcement based on claims of the award being "arbitrary and capricious" or other unspecified grounds are not permissible under Chapter 2 of the Federal Arbitration Act (FAA) or the Convention. The court declined to vacate the arbitral award granted to MAN GHH and the associated derivative awards of costs and conversion rate compensation.
On cross-appeal, MAN GHH challenged the district court's refusal to award post-arbitral-award prejudgment interest. The court had entered judgment on the arbitral award but denied the request for prejudgment interest, citing its jurisdiction under diversity and Florida law, which does not allow for such interest. The appellate court determined that federal question jurisdiction existed under Chapter 2 of the FAA, which permits the awarding of post-arbitral-award prejudgment interest. The case was remanded for the district court to consider whether to exercise its discretion to award such interest.
The court clarified that, unlike many other countries, the U.S. lacks a federal statute governing prejudgment interest for international arbitral awards, and such awards are typically considered equitable remedies. In this circuit, prejudgment interest is viewed not as a penalty but as compensation for the rightful use of funds, generally awarded when damages have been fixed by an arbitral award. The appellate court also noted that in the absence of a controlling statute, federal courts have discretion in determining the rate of prejudgment interest, typically guided by fairness, relevant state law, and the U.S. Treasury bond rate for post-judgment interest.
The district court's decision on whether to grant prejudgment interest was based on its assertion of federal subject-matter jurisdiction under 9 U.S.C. § 203, indicating that federal law, rather than state law, governed this issue. The court chose not to award post-arbitral-award prejudgment interest, citing diversity jurisdiction and Florida law prohibiting such an award. However, it was determined that federal law governs both entitlement and the rate of post-arbitral-award prejudgment interest, leading to the conclusion that the district court did not exercise its discretion appropriately. Consequently, the case is remanded for the district court to assess whether MAN GHH is entitled to this interest.
In a separate appeal, MAN GHH's counsel contested the district court's imposition of Rule 11 sanctions, which are imposed at the district court's discretion based on a determination of whether legal filings were made for improper purposes or lacked legal merit. An abuse of discretion occurs if the court makes significant legal or factual errors regarding the imposition of such sanctions. Additionally, the district court appeared to misinterpret Florida case law concerning the awarding of prejudgment interest on arbitral awards, mistakenly believing it could not grant post-award prejudgment interest when, in fact, the cited case did not preclude such an award.
Sanctions under Rule 11 may be imposed for filings made to the court for improper purposes, including harassment or causing unnecessary delays and increased litigation costs. Improper purpose can be demonstrated through excessive persistence in claims despite adverse rulings. Rule 11 aims to deter frivolous claims and reduce litigation costs. For sanctions to be warranted, a filing must lack any factual or legal support and be truly frivolous; creative claims may be dismissed but not punished. Sanctions can also be imposed for excessive relitigation of issues if the court has clearly decided the matter previously and no new arguments are presented.
In the case at hand, MAN GHH provided an expander and services to Barnard and Burk under a design contract and service contracts, and also provided spare parts and services to Nitram under separate service contracts. MAN GHH initially sought arbitration for third-party claims by Barnard and Burk and later for tort and breach-of-warranty claims from Nitram and IRI. Although only the design contract was in the record, the district court determined that all claims were closely related and ordered arbitration in Tampa based on the design contract's arbitration clause. The court ruled that Nitram's and IRI's claims were arbitrable, regardless of their classification as tort or breach-of-warranty claims, as long as they involved allegations related to the arbitration agreement.
MAN GHH sought a preliminary injunction to limit the scope of an arbitration in Tampa and alternatively requested an order to compel arbitration of certain claims in Europe, which were anticipated to be raised by Nitram, Barnard, and Burk. MAN GHH asserted that these claims were new and arose from three service contracts not previously addressed by the district court in its earlier arbitration orders. They argued that the arbitration clauses in these contracts mandated arbitration in Paris and Zurich. In contrast, Barnard, Burk, and Nitram argued that the district court had acknowledged the potential for these claims during earlier proceedings, implying that they were already considered for arbitration in Tampa.
The district court ruled that its prior orders had indeed encompassed claims under the service contracts and mandated that arbitration occur in Tampa. Consequently, the court denied MAN GHH's motion for a preliminary injunction. Following this, Barnard and Burk filed for sanctions against MAN GHH, claiming that the preliminary injunction motion was an improper attempt to revisit a previously decided issue regarding the arbitration's venue. The district court agreed and imposed sanctions, which were stayed pending appeal. MAN GHH's counsel contended that the district court erred in its ruling and that the claims should be arbitrated in Europe, asserting that the earlier orders did not cover these claims. The appellate court found merit in MAN GHH's arguments, indicating that the district court abused its discretion and that the sanctions order should be vacated.
Nitram filed a contract suit against IRI, Barnard, and Burk based on their agreement for installing an expander. Barnard and Burk later filed a third-party complaint against MAN GHH, seeking indemnification based on their design contract. The court's order to compel arbitration of Barnard and Burk's claims against MAN GHH was strictly based on the arbitration clause in the design contract. Nitram, IRI, and Barnard and Burk opposed a preliminary injunction, arguing that the earlier arbitration order covered claims related to three service contracts. However, the district court's later sanctions order confirmed its intent to incorporate this argument into the denial of the injunction. The judge who reviewed the earlier orders compelling arbitration was different from the judge who issued those orders. When the court ordered arbitration for Nitram's and IRI's tort and breach-of-warranty claims against MAN GHH, it did so based on their connection to the design contract and their status as third-party beneficiaries. Ultimately, the court confined arbitration to the claims presented: Barnard and Burk's claims against MAN GHH and Nitram's and IRI's tort and warranty claims. No claims related to the three service contracts had been presented, and thus there were no arbitration clauses applicable to those claims. Under the Federal Arbitration Act (FAA), parties are not compelled to arbitrate claims unless they have agreed to do so, and courts must enforce arbitration agreements as per their terms. In this case, the parties designated claims arising from the service contracts to their own arbitration clauses, not to the design contract's clause, and no contract claims from the service contracts were submitted to the district court.
The court found that it could not have ordered arbitration of claims related to three collateral service contracts, as the arbitrators exceeded their authority by hearing these claims. MAN GHH's counsel's motion for a preliminary injunction to limit the Tampa arbitration and to move it to Europe was supported by the record, contradicting the district court's assessment that the motion lacked such support. The district court's imposition of sanctions for this motion was deemed an abuse of discretion, leading to a reversal of the Rule 11 sanctions against MAN GHH's counsel. The court affirmed the district court's denial of the motion to vacate the arbitral award but vacated the denial of prejudgment interest, remanding for further resolution. Claims under the contract with Barnard and Burk Engineers were to be arbitrated in Zurich, while those involving the spare rotor contract with Nitram were to be arbitrated in Paris. The contract with Nitram for engineering services lacked an arbitration clause, indicating the district court likely could not have compelled arbitration for those claims. Thus, the claims were not clearly due to be arbitrated in Tampa. The argument regarding the arbitration was waived by MAN GHH and the appellants, as they did not pursue it on appeal.
