March 15, 2016 Practice Points

American Rule Governs Attacks on Arbitration Awards

By Mitchell L. Marinello

In Zurich American Ins. v. Team Tankers AS, Case No. 14-4036-cv (January 28, 2016), the Second Circuit held that a carrier who prevailed in arbitration was not entitled to recoup the fees and costs it incurred in its efforts to confirm the arbitration award in court.

The carrier had transported the chemical acrylonitrile (ACN) for a customer. The customer brought arbitration claiming the carrier had improperly handled the ACN during the voyage and caused it to yellow and decline in value. After losing the arbitration, the customer opposed the carrier’s effort to confirm the arbitration award. The lower court confirmed the award and held that the carrier was entitled to recover its attorney’s fees and costs in the confirmation proceedings. In overturning that decision, the Second Circuit stated:

Our basic point of reference when considering the award of attorney's fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise." Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2015). In the proceeding below, the District Court determined that this "default rule," id. at 2168, was displaced by contract. The Court awarded fees and costs to the respondent carrier under a provision of the charter agreement which reads: "BREACH. Damages for breach of this Charter shall include all provable damages, and all costs of suit and attorney fees incurred in any action hereunder."

The court found the lower court’s reasoning to be in error. It stated that the contractual provision in question authorizes a fee award against a party that breaches the charter agreement, but that there was no finding below that the customer (who lost its contract claim against the carrier) had breached the charter agreement. As a result, the contractual provision did not apply.

The customer then argued that a fee award would be proper as a matter of statutory law, but the court also rejected that argument:

The [customer] argues in the alternative that the award can be sustained under 28 U.S.C. § 1927, which authorizes a court to assess "costs, expenses, and attorneys' fees" against any attorney who "so multiplies the proceedings in any case unreasonably and vexatiously." But an award under § 1927 is proper only "when there is a finding of conduct constituting or akin to bad faith." State St. Bank v. Inversiones Errazuriz, 374 F.3d 158, 180 (2d Cir. 2004) (internal quotation marks omitted). The attorney's actions must be "so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose such as delay." Id.

The court held that the record did not support a finding of bad faith or improper purpose. It reasoned that the customer's arguments on appeal were tied to recognizable legal concepts. Thus, the customer’s manifest-disregard argument relied on the proposition that arbitrators manifestly disregard the law when the facts they find flatly and obviously preclude the legal conclusions they reach. The customer’s "corruption" and "misbehavior" arguments relied on the disclosure-based framework that the court had applied in evident-partiality cases. See, e.g., Applied Indus. Materials Corp. v. Ovalar, 492 F.3d 132, 137-38 (2d Cir. 2007). The court stated that the customer’s arguments were not convincing, but it held that they were “not so unconvincing as to require the conclusion that they [were] made for an improper purpose.”

Practice Pointers: The American Rule is a firm rule of law, and it will not be overridden simply because a party challenges an arbitration award and loses. Accordingly, counsel drafting arbitration agreements should consider adding a provision that specifically provides that, if the arbitration award is challenged, the prevailing party shall be entitled to recover its attorney’s fees in any legal proceedings that follow. Note that the contractual language here suggested that result but did not cover every situation. Note also that unsuccessful challenges to an arbitration award will not support an award of attorney’s fees under 28 U.S.C. § 1927 unless they are so meritless that they support a finding of bad faith.

Keywords: alternative dispute resolution, adr, litigation, attorney’s fees, costs, American Rule, confirmation of award, § 1927, bad faith

Mitchell L. Marinello is with Novack and Macey LLP in Chicago, Illinois.


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