It often makes solid business sense for aviation entities to enter into arbitration agreements as part of the core business contract, given the international (cross-border) nature of the aviation industry, the complexity of disputes involving aircraft, and the time commitment, expense, and onerous “discovery” associated with federal and state court litigation in the United States. Depending on the complexity of the transaction and ultimately the amount in dispute, the arbitration panel may consist of either one or three panelists. The American Arbitration Association (AAA) is a popular choice for the maintenance of the case and selection of the panel, and New York state law is often the choice of law.
However, as recently litigated cases demonstrate, the existence of an arbitration clause does not mean that there will be no federal or state law litigation, with regard to both whether an arbitration can occur and whether the award will be enforced. Aviation companies that are interested in utilizing the arbitration option are well-advised to ensure that (1) the underlying agreement contains a properly drafted and enforceable arbitration clause and (2) legal arguments for enforcement of the arbitration clause are not waived. The cases discussed below highlight the types of arguments that are used (often, but not always, unsuccessfully) to try to avoid operation of an arbitration clause.
The key predicate for a requirement to arbitrate a dispute is the existence of and language in an arbitration clause in the underlying agreement. Although some parties voluntarily agree to send their dispute to arbitration, most parties agree in their contract—prior to any dispute—to settle disputes through binding arbitration.
When reviewing an arbitration award, there is a strong presumption that the award is enforceable. The Federal Arbitration Act (FAA) allows for very limited judicial review to confirm, vacate, or modify arbitration awards. An award may be vacated upon one of four enumerated grounds in the FAA:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
Generally speaking, the four statutory grounds for vacatur may not be supplemented by contractual provisions. Accordingly, when parties agree to resolve disputes through arbitration, without the court’s intervention, the courts will enforce the bargains implicit in such agreements by enforcing arbitration awards absent a reason to doubt the authority or integrity of the arbitral forum.
However, some courts have vacated arbitration awards upon a finding of “manifest disregard” by the arbitrators in their treatment of the underlying law—a standard that allows a court to vacate an award upon determining that there is absolutely no support at all in the record justifying the arbitrators’ determinations. Although “manifest disregard of the law” is not set forth in the FAA, some federal courts have recognized it as an additional basis for vacatur. In Hall Street Associates, LLC v. Mattel, Inc., the U.S. Supreme Court cast doubt on whether a party can continue to dispute an arbitration award on such nonstatutory grounds. A split among the circuit courts of appeal has emerged in the wake of the Hall Street decision. In particular, the Second, Fourth, and Ninth Circuits have found that the manifest disregard doctrine continues to exist as a “judicial gloss” under 9 U.S.C. § 10(a)(4) because arbitrators who render a decision in violation therewith have “exceeded their powers” under that provision of the FAA. On the other hand, the Fifth, Eighth, and Eleventh Circuits have concluded that, in the aftermath of Hall Street, the manifest disregard standard no longer survives because it is not enumerated in the FAA.
Arbitrators overstep their limits, and subject the award to judicial vacatur under § 10(a)(4), if the arbitrators decide an issue not submitted, grant relief in a form that cannot be rationally derived from the parties’ agreement and submissions, or issue an award that is so completely irrational that it lacks support altogether. In essence, the arbitrator’s goal is to interpret and enforce the contract. As long as the arbitrator makes a good faith effort, serious errors of law or fact will not subject the award to vacatur. Only when the panelist “strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial justice’” does the award become unenforceable.
Despite the strict standard delineated above, there are myriad examples of disgruntled litigants claiming that an arbitration provision or award should not be enforced. The following cases are just some of the most recent examples.
In Gulfstream Aerospace Corp. v. OCELTIP Aviation 1 Pty Ltd, a party seeking to avoid the consequences of a million-dollar arbitration award raised several procedural obstacles to enforcement of the award, but none succeeded. The case arose when Gulfstream filed an arbitration demand against a buyer of its G550 jet aircraft after the buyer failed to make a payment when due and subsequently failed to cure the breach of its payment obligation. A three-member arbitration panel found for Gulfstream and awarded it $1,096,160.32, comprised of (1) $1 million for the unpaid portion of the $8 million liquidated damages amount specified in the sales agreement, (2) $94,467 as attorney fees and costs, and (3) $1,693.32 as hearing expenses.
After the buyer filed an action in a Georgia state superior court to vacate the award, Gulfstream removed the case to a federal district court in Georgia and requested that the court confirm the arbitration award against the buyer. In February 2020, the district court issued its decision to enforce the arbitration award upon its conclusion that the buyer failed to show that the arbitral tribunal manifestly disregarded the law, as would provide for vacatur of the arbitration award under the Georgia Arbitration Code (GAC).
The buyer argued that the case needed to be remanded to state court because the sales agreement specified that Georgia arbitration law applied, and therefore Georgia superior courts had exclusive jurisdiction to consider the buyer’s request for vacation of the award. The district court denied the remand request, holding that it had subject matter jurisdiction over the buyer’s application to vacate the award. The court ruled that the sales agreement fell within the scope of the FAA because the buyer was an Australian entity. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) is implemented and enforced by chapter 2 of the FAA, which applies to international arbitral proceedings in which “one of the parties to the arbitration is domiciled or has its principal place of business outside of the United States.”
The buyer also contended that the sales agreement contained a choice of law provision selecting Georgia law and that the provision therefore incorporated the GAC into the agreement. As a result, the buyer contended, the superior court for the county where the arbitration occurred had exclusive jurisdiction to enforce or vacate the award. In rejecting this argument, the district court observed that section 4.3.1. of the sales agreement provided as follows:
Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration administered by the [AAA] in accordance with the provisions of its Commercial Arbitration Rules, including as appropriate its Procedures for Large, Complex Commercial Disputes or its International Dispute Resolution Procedures, and judgment on the award rendered by the arbitrator(s) may be entered by any court having jurisdiction thereof.
The court explained that “federal circuits have routinely held that parties may agree to state law rules for arbitration even if such rules are inconsistent with those set forth in the FAA, but . . . the parties must clearly evince their intent to be bound by such rules.” “[T]he strong default presumption is that the FAA, not state law, supplies the rules for arbitration”—and the buyer failed to overcome this presumption.
The court also ruled that “the parties’ choice of law provision [did] not express the parties’ intent to depart from the FAA’s standard of vacatur” and instead apply state law, which allowed for vacatur if the buyer showed that the award was in manifest disregard of the applicable law. The court distinguished a prior case where the agreement specified that “[a]ny dispute which may arise from the interpretation, execution or termination of this agreement or from the breach thereof . . . shall be submitted to arbitration . . . according to the provisions of the Florida International Arbitration Act and in compliance with the rules of the [AAA].” There, “the parties specifically stated that the Florida International Arbitration Act was to apply. The parties did not so specify in the Sales Agreement here.”
Even after construing the sales agreement as a whole, the court was not convinced that its reference to Georgia law was a clear intent to apply the GAC.
First, the provision delineating the rules for the arbitration, Section 4.3.1. of the Sales Agreement, stated that the arbitration was to be administered by the AAA and that the judgment could be entered by “any court having jurisdiction.” The choice of law provision, while nested under the arbitration heading, [was] contained in another section in which the parties chose Georgia law to govern and disclaimed the application of the U.N. Convention on Contracts for the International Sale of Goods (“UNCISG”). Section 4.3.3’s specific exclusion of the UNCISG in the same sentence as the selection of Georgia law to govern “without reference to rules regarding conflicts of law” counsels against a finding that this choice of law clause is more than “a substitute for ordinary conflict-of-laws analysis” and was intended to displace the FAA in lieu of the GAC. The parties expressly disclaimed application of the UNCISG and could have disclaimed the FAA if the GAC was intended to apply.
The court further held that, even if the GAC governed vacatur of the award, the buyer’s arguments for vacating the award under state law failed because in none of the five instances cited by the buyer did the arbitrator manifestly disregard the applicable law.
The case of Dynamic International Airways, LLC v. Air India Ltd. arose out of the annual Islamic pilgrimage (hajj) to Mecca, Saudi Arabia, in 2013 and 2014. Dynamic, which operated a fleet of aircraft on behalf of tour and cargo operators, entered into a contract with Air India to provide air transportation between India and Saudi Arabia to approximately 40,000 pilgrims for the hajj in those two years. Dynamic asserted that it flew the passengers but was denied payment of nearly $9 million by Air India for the transportation. Dynamic tacked on a claim for $84 million because of promises made by Air India regarding 2015 and 2016 events.
The agreements for 2013 and 2014 contained a “Settlement of Disputes” clause designating an “Authority determined by the [Indian] Ministry of Civil Aviation” as the arbitration authority. However, Dynamic filed suit in federal district court in New York City; Air India followed with a letter to the court seeking permission to file a motion to compel arbitration or to dismiss the Dynamic case for forum non conveniens.
Attempting to be clever, Dynamic asserted that the Air India letter to the court represented Air India’s consent for the dispute to be tried in New York. The court did not accept this tactic. Instead, it ruled (not surprisingly) that the parties’ underlying agreement had specified arbitration to occur in India. In ruling that the letter to the court did not create a new binding agreement to arbitrate the case in New York, the court reasoned that because “the parties did not agree on any material terms of the arbitration, the December 16 Letter is not an enforceable arbitration agreement.” At most, the letter was only an “agreement to agree” on the terms of arbitration, and such agreements to agree are not independently enforceable. Fatally, the letter did not reflect “at least three terms critical to any arbitration: the location, forum and rules of the arbitration. Instead of agreeing to those terms upfront, the Letter contemplates that the parties would negotiate those terms in the future.” In effect, Dynamic’s argument lacked the fuel to power it.
Once the New York court tossed the Dynamic argument asserting that a new arbitration agreement had been reached, there was little else for the court to do but direct the parties to proceed to arbitration in India. The motion to compel arbitration filed by Air India was granted.
One lesson of the Air India case, however, is to be careful in submitting letters to the court. The New York federal courts favor letters over formal motion practice. But counsel and parties should be on notice that sharp opposing counsel will try to use the language of the letter to gain an advantage.
Advanced Air Management, Inc. v. Gulfstream Aerospace Corp. presents a good example of a case where an aviation entity challenged an arbitration clause by asserting that it was in the fine print and thus would be “unconscionable” to enforce. The party had some success with this argument, convincing a California state trial court that jet manufacturer Gulfstream had overreached in securing the arbitration provision.
The case involved a contract under which Gulfstream was required to maintain and repair an aircraft for Advanced Air Management. Gulfstream waited until the time of the repair job to insert the arbitration clause in the work authorization agreement terms and conditions, which differed from the language initially provided to Advanced. The terms and conditions included the following language:
ARBITRATION. Any controversy or claim arising out of either this Agreement or Customer’s service visit to Gulfstream shall be governed by the laws of the State of Georgia, without regard for rules concerning conflicts of law, and settled by one (1) arbitrator (except, if the claim is in excess of $2 Million, then by three (3) neutral arbitrators) under the Commercial Arbitration Rules of the [AAA] in the City where the work hereunder was performed.
After the maintenance and repair procedures, Advanced experienced a problem with the gearbox oil drain plugs. Advanced filed a complaint against Gulfstream, alleging that the arbitration clause and certain other provisions of the work authorization agreement purporting to limit Gulfstream’s liability were procedurally and substantively unconscionable. Advanced also alleged that Gulfstream was negligent in performing the maintenance and repair work. Gulfstream responded by moving to compel arbitration.
Advanced argued that the arbitration clause was procedurally unconscionable because Gulfstream provided it to Advanced for the first time three months after Advanced signed the proposal incorporating the work authorization agreement’s terms and conditions. Advanced argued that it had no opportunity to negotiate the terms of the agreement and was not aware of the arbitration clause in the dense text in small type on the preprinted form. Gulfstream argued that it was up to the arbitrator and not the court to decide if the arbitration provision was unconscionable. The trial court found that the parties’ contract was unconscionable. On appeal, Gulfstream argued that “the parties agreed to delegate to an arbitrator the authority to decide disputes concerning the enforceability of the arbitration agreement, and Advanced never specifically challenged the validity of that delegation, so the trial court was required to order arbitration and allow the arbitrator to decide whether the arbitration agreement was enforceable.” The appeals court agreed with Gulfstream.
In reversing, the court of appeals highlighted that the work authorization agreement stated that any controversy or claim arising out of the form or the service visit to Gulfstream would be resolved by AAA arbitration and its Commercial Arbitration Rules. Rule R-7(a) of those rules stated that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” Thus, the rule explicitly provided that the arbitrator would decide questions of arbitrability. “By expressly incorporating the AAA Commercial Arbitration Rules into the arbitration agreement, the parties clearly and unmistakably agreed to have the arbitrator decide questions of arbitrability.” The court thus concluded:
Because the parties clearly and unmistakably agreed to have an arbitrator decide questions of arbitrability, the trial court was required to enforce the delegation unless Advanced challenged the delegation specifically. . . . Advanced did not argue that the agreement to have arbitrability decided by the arbitrator was substantively unconscionable, so Advanced did not specifically challenge the delegation.
The party challenging an arbitration award in Eagle Aviation Technologies, LLC v. Carson Helicopters, Inc. fared no better. Carson is an aviation company located in Pennsylvania. In addition to selling composite tail rotor blades and refurbishing Sikorsky S-61 helicopters for commercial use, it hoped to create a new secondary market for aging H-60 Blackhawk helicopters through its redesigned rotor blades. Carson contracted with Eagle, a research and development company in Hampton, Virginia, to complete the design and manufacture of Carson’s H-60 composite rotor blade. Eagle also did work on the tail rotor blades for Carson’s Sikorsky S-61 helicopters.
Under the service contract’s statement of work, Eagle was to provide the “design, analysis, test, and manufacturing of [an] Advanced Composite Blackhawk Main Rotor Blade.” The statement of work provided that a detailed work breakdown structure and project plan would be developed as the program progressed. The service contract indicated that the statement of work could be amended, revised, or extended by mutual agreement of the parties and further gave Carson the right to make changes within the general scope of the agreement so long as Carson provided Eagle written notice of the change. Eagle was to complete the work on a “time and material” basis. The agreement committed the parties to binding arbitration in the event of a dispute, with the arbitrator’s decision to be considered “final.” The agreement did not refer to any work that Eagle performed on Carson’s Sikorsky S-61 project.
Disputes arose between the parties over whether Eagle was performing under the contract. Carson claimed that Eagle was overbilling for unperformed work, mishandling recruitment efforts, and not making a good faith effort to complete its research. Carson filed a demand for arbitration with the AAA, alleging claims for breach of contract and tort. The demand included 14 examples of Eagle’s fraudulent billing and overbilling practices, as well as issues regarding Eagle’s work on the Sikorsky S-61 tail rotor blades project. Eagle filed a motion requesting that the arbitrator dismiss the demand because Carson failed to prove that there was a contract. Following oral argument, the arbitrator granted Eagle’s motion to dismiss in part. He found that the “gist of the action doctrine” barred Carson’s tort claims but that a valid contract existed and that the breach of contract claim should be arbitrated.
After a four-day hearing, the arbitrator found in favor of Carson and awarded it $510,000 plus costs. The arbitrator found that the parties had mutually agreed to expand the scope of the agreement to include the work on the Sikorsky S-61 tail rotor blades project, that Eagle had engaged in the practice of overbilling in connection with Carson projects, and that Eagle had breached the terms of the agreement. The arbitrator rejected Eagle’s counterclaims because they were first raised in its post-hearing brief.
Eagle filed a petition with a federal district court in Philadelphia to vacate the arbitration award, asserting that the arbitrator exceeded the scope of his power under the arbitration clause by addressing the testing and production of the Sikorsky S-61 composite tail rotor blades, an autoclave purchase, recruiter fees payment, and adjustment of costs paid. Eagle contended that the award should be vacated under FAA § 10(a)(4) because the arbitrator exceeded his authority by basing the award “on matters over which it lacked jurisdiction.” Carson countered that both parties amended, revised, and extended their contract to encompass such work.
The court decided not to disturb the award because of its position that an arbitrator does not exceed the scope of its power so long as the arbitrator makes a “good faith attempt” and interpretation based on principles of contract law. According to the court, “the Arbitrator first looked to the plain language of the Agreement to determine the scope of the Agreement’s provisions” and found language that supported his conclusion that changes to the scope of the contract could be made, including the addition of the Sikorsky S-61 tail rotor blades project. The court further ruled that the arbitrator also did not exceed the scope of his power regarding the adjustment of amounts paid because he looked to the agreement, which provided that “each payment previously made shall be subject to adjustment as a result of such audit.” Ultimately, the arbitrator did not abuse his power because he used the plain language of the agreement and the actions of the parties and gave consistent meaning to multiple provisions.
In Air Center Helicopters, Inc. v. Starlite Investments Ireland Ltd., the court refused to vacate an arbitration interim order in favor of Starlite. The dispute arose out of a federal contract to provide helicopters to the U.S. Defense Department. In addition to serious penalties under the contract, failure to provide the helicopters could result in harm to armed forces. For this reason, it was important that the arbitrator have the ability to issue an interim order while the arbitration was pending.
Air Center Helicopters Inc. (ACHI) manufactured helicopters in Fort Worth, Texas. Approximately 90 percent of its business was government contracts, and it had contracted with the Defense Department for over 30 years. ACHI employees worked on classified projects and required high-level security clearances and Federal Aviation Administration certifications. Starlite had much less experience in contracting with the U.S. government but previously worked as a subcontractor for Erickson Helicopters before Erickson went bankrupt. Because of security restrictions and its lack of experience, Starlite struggled to contract with the U.S. government and sought to subcontract instead.
Starlite proposed to have ACHI replace Erickson as a subcontractor with Fluor Corporation, the prime contractor with the U.S. Army, with Starlite acting as a subcontractor to ACHI. ACHI submitted a proposal to Fluor seeking to handle helicopter work supporting U.S. military operations in Afghanistan. The proposal listed Starlite as a subcontractor to ACHI. Fluor awarded the contract to ACHI, and ACHI entered into a series of contracts with Starlite, including a lease agreement for each of the four aircraft required under the Fluor contract, three operational and maintenance lease agreements, an aircraft lease, and eight side letters. The Fluor contract required that the helicopters be 20 years old or less. At the time, Starlite was providing helicopters that were 40 years old and Fluor temporarily waived the age requirement. Unfortunately, Fluor decided to rescind the waiver, such that ACHI needed to provide newer (20 years old or less) helicopters.
Starlite filed a demand for arbitration, alleging breach of contract, anticipatory breach of contract, and other claims, as well as an application for emergency relief and interim relief. After a hearing, the arbitrator issued an interim order, which concluded that Starlite had demonstrated a probable right to relief and ordered specific performance, namely preservation of the status quo. ACHI responded by filing a motion to vacate and a preliminary injunction motion. ACHI argued that the arbitrator “(1) imperfectly executed his powers by entering an indefinite order; (2) exceeded his powers by manifestly disregarding settled law in relying on an implied-in-fact contract theory; and (3) exceeded his powers by granting relief to a non-party.”
The court found for Starlite, reasoning that the arbitrator did not act contrary to express contractual provisions. Rather, the order aligned with the parties’ agreements. The court did not read the interim order as requiring ACHI to deliver any helicopter pursuant to the parties’ existing agreements. Instead, the interim order required ACHI to pay Starlite upon its performance. The court observed that ACHI might choose to deliver compliant aircraft to Fluor to preserve its relationship with Fluor, but the interim order did not require it. “If Starlite provides the compliant aircraft, . . . the Interim Order requires that ACHI pay Starlite. If Starlite fails to deliver the compliant aircraft in the time provided, then that is not performance rendered, and the Interim Order does not require ACHI to pay Starlite.
The court further found that the interim order did not determine the rights or obligations of a third party but rather only those of ACHI regarding its relationship with Starlite. ACHI failed to meet its “high burden to show that the arbitrator imperfectly executed or exceeded his powers in the Interim Order.”
Finally, in Spirit Airlines, Inc. v. Maizes, members of the Spirit Airlines $9 Fare Club alleged that Spirit had violated the club agreement because the members paid the $59.95 yearly membership fee but allegedly did not receive the promised benefits and rights of membership. The members filed an arbitration demand, which included a request that the arbitrators treat the proceeding as a class action.
Spirit reacted by filing a lawsuit in federal court in Florida, seeking a declaration that the arbitration panel was without power to consider class claims. The district court denied Spirit’s motion for preliminary injunction and ruled that it was for the arbitration panel, rather than the court, to decide whether the panel could consider class claims, and the Eleventh Circuit Court of Appeals affirmed. At issue was the language from the parties’ agreement, which stated:
This Agreement and the terms of membership shall be governed and construed in accordance with the laws of the State of Florida without giving effect to the choice of law provisions thereof. Any dispute arising between Members and Spirit will be resolved by submission to arbitration in Broward County, State of Florida in accordance with the rules of the [AAA] then in effect. Notwithstanding the foregoing, nothing in this Agreement is intended or shall be construed to negate or otherwise affect the consumer protection laws of the state in which Members reside.
In its ruling, the district court found that “the agreement’s choice of AAA rules incorporated Rule 3 of the Supplementary Rules for Class Actions, which designates the arbitrator to decide whether the arbitration agreement permits class arbitration. Because the AAA rules require the arbitrator to decide this question, the court dismissed the case for lack of jurisdiction.”
In affirming, the Eleventh Circuit noted:
Arbitrations routinely generate three categories of dispute. First, there are the merits of the disagreement. Second, there is a dispute about whether the parties agreed to arbitrate their disagreement. Third, parties disagree about who gets to decide whether they agreed to arbitrate their differences. . . . Here, the parties dispute whether the agreement’s choice of AAA arbitration rules amounts to “clear and unmistakable” evidence of the parties’ intent to have an arbitrator decide whether the agreement permits class arbitration.
The Eleventh Circuit agreed with the district court’s finding that the parties’ agreement plainly chose AAA rules, including Supplementary Rule 3, emphasizing that this was “clear and unmistakable evidence that the parties chose to have an arbitrator decide whether their agreement provided for class arbitration.”
Spirit argued that the court should demand a higher showing for class arbitrability questions than for other questions of arbitrability. The airline contended that the higher burden was needed because “class arbitration dramatically changes what ordinarily goes on in arbitration.” The Eleventh Circuit acknowledged that “Spirit’s argument has some authority. Four circuits have held that adoption of the AAA rules is not clear and unmistakable evidence of the parties’ intent to have an arbitrator decide whether the agreement allows class arbitration.” Yet, while the Eleventh Circuit said that it respected the work of its sister circuits, it opted to read Supreme Court precedent differently.
The Spirit Airlines case shows that the forum may have an impact on how an arbitration agreement is applied. Spirit appears to have sought the benefit of an arbitration requirement versus a court action, but—at least from the viewpoint of the Eleventh Circuit—it did not include language in its membership agreement that per se precluded an arbitrator from deciding that a class action claim could be arbitrated.
The best arbitration case starts with a good arbitration clause that gives the entity the right to seek or demand arbitration before decision makers who will follow the law and understand the industry. Next, it is key to retain the right arbitrator(s). Often, an arbitration clause will specify certain skills that are needed for the panel. This makes arbitration much more valuable than a lay jury for some disputes. However, parties should understand the power that one panelist may have over the other two panelists and ensure that all of the panelists are appropriate for the dispute.
Once the case is before the panel, keep the presentation focused and simplified. If arbitrators think that you are wasting their time, they will find a way to penalize your client. In addition, assume that the panel will learn all of the relevant facts; this is not a situation where (as with juries) the key facts can be excluded from the decision maker. Moreover, it is important to remember that panelists are paid for the work they do. They are there to hear evidence and make a decision on the merits. That is why it is rare for experienced counsel to file a motion for summary judgment with a panel, and even more rare for the panel to grant it.
Cynics say that the word “arbitrary” is the root of “arbitration.” However, with the right panel, an arbitration can be much more efficacious than a jury trial. The key is a good arbitration provision, caution with regard to not waiving arguments, and preparation and execution before the panel.
