Made-to-measure remedies – security and finality

Manfred Arnold looks at the power of arbitrators in New York

AT one of the London ICMA XV luncheons in April of this year, I happened to sit next to Sir Christopher Staughton, and we discussed dissents and also disagreements with court decisions. I mentioned to him that I had drawn some criticism from my peers in New York arbitration for disagreeing with a House of Lords decision, which, in the absence of a US court ruling on this point, had been relied upon by one of the parties as well as by the panel majority. Sir Christopher saw nothing wrong with disagreeing with the highest English court. In fact he mentioned that he also had done so in a dissenting judgment given in the Court of Appeal of Gibraltar.

Disagreeing or questioning should be made on known facts and inherent knowledge, not just because it is different from your own experience or expectation.

At ICMA XV, in response to a New York paper, a couple of comments were made by London delegates which seemed to be based upon ignorance and possibly partisanship. On the issue of arbitrators’ powers, and specifically the ability of New York arbitrators to order security, a London solicitor raised the question of whether there was legal precedent or whether the arbitrators just grabbed the power on their own. I found the question to be offensive and responded that there were a number of court decisions in support. The fact that London arbitrators do not have similar powers should possibly have given rise to a discussion on the merits rather than a challenge as mounted by the London solicitor.

There is a line of arbitration and court decisions in New York dealing with the issue of security and the power of arbitrators to address them.

Unlike in other jurisdictions, New York arbitrators are not bound by legal precedent as fashioned by the courts in various districts or even the Supreme Court of the United States. Judges disagree with each other, the Supreme Court issues split decisions, arbitrators can disagree with conclusions reached, but arbitrators should not disregard the law. There is a fine line between ignoring the law and disagreeing with the law. You cannot state that you know what the law is, but that you chose to ignore it. You can, however, take the position that you have reviewed the various decisions and chosen to disagree with them for reasons given.

The reason that parties petition for security is based upon their concern that might lose out in terms of being able to contest an arbitration award. On the other hand, there are a number of other remedies to accomplish this goal via attachments, liens, arrests, bonds, escrow, etc.

In 1988, New York arbitrators issued awards for the Camara (SMA 2430) and the Cinchona (SMA 2430A) denying interim awards but directing charterers to deposit the amounts claimed into interest-bearing accounts. The court, in response to the motions to confirm, held that “the awards in this case ordering the payment of funds into escrow were designed to protect [owners’] claims pending the final determination of liability for the cargo loss. As petitioner has urged, if the confirmation of the arbitrator’s [sic] awards were refused, the entire purpose of the award would be frustrated and the awards would be a futile exercise of the arbitrator’s [sic] powers.”

These rulings were adopted in the Hallborg (SMA 2639) and also in the Balsa 9 (SMA 2803), the Eurogas (SMA 3005), the Marianic K (SMA 3168), the Bregen (SMA 3378) and the Rokos Vergottis (SMA 3415). In contrast, in the Allison (SMA 3410) and the Lacerta (SMA 3515), the arbitrators acknowledged their power to order security, but declined to do so. In the Lacerta, the panel stated, “Other than pointing out that the Lacerta had been sold, and citing various cases which addressed the posting of security, [charterers], in the panel’s opinion, have not advanced any compelling reason to grant their request for security . . .”

I have been involved in a number of the cases granting security requests, and likewise I have denied the request. I have stated before that requests for security must be carefully considered by the arbitrators and should not be granted just for the asking. The arbitrators must remember that their powers in this respect exceed those of judges, which places a great responsibility upon their shoulders. The guiding principle, as a general proposition, must be to maintain the status quo. Neither party should be placed in a better contractual or economical position than it was at the time of the fixing.

In the Cheshire arbitration (SMA 3129), the panel referred to the Marianic K decision and emphasised the arbitrators’ broad powers to impose equitable remedies and thereby ensure that their ultimate decision on the merits will not be merely academic. The panel held that, “Despite this positive and affirmative message to arbitrators, ordering security for claims is an act which arbitrators should approach cautiously. In our view, the mere request for security by one party should not be granted without careful consideration of the particular circumstances, including other remedies available to the petitioner.”

The Enerchem Avance (SMA 2907) was decided by a sole arbitrator, who was the winning attorney in the Camara/Cinchona cases. He stated, “This arbitrator does not believe that arbitrators should order security to be established for unliquidated claims with impunity. There should be special circumstances, such as a special clause in the charter party, or outside considerations which require security in order to maintain the status quo.”

I think that it is significant, and borne out by the record, that New York arbitrators apply their powers on a very selective basis, one which addresses the full circumstances of the particular case, and that they do not blindly follow precedent.

Let me conclude with a brief word on the finality of maritime arbitration awards in the US. Not much has changed over recent years. The courts continue their strong support for arbitration and, therefore, in the absence of evidence of corruption, fraud or undue means, it can reasonably be expected that an award will be confirmed when challenged. One should not be concerned about the number of motions to confirm or vacate filed with the courts and take it as an indicator for the finality of awards. The real benchmark is how many cases are vacated. The number overall is minute. I base this statement on my own arbitration experience covering slightly more than 30 years and having participated in over 800 published awards. Out of this number, quite a few were challenged in the lower courts as well as the Courts of Appeal; one even went up to the Supreme Court (for which certiorari was denied). All but two were confirmed. It may be ironic, but both were remanded to newly appointed panels (on which I again served) with similar results.

The courts have viewed their role as very confined with respect to arbitration, and as long as rational grounds for the arbitrators’ decision can be inferred, an arbitration award should be confirmed. The courts have supported the concept that where the parties had agreed to arbitrate their disputes, the role of the courts’ review is limited to the provisions (Section 10) of the Federal Arbitration Act. The courts refuse to second-guess an arbitrator’s decision in a contract dispute. In other words, the courts should not retry matters which have already been decided in arbitration.

The pronouncement by Justice Harlan Fiske Stone (Chief Justice of the Supreme Court, 1941-1946) is very much on point and supportive of the arbitration system as we practice it in the US:

The very refinements and complexities of our court machinery often make it cumbersome and dilatory when applied to controversies involving simple issues of fact or law. This is especially true in the case when the issue of fact turns upon expert knowledge as to the nature or quality of merchandise or the damage consequent upon the failure to perform a contract for its delivery . . . which can be better determined by a layman having training and experience in a particular trade or business than by a judge and jury who have not had that training and experience.

In the past, when giving speeches or writing papers, it has been my position not to be controversial to the point of criticising other arbitration systems. I have always felt that one should state one’s case based upon facts and the record, providing sufficient information to educate, and then let people draw their own conclusions and make their choices. I now realise how naïve my approach has been.

New York arbitrators have awesome powers granted to them through the federal court system and the Arbitration Act. They can award punitive damages, including RICO; they can order security, which judges cannot do; and their decisions are final. It speaks for the system and the practising arbitrators that they apply discretion and restraint when working within the parameters of their extraordinary powers.