Challenges to Arbitration Awards Carry a High Risk of Sanctions
In a recent decision, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s confirmation of an arbitration award of damages and judgment for attorneys’ fees. The Opinion discusses the difficult burden faced by a losing party who “cannot resist the urge to try for a second bite at the apple.” The Court further stated “that challenges to commercial arbitral awards bear a high risk of sanctions,” though sanctions were not awarded here because a fee-shifting provision in the contract assured that the prevailing party would not bear the cost of the appeal.
The case arose from a contract giving a supplier exclusive rights to distribute products in a foreign country. The supplier did so by contracting with two non-U.S. subsidiaries. After the manufacturer breached the contract, the supplier commenced an arbitration proceeding. The arbitrator awarded the supplier substantial damages. The manufacturer filed a motion in district court to vacate the award. The district court denied the motion and instead granted the supplier’s motion to confirm the award. The district court also awarded the supplier attorneys’ fees, and costs.
The Seventh Circuit Opinion first discussed issues relating to provisions of the Federal Arbitration Act to enforce foreign arbitration awards, which were potentially relevant because the supplier is a foreign corporation. Because this was not a “close case” the Court determined that the district court did not err in proceeding under Chapter 1 of the FAA, relating to domestic awards.
The Court rejected the manufacturer’s challenge to the award, reaffirming that in the Seventh Circuit, manifest disregard of the law is not a ground on which an arbitration award may be rejected, unless the award “orders parties to do something that they could not otherwise do legally.” (In four other Federal Circuits “manifest disregard of the law” is no longer a viable standard under which to review arbitration awards, while five Circuits continue to apply that standard.) The district court’s award of attorneys’ fees was also upheld because the facts supported a conclusion that the fees were commercially reasonable and properly shifted to the manufacturer under a contract provision between the parties.
In a final observation, the Court stated that, “Attempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process.”