VICTOR MARRERO, District Judge.
On October 18, 2011, petitioners Agility Public Warehousing Co. K.S.C. ("PWC") and Professional Contract Administrators, Inc. ("PCA") (together, "PWC/PCA") petitioned the Court (Docket No. 1) to confirm partial and final arbitration awards (together, the "Award") against respondent Supreme Foodservice GmbH ("Supreme"). A panel of three arbitrators (the "Tribunal") under the auspices of the American Arbitration Association ("AAA") International Centre for Dispute Resolution issued the Partial Final Award on April 26, 2011, and the Final Award and August 25, 2011. (See Docket No. 17, ex. 1A, 1B.) Supreme cross-petitioned to vacate the Award on November 4, 2011 (Docket No. 18).1 Supreme argues for vacatur of the Award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, 9 U.S.C. §§ 201-08, 21 U.S.T. 2517 (the "Convention") and the Federal Arbitration Act (the "FAA"), 9 U.S.C. §§ 1-16.
In an Order dated December 19, 2011, the Court confirmed the Award and denied Supreme's motion to vacate (Docket No. 31). The Court now sets forth its findings, reasoning, and conclusions in support of the December 19, 2011 Order below.
The arbitration at issue derives from agreements between the parties related to the supply of food to American troops in Afghanistan. On October 25, 2004, PWC/ PCA and Supreme Foodservice AG, a subsidiary of Supreme, executed an agreement (the "Services Agreement") whereby Supreme, with the assistance of PWC/ PCA, would enter a bid (the "Solicitation") with the United States government to win the prime vendor contract supplying food to United States forces in Afghanistan, also known as "Zone 3." At the time of the negotiation of the Services Agreement, PWC operated as the prime vendor supplying food and related supplies to troops in "Zone 1," including Iraq, Kuwait, and Jordan. PCA provided advice and counseling to food supply contractors, including PWC.
Under the Services Agreement, PWC/ PCA's assistance to Supreme included providing food prices and supply chains for use in the Solicitation. In the event that Supreme won the prime vendor contract, the Services Agreement provided that Supreme would pay PWC/PCA a "Monthly Service Fee" equal to 3.5% of "Net Revenues," as therein defined. The Services Agreement also provided that Supreme would continue to pay PWC/PCA 1.75% of "Net Revenues" after termination of the Services Agreement ("Post-Termination Fees") for the life of the prime vendor contract.
The parties performed under the Services Agreement and the Side Agreement without dispute until November 2007. Around that time, news broke of a criminal investigation into PWC's procurement practices. On March 26, 2008, following a dispute between the parties over PWC/ PCA's refusal to supply pricing information to Supreme, Supreme gave notice of termination of the Services Agreement for material breach, and ceased payment of the Monthly Service Fees.
Article 12 of the Services Agreement provides that disputes shall be settled under the Rules of the AAA by a panel of three arbitrators. Accordingly, on July 31, 2008, PWC/PCA filed a Notice of Arbitration with the AAA, alleging breach of the Servicing Agreement and seeking to recover unpaid Monthly Service Fees from December 2007 to March 2008 and Monthly Service Fees accrued thereafter. In the alternative, PWC/PCA sought Post-Termination Fees if Supreme had properly terminated. Supreme answered on September 17, 2008 that it had properly terminated because PWC/PCA had committed material breach by failing to provide pricing information upon request. Supreme also argued that it did not owe any Post-Termination Fees for transportation services covered in the Side Agreement, which was a separate contract from the Services Agreement.
The Tribunal held a preliminary hearing on March 25, 2009 and set a schedule for arbitration. The parties exchanged documents, filed written witness statements, and submitted expert reports and pre-hearing briefs.
On November 9, 2009 the United States unsealed a criminal indictment (the "Indictment") against PWC in the United States District Court for the Northern District of Georgia. The Indictment accused PWC of a "Major Fraud Against the
Following the unsealing of the Indictment, Supreme filed a Second Amended Statement of Defense and Counterclaims, claiming for the first time that PWC/PCA had fraudulently induced it to enter into the Services Agreement "by making promises they intended to fulfill only by illegal means." (Docket No. 17, ex. IB at 15-16.) Thereafter, Supreme opposed, and the Tribunal denied, PWC/PCA's request for a stay of the arbitration during the criminal proceedings. Supreme also sought the testimony of four PWC executives, including 1) Toby Switzer; 2) Stephen Lubrano, assistant general manager; 3) Tarek Aziz Sultan Al-Essa, board chairman and managing director; and 4) Emad AlSaleh, deputy general manager (collectively, the "PWC Executives").
The Tribunal held two weeks of hearings in New York in February 2010. Thirteen witnesses testified during the hearings, including two experts and several PWC employees. However, the PWC Executives did not testify despite Supreme's request. As the Tribunal later explained, "the missing PWC witnesses — while never actually asserting the Fifth Amendment privilege — quite clearly declined to appear to avoid answering questions under oath in arbitration that might in some way impact upon the pending criminal proceeding." (Docket No. 17, ex. 1B at 17.)
Following the hearings, the parties submitted post-hearing briefs, as well as additional calculations and letter-briefs related to damages calculations. In its pre- and post-hearing briefs, Supreme argued that the PWC Executives' decision not to testify was fatal to PWC/PCA's claims. Supreme contended that New York law
On April 26, 2011, the Tribunal issued its Partial Final Award, constituting a 56-page opinion and a 17-page partial dissent. The Tribunal concluded that although Supreme was entitled to terminate the Services Agreement because PWC/PCA had failed to provide pricing and vendor information, Supreme nonetheless owed PWC/ PCA Monthly Service Fees through termination on March 26, 2008, and the reduced Post-Termination Fees thereafter. Arbitrator Milton Mollen ("Mollen") dissented from the majority, arguing that PWC/ PCA's claims should be dismissed. The Tribunal unanimously denied Supreme's fraudulent inducement and rescission claims. The Final Award, dated August 25, 2011, incorporated the Partial Final Award and award PWC/PCA $38,660,021 in damages.
Mollen's dissent focused in large part on the PWC Executives' refusal to testify, stating that "Claimants' course of conduct in the hearing of their claims can be titled `the Case of the Missing Witnesses.'" (Docket No. 17, ex. 1C at 1.). In voting to dismiss PWC/PCA's claims, he noted the refusal of the PWC Executives to testify as part of the reason for his dissent.
Rather than dismiss PWC/PCA's claims, the Tribunal majority did make adverse inferences against PWC/PCA as a result of the missing PWC Executives' testimony. For example, the Tribunal inferred that PWC/PCA did not give Supreme its best prices and vendor information; this led to the conclusion that PWC/PCA breached the Services Agreement. (Id. at 47-48 ("This is one area in which the testimony of the missing witnesses can be deemed crucial ... PWC's failure to appear with knowledgeable witnesses warrants an adverse inference.").) Since the Tribunal ruled that Supreme properly terminated the Services Agreement, Supreme owed the reduced Post-Termination Fees, rather than the full Monthly Service Fee, for the period beginning March 26, 2008.
With regard to the Side Agreement, the Tribunal adversely inferred that Switzer's testimony "would not have been helpful to PWC/PCA," (Id. at 52), and therefore rejected PWC/PCA's argument that the Side Agreement was an amendment to the Services Agreement, rather than a separate contract. As a result, the Tribunal ruled that Supreme did not owe Post-Termination Fees for outbound transportation services included in the Side Agreement. Nevertheless, the Tribunal found that Supreme did owe PWC/PCA Post-Termination
The role of a district court in reviewing an arbitral award is "narrowly limited," and "arbitration panel determinations are generally accorded great deference under the FAA." Tempo Shain v. Bertek, Inc., 120 F.3d 16, 19 (2d Cir.1997); see Zeiler v. Deitsch, 500 F.3d 157, 164 (2d Cir.2007). This deference promotes the "twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation." Telenor, 584 F.3d at 405. As a result, the burden of proof "required to avoid confirmation is very high," D.H. Blair & Co. v. Gottdiener, 462 F.3d 95, 110 (2d Cir.2006), and a court will enforce the award unless the party seeking vacatur shows that the arbitrators failed to present a "barely colorable justification for the outcome reached." Rich v. Spartis, 516 F.3d 75, 81 (2d Cir.2008) (quoting Landy Michaels Realty Corp. v. Local 32B-32J Serv. Emps. Int'l, 954 F.2d 794, 797 (2d Cir.1992)).
Supreme argues that the Award should be vacated under Convention Article V(2)(b) ("Article V(2)(b)"), and §§ 10(a)(3) and 10(a)(4) of the FAA.
Pursuant to the Convention and the FAA, a district court must confirm an arbitral award unless the party seeking vacatur establishes any of the limited exceptions listed in § 10(a) of the FAA or one of the grounds for refusal specified in the Convention. See Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008); Telenor, 584 F.3d at 405.
The Convention lists seven grounds for denial of a confirmation, including if the "recognition or enforcement of the award would be contrary to public policy...." Convention, art. V(2)(b). "Article V(2)(b) [of the Convention] must be `construed very narrowly' to encompass only those circumstances `where enforcement would violate our most basic notions of morality and justice.'" Telenor, 584 F.3d at 411 (quoting Europcar Italia S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 315 (2d Cir.1998)).
The FAA provides for vacatur:
9 U.S.C. § 10(a). When a petitioner seeks to vacate an arbitral award pursuant to FAA § 10(a)(3) based on an evidentiary decision of the arbitrators, "except where fundamental fairness is violated" that decision "will not be opened up to evidentiary review." Rai v. Barclays Capital, Inc., 456 Fed.Appx. 8, 9, No. 10-3070-cv, 2011 WL 5176169, at *1 (2d Cir. Nov. 2, 2011) (quoting Tempo Shain, 120 F.3d at 20). With regard to § 10(a)(4), which applies when arbitrators "exceed[] their powers," the Second Circuit has "consistently accorded the narrowest of readings to the [FAA's] authorization to vacate awards [pursuant to § 10(a)(4)], especially where
In addition to the explicit provisions of the Convention and the FAA, the Second Circuit has added a gloss on FAA § 10(a) which allows a district court to vacate where the award evidences "manifest disregard" of the law. Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 548 F.3d 85, 91-92 (2d Cir.2008), rev'd on other grounds, ___ U.S. ___, 130 S.Ct. 1758, 176 L.Ed.2d 605 (2010); T. Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 339 (2d Cir.2010). Courts vacate awards on grounds of manifest disregard only in "those exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent." Stolt-Nielsen, 548 F.3d at 91-92 (quoting Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 389 (2d Cir. 2003)).
An arbitral award may be vacated based on manifest disregard of the law if: (1) the law that the arbitrators allegedly ignored was clear and "explicitly applicable to the matter before [them];" (2) "the law was in fact improperly applied, leading to an erroneous outcome;" and (3) the arbitrators knew of the law's existence and applicability, but intentionally disregarded it. T.Co Metals, 592 F.3d at 339 (quoting Duferco, 333 F.3d at 389-90).
The decision of the PWC Executives not to testify is the focal point of Supreme's cross-petition for vacatur. Pursuant to Article V(2)(b) and FAA §§ 10(a)(3) and 10(a)(4), Supreme argues that the Award should be vacated because the Tribunal should have dismissed PWC/ PCA's claims as a consequence of the PWC Executives' refusal to testify. Supreme asserts that this testimony would have been essential to its McConnell defense. According to Supreme, the Award is therefore fundamentally unfair and undermines explicit New York public policy requiring dismissal of a party's affirmative claims where that party then asserts privilege. In addition, Supreme argues that the Tribunal exceeded its powers and manifestly disregarded the law in declining to dismiss the claims after the PWC Executives' refused to testify.
Supreme's argument turns on its assertion that, under New York law, "an action must be dismissed if the party seeking relief uses a privilege to refuse to testify about matters that may bear on a defense." (Docket No. 17, at 18.) New York courts do find claimants in default if they invoke the Fifth Amendment to avoid giving evidence, see, e.g., Laverne v. Incorporated Vill. of Laurel Hollow, 18 N.Y.2d 635,
The Tribunal therefore did not act against explicit public policy or in manifest disregard of the law in deciding that it would "assess the evidence, or lack of it, as a whole" and reach a determination on the merits. (Docket No. 17, ex. IB at 26.) See Commercial Risk Reinsurance Co. v. Security Ins. Co. of Hartford, 526 F.Supp.2d 424, 428 (S.D.N.Y.2007) ("Arbitrators... possess broad latitude to determine the procedures governing their proceedings, to hear or not hear additional evidence, to decide what evidence is relevant, material, or cumulative, and otherwise to restrict the scope of evidentiary submissions."). As the Tribunal recognized, the PWC Executives were not asserting the privilege as a "sword" for purely tactical reasons, but were indeed under indictment. A stay of the arbitration during the criminal proceedings would have avoided the need for any witnesses to invoke the privilege, but Supreme opposed such a request. The Tribunal noted that "Supreme's insistence that the case be heard sooner rather than later helped to orchestrate the situation" in which the PWC Executives faced self-incrimination if they testified. (Docket No. 17, ex. 1B at 25.)
Nor was PWC/PCA's behavior comparable to a case in which a party makes affirmative claims, but then refuses to produce any evidence. Well before Supreme sought the testimony of the PWC Executives, PWC/PCA had produced documents and witness statements, and several PWC employees testified during the hearing. As the Tribunal explained, the parties produced a "considerable amount of documentary and testimonial evidence" with which to analyze the claims. (Docket No. 17, ex. IB at 26.)
The Tribunal produced much more than a "barely colorable justification" for its decision. In its lengthy Partial Final Award, the Tribunal analyzed New York and federal law on the issue of what to do about the missing testimony, (see id. at 20-26), and arrived at the careful conclusion that it would draw adverse inferences against PWC/PCA where appropriate. The Tribunal examined the parties' evidence, including the Indictment, and drew adverse inferences against PWC/PCA in recognition of the PWC Executives' refusal to testify. After weighing the evidence, including the adverse inferences, the Tribunal
In light of the Tribunal's well-reasoned opinion and the adverse inferences drawn on behalf of Supreme, there is no support for Supreme's arguments that the Tribunal's determination was fundamentally unfair, contrary to public policy, or in manifest disregard of the law.
Moreover, the Tribunal did not "exceed[][its] powers." Supreme cites Stolt-Nielsen, 130 S.Ct. at 1768, to support its argument that the Tribunal exceeded its power by "fashioning [its] own policy" rather than "interpreting and applying an agreement." (Docket No. 16 at 18.) Unlike the circumstances involved in Stolt-Nielsen, in which the arbitration panel did not look to governing law but "proceeded as if it ha[d] the authority of a commonlaw court," id. at 1769, the Tribunal here worked within the framework of existing law to reach its conclusion. Since Supreme argues that the Tribunal improperly decided the issue of the missing testimony, but does not challenge the Tribunal's authority to reach that question in the first place, the Court will not vacate under § 10(b)(4). See DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 824 (2d Cir. 1997) ("Our inquiry under § 10(a)(4) thus focuses on whether the arbitrators had the power, based on the parties' submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue.").
Pursuant to FAA §§ 10(a)(3) and 10(a)(4), Supreme cross-petitions for vacatur of the Tribunal's award to PWC/PCA of Post-Termination Fees for Inbound Airlift Services.
Accordingly, for the reasons stated above, it is hereby