In a summary order, the Second Circuit Court of Appeals affirmed a 2011 decision by the District Court for the Southern District of New York confirming an arbitration award issued by a panel of the Society of Maritime Arbitrators. (NYKCool A.B. v. Pacific Fruit Inc. 2nd Cir. 11-4246-cv. Jan. 16.)
The arbitration panel held Pacific Fruit and its co-defendant in this action, Kelso Enterprises Ltd. (jointly, “the charterers”), were jointly and severally liable to the refrigerated ship operator NYKCool for $8,787,157 in damages for breach of contract.
Pacific Fruit and Kelso are parts of Ecuador’s Noboa Group, with Pacific Fruit exporting bananas and other cargo to California; Kelso to Japan.
The court noted to ensure the twin goals of arbitration are met — “settling disputes efficiently and avoiding long and expensive litigation” — arbitration awards are subject to very limited review.
On appeal, Pacific Fruit contended the arbitration panel manifestly disregarded New York contract law by concluding the two firms had entered into an oral contract to have NYKCool transport weekly shipments of the charterers’ bananas from Ecuador to California and Japan for the period between 2005 and 2008.
But the 2nd Circuit said it found “no manifest disregard of the law in the arbitration panel’s conclusion that the parties had entered into a binding oral contract for the period between 2005 and 2008. In particular, we agree with the panel’s conclusion that the parties’ substantial partial performance on the contract weighs strongly in favor of contract formation.
“It is undisputed that in 2005 and 2006 NYKCool transported 30 million boxes of cargo for charterers on over 100 voyages, for which it received $70 million dollars in payments even though there was no written contract in place,” the court said.
“Moreover, the parties’ behavior during 2005 and 2006 strongly suggests that they believed themselves subject to a binding agreement. Notably, the parties engaged in extensive renegotiation of the terms of the contract when Kelso began facing difficulties meeting its cargo commitments.
“In these circumstances, the panel cannot be said to have engaged in ‘egregious impropriety’ in concluding that the parties intended to enter a binding oral agreement.”
Pacific Fruit also complained the arbitration panel manifestly disregarded the law in holding the charterers jointly and severally liable for all the damages arising out of their breach of contract.
The 2nd Circuit said under New York law it is settled that separate legal entities may not generally be subject to liability for one another’s contractual obligations merely because they are corporate affiliates. But it cited other cases that noted under New York law when two or more entities take on a contractual obligation they generally do so jointly.
The appeals court said there was “at least a ‘barely colorable justification’ for the panel’s conclusion that Pacific Fruit and Kelso were co-promisors on a single contract, and…therefore may be held jointly and severally liable for damages.”
Pacific Fruit also argued the arbitration panel exceeded its authority by imposing joint and several liability because Pacific Fruit and Kelso initially agreed to arbitrate their claims in “two separate” written contracts with NYKCool, neither of which “authorize the panel to impose liability upon Pacific Fruit for Kelso’s contractual obligations, or vice versa.”
The court said this argument was “unconvincing. The arbitration panel concluded that the instant dispute arises out of the parties’ ‘binding and enforceable new contract’ for the years 2005 through 2008” and the “terms of this single contract mirrored those of the written agreements that had been in force prior to the inception of the new agreement.”
The court noted when an arbitration clause is broad, arbitrators have discretion to order remedies they determine appropriate, so long as they do not exceed the power granted to them by the contract itself. It concluded the parties’ agreement to arbitrate granted the panel the authority to impose joint and several liability pursuant to the relevant oral contract covering the years between 2005 and 2008.
The court said it saw “no fundamental unfairness in the panel’s decision to impose joint and several liability without first holding a supplemental evidentiary hearing specifically devoted to the issue.
While summary orders can be cited, they do not have precedential effect.