Ohio Federal Court Upholds ICDR Arbitration Award in Favor of Chinese Party

Recently, the U.S. District Court for the Southern District of Ohio denied an Ohio company’s motion to vacate or modify a USD 1.3 million arbitration award from the International Centre for Dispute Resolution (“ICDR”) and confirmed the award in favor of the Chinese company claimant. The case illustrates the benefits of international arbitration and serves as a reminder of the limited grounds on which an award can be vacated under the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and the Federal Arbitration Act (the “FAA”), which adopts and implements the New York Convention under Chapter 2.

Petitioner, G&K Services LUG, LLC (“LUG”), a Minnesota company, sought to vacate or modify the ICDR award in favor of Talent Creation, Ltd. (“Talent”), a Chinese corporation. LUG alleged the arbitrator exceeded her authority under the FAA and New York Convention and “manifestly disregarded [Ohio] law in issuing the Award[,] by ruling on a claim that Talent “did not assert in its Demand for Arbitration, and in fact never asserted until after the evidentiary hearing[,]” and by refusing to enforce Ohio’s 4-year statute of limitations and “Ohio law on laches.”

Alternatively, LUG requested that the court modify the award “to remove $400,000 in liquidated damages awarded” on the claim it alleged was not asserted until post-hearing. The 15-page Final Award from the ICDR arbitration and the underlying International Supply Agreement, which contained the arbitration provision, were attached to the Petition as exhibits.

The motion to confirm the ICDR award was succinct and the memorandum offered no legal argument whatsoever, as the issues were reserved for briefing.

In the Order, the court found it had jurisdiction over the matter pursuant to 9 U.S.C. § 203 and 28 U.S.C. § 1332. The court noted the New York Convention governed the matter because the arbitration award involved a party domiciled or having its principal business outside of the United States. The court observed that the New York Convention provides seven (7) grounds for vacatur or modification of an international arbitration award and that the court also has authority to vacate or modify the award on any of the grounds set forth in the FAA, including where “arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award…was not made.” Recognizing the strong public policy favoring arbitration and enforcing awards, the court noted the narrow standard when reviewing awards.

The court rejected LUG’s argument that the arbitrator exceeded her powers by including an amount for liquidated damages in the award. LUG argued Talent’s Notice of Arbitration did not include a claim for liquidated damages based on a provision in the International Supply Agreement. LUG further asserted that because the claim was raised only in Talent’s post-hearing brief, “without obtaining LUG’s consent to arbitrate the issue and without amending or supplementing its initial arbitration notice[,]” Talent violated the ICDR rules.

LUG seems to have applied a civil procedure analysis in challenging the ICDR proceedings by arguing that without Talent obtaining leave or LUG’s consent to amend the Notice (as would be required if the case were being litigated in federal court), the arbitrator could not render an award on the liquidated damages claim. The court rejected that contention, holding the arbitration provision called for the parties to arbitrate any dispute under the International Supply Agreement. The court found the arbitrator did not exceed her powers because the dispute “fell squarely within the Agreement’s subject matter,” and it also deferred to the arbitrator on this procedural matter because the court “is not governed by, or even necessarily familiar with, ICDR rules.”

The court also rejected LUG’s arguments that the arbitrator exceeded her powers by rejecting its laches defense and that she manifestly disregarded the applicable Ohio statute of limitations. The court addressed these issues in-depth. It held the arbitrator’s rejection of the laches defense was not unreasonable, arbitrary, or unconscionable. Similarly, it found, in part, that in light of the “strong pro-enforcement biases of the Convention and FAA,” LUG failed to meet its burden that the arbitrator manifestly disregarded Ohio law in rejecting the status of limitations defense. Eight (8) days after the court confirmed the award, a Satisfaction of Judgment was filed, concluding the matter.

Generally, the benefits of arbitrating international commercial disputes are well-recognized. This case shows the importance of thoughtfully drafting the arbitration provision in an international commercial agreement. For instance, parties can agree that the arbitrator must be admitted to practice law in the jurisdiction of the law that will govern the arbitration or that the arbitrator(s) can only decide claims raised in the arbitration demand, which may avoid issues such as those raised by LUG. Parties to international commercial agreements may want to consider giving more attention to arbitration provisions in light of this decision.

For questions on and assistance with international commercial agreements and disputes, please contact Jon P. Yormick at [email protected] or 216.928.3474.

Former NFL Player’s Motion to Remand Complaint is Sacked

Recently, the U.S. District Court for the Southern District of Ohio denied a motion to remand to state court an action seeking to compel arbitration against Certain Interested Underwriters at Lloyd’s of London and other defendants.  The plaintiff, a former National Football League player and star defensive player at The Ohio State University, suffered a career-ending injury in 2001 after just 2 years as a member of the New England Patriots professional football team.  He allegedly purchased a disability insurance policy from the defendants, but his claim for disability was allegedly denied by the defendants without proceeding to mandatory arbitration called for in the policy.  The plaintiff then filed a complaint for specific performance, breach of contract, and insurance bad faith in state court in Columbus, Ohio.

Two of the defendants removed the case to federal court and indicated that the third defendant consented to removal, but the third defendant did not sign the Notice of Removal.  The plaintiff moved to remand the case to state court, arguing that the federal court lacked subject matter jurisdiction because removal was not timely consented to by all defendants, as required by the removal statute, 28 U.S.C. § 1446.

The Notice of Removal, however, invoked federal question jurisdiction under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”), 9 U.S.C. § 201 et seq. and the Federal Arbitration Act, 9 U.S.C. § 1 et seq.  The Court explained that it has federal question jurisdiction if the Notice of Removal relied on the Convention as grounds for removal.  The Court cited 9 U.S.C. § 203, which states an “action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States.”

The Court further noted that the Convention applies to written arbitration agreements arising out of a commercial relationship where at least one of the parties is not a U.S. citizen or the commercial relationship has a reasonable relation with at least one foreign state.  Despite the Lloyd’s Underwriters not being disclosed parties, the Court found sufficient evidence that the defendant that signed the insurance agreement had acted as an agent for the Lloyd’s Underwriters.  The defendant signed the agreement as a “Lloyd’s Correspondent.”  Accordingly, the requirements of the Convention were met, meaning the action was deemed to arise under U.S. laws and treaties and the Court had subject matter jurisdiction over the action.

Significantly, the Court went on to hold that the removal statute’s rule of timely unanimity was not applicable.  That rule requires all defendants to join in a Notice of Removal within 30 days of when the case became removable to federal court.  The Court explained that the failure of the third defendant to consent to removal in a timely manner would generally render removal improper.  Here, however, the Convention provides that where the subject matter of a state court action relates to an arbitration agreement falling under the Convention, “the defendant or the defendants may, at any time before the trial thereof, remove such action.”  9 U.S.C. § 205.  Since all defendants joined in removal before trial of the state court action, the Court held the case was timely removed to federal court.

The Magistrate Judge issued a Report and Recommendation to deny the plaintiff’s motion to remand.  Neither side filed objections and the District Court Judge adopted the Report and Recommendation.  See Katzenmoyer v. TR’BL Marketing, Ltd., Civil Action 2:12-cv-660 (S.D.Ohio 2012).

For questions about and assistance with international litigation and dispute resolution matters, please contact Jon P. Yormick, Attorney and Counsellor at Law, [email protected]

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