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In re Arbitration Between Sanko S.S. Co.

decided: October 17, 1973.


Appeal from an order of the District Court for the Southern District of New York, Brieant, J., denying motion of petitioner, Sanko Steamship Co., Ltd., to have arbitration award vacated.

Lumbard Friendly and Feinberg, Circuit Judges.

Author: Lumbard

LUMBARD, Circuit Judge:

Appellant, Sanko Steamship Co., Ltd., the unsuccessful party in an arbitration conducted under a New York Produce Exchange Arbitration Clause and pursuant to the rules of the Society of Maritime Arbitrators, seeks a rehearing of a charter dispute by an impartial panel of arbitrators. It claims that the presiding member of the three-man panel which originally arbitrated its dispute with Cook Industries failed to disclose his company's previous associations with Francis O'Brien, Cook's attorney at the arbitration hearing, and large-scale dealings between Cook and his ultimate employer, the Louis Dreyfus partnership. After an award by the panel dated June 19, 1972, finding that Sanko had breached the charter contract and that Cook was thus excused from performance, Sanko sought an order in the New York Supreme Court vacating the award. Cook did not respond, but instead moved on September 27, 1972 in the United States District Court for the Southern District of New York to have the award confirmed. Shortly thereafter Sanko moved to vacate in the same district court.*fn1 By a memorandum decision dated December 8, 1972, Judge Brieant denied Sanko's motion to vacate and granted Cook's motion to confirm, without an evidentiary hearing. An order was entered accordingly on January 15, 1973, from which Sanko appeals.

The dispute between Sanko and Cook has its origins in a charter contract entered into by the parties on February 26, 1971. This contract was a grain charter on a New York Produce Exchange form for one voyage from any port in the United States Gulf Coast range to Japan by ship to be supplied by Sanko, a Japanese company, to Cook, an American grain dealer. Under the terms of the charter, the vessel was to load sometime between August 1 and August 25, 1971. Sanko was required to give ten days notice of the vessel's estimated time of readiness. Cook was then to provide Sanko or its agent with a declaration of the port in the Gulf Coast range where the vessel was to load "at least 96 hours prior [to] the vessel's estimated time of readiness." If the ship was not ready to load before noon on August 25, Cook was to have the option of canceling the charter.

On July 15 and August 6, Sanko gave Cook an estimated time of readiness of August 18 for one of its ships, the "Mary S." Sanko's office in New York and its agent then sought an official declaration of the loading port from Cook, but without success. Finally, Cook telexed Sanko's Tokyo office on August 23 declaring New Orleans the loading port. Although the Mary S was still discharging cargo in Houston at that time, she was able to reach New Orleans and tender her notice of readiness by 10:45 a.m. on August 26, only 76 hours after the loadport nomination by Cook. The vessel was nevertheless rejected because it had arrived after the cancellation date of August 25.

Sanko claimed a loss in excess of $200,000 due to this cancellation and sought arbitration under the terms of the contract. An arbitration panel was chosen, consisting of one member appointed by Sanko and one by Cook, with these two arbitrators then selecting John Besman, a founder of the Society of Maritime Arbitrators, as chairman of the panel. After hearing the evidence and reviewing the charter contract, the arbitration panel unanimously rejected Sanko's claim, concluding that although Cook had been late in making its loadport nomination, it was excused from performance because the Mary S could not have arrived in New Orleans under any circumstances before the cancellation date of August 25.

In seeking to have the arbitration panel's award vacated, Sanko raised in the New York Supreme Court and then in the district court the issue of Besman's failure to make full disclosure of his business connections with Cook Industries and its counsel, Francis O'Brien. At the commencement of the arbitration proceedings, Besman had stated that the company of which he was president, Sagus Marine Corporation, had had business dealings with Cook "of a spot nature." But according to Sanko, he failed to reveal several other significant connections with Cook. Sanko claimed that inquiries it had made as a result of its dissatisfaction with the arbitration award had revealed that Sagus Marine is a subsidiary or affiliate of the Louis Dreyfus Partnership of France and that shortly after the arbitration award Besman had left for Europe to head a second Dreyfus subsidiary. Dreyfus, whose man Besman clearly was, is, like Cook, one of the few major world grain dealers. But although technically competitors, the two companies, according to Sanko, arrange "swaps" and "sales" from time to time running into the millions of dollars. Thus, Besman might have had some interest in reaching a decision favorable to Cook, if only to lay the groundwork for a return favor to Dreyfus from Cook in the future.

Sanko also claimed discovery of ties between Besman and Cook's attorney, Francis O'Brien. It maintained that Sagus Marine had been represented by O'Brien for some time and, in fact, that it had followed him when he had shifted law firms in order to assure his continued representation as its counsel.

Although stating that he would accept Sanko's version of contested facts and that no evidentiary hearing would therefore be necessary, Judge Brieant nevertheless discounted these instances of undisclosed interests. He failed to find any parent-subsidiary relationship between Dreyfus and Sagus Marine, although this had been strongly urged by Sanko. With regard to transactions between Cook and Dreyfus, he found an "occasional business relationship" which was "insubstantial," a conclusion at variance with Sanko's position, stated in its affidavit, that there were "continuing business dealings" between the companies. Concerning the relationship between Besman and Cook's attorney, O'Brien, the court seemed to interpret the facts to show merely that O'Brien "formerly belonged to a law firm which formerly represented [Besman's] employer in an unrelated matter." In contrast, Sanko had pointed to a far more substantial and continuing relationship.

These discrepancies require that this case be remanded so that an evidentiary hearing may be held and the full extent and nature of the relationships at issue may be ascertained. After the facts of the relationship between Cook and Dreyfus or Besman and O'Brien are thoroughly aired, the district court will be in a better position to follow the dictates of Commonwealth Coatings v. Continental Cas. Co., 393 U.S. 145, 21 L. Ed. 2d 301, 89 S. Ct. 337 (1968).

Commonwealth Coatings involved an arbitration between a subcontractor and sureties on the prime contractor's bond. In a procedure similar to that followed by Sanko and Cook, the subcontractor and the prime contractor each appointed an arbitrator and these two arbitrators then selected a third arbitrator. This third arbitrator had had "repeated" and "significant" business dealings with the prime contractor "involving fees of about $12,000 over a period of four or five years," although there had been no contacts during the year preceding the arbitration. The business relationship that had existed was not revealed to the subcontractor and for this reason it sought to have the arbitration award in favor of the sureties set aside.

The Court held that the award must be vacated, declaring that arbitrators are required to disclose "any dealings that might create an impression of possible bias." 393 U.S. at 149. Comparing the arbitrator to a judge, the Court emphasized that while

it is true that arbitrators cannot sever all their ties with the business world. . . we should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the ...

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