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Sperry International Trade Inc. v. Government of Israel


decided: September 3, 1982.


Appeals from orders of the United States District Court for the Southern District of New York (1) vacating an order of attachment entered in New York Supreme Court, and (2) confirming an arbitration award.

Mansfield and Kearse, Circuit Judges, and Cabranes,*fn* District Judge.

Author: Kearse

KEARSE, Circuit Judge:

The principal question on these appeals concerns the power of arbitrators to make certain rulings, in light of a prior decision of this Court in this litigation reversing the district court's granting of a preliminary injunction on the ground that the moving party had failed to prove irreparable injury. In No. 82-7181, respondent-appellant Government of Israel ("Israel") appeals from an order of the United States District Court for the Southern District of New York, Milton Pollack, Judge, confirming an arbitration award in a proceeding between Israel and petitioner-appellee Sperry International Trade, Inc. ("Sperry"). Because we conclude that the award was within the arbitrators' powers and did not disregard the law, we affirm. On the basis of this affirmance we also affirm No. 82-7121.*fn1


The relevant facts in this continuing controversy between Sperry and Israel are more fully discussed in our previous opinion in Sperry International Trade, Inc. v. Government of Israel, 670 F.2d 8 (2d Cir. 1982) (" Sperry I "), and Judge Pollack's opinion at issue here, reported at 532 F. Supp. 901 (S.D.N.Y. 1982). Familiarity with both opinions is assumed.

In July 1978, Sperry Rand International Trade, Inc., the predecessor of appellee Sperry (both referred to as "Sperry"), and Israel executed a contract (the "Contract") requiring Sperry to design and construct a communication system for the Israeli Air Force. As contemplated by para.59 of the Contract, Sperry caused Citibank, N.A. ("Citibank") to open a clean irrevocable letter of credit in Israel's favor for a sum eventually set at approximately $15 million. Paragraph 59 gave Israel the right to draw on this letter of credit, to the extent of its payments to Sperry, upon presentation of a sight draft and Israel's own "certification that it is entitled to the amount covered by such draft by reason of a clear and substantial breach" of the Contract. The provision for payment in the letter of credit itself stated, somewhat differently, as follows:


Paragraph 45 of the Contract provided that all Contract disputes that could not be resolved by negotiation were to be submitted to arbitration in accordance with the rules of the American Arbitration Association.

On August 3, 1981, Sperry initiated arbitration proceedings, seeking a declaration that Israel had breached its contractual obligations and demanding damages of approximately $10 million. Sperry alleged that its attempts to perform its obligations under the Contract had been seriously and substantially frustrated by wrongful actions and inactions of Israel. Israel denied Sperry's allegations and asserted eleven counterclaims, claiming, inter alia, nonperformance of the Contract by Sperry.

On September 11, 1981, Sperry instituted suit in the district court to compel arbitration and to enjoin Israel from drawing on the letter of credit pending a decision by the arbitrators. The district court enjoined Israel from making the certification that would enable it to draw on the letter of credit, "pending an early ruling by the arbitrators" as to "whether it is equitable and proper in the circumstances that Israel shall or shall not draw on the letter of credit." On January 21, 1982, we reversed the district court's order granting the preliminary injunction because Sperry had made no showing that it would be irreparably injured in the absence of such an injunction. Sperry I. We declined to express a view as to the merits of the controversy. Id., 670 F.2d at 11 & n.4. By order dated January 25, we issued our mandate immediately.

On January 27, 1981, Israel furnished Citibank with a sight draft and certification acceptable to Citibank for drawing down the letter of credit, and requested Citibank to transmit the proceeds to an account at another bank in New York. On January 31, however, before the proceeds had been transmitted, Sperry obtained an ex parte order of attachment in New York State Supreme Court. Israel removed the action to federal court pursuant to 28 U.S.C. § 1441(d) (1976) and moved to vacate the order of attachment; Sperry cross-moved to confirm the attachment. Argument on these motions was scheduled for February 9, with the expectation that by that time the arbitrators would have ruled on the letter of credit question. On February 8, the arbitration panel held its first hearing and considered Sperry's motion to require Israel to withdraw its certification and demand for payment, and to enjoin it permanently from drawing down the letter of credit. Early on the morning of February 9, the arbitrators made their award on these issues (the "Award"), ordering that the proceeds of the letter of credit be held in an escrow account in the joint names of Israel and Sperry.*fn2

This action was promptly reported to Judge John M. Cannella, before whom the parties argued the motions to vacate or confirm Sperry's attachment. Sperry stated that it would move for an order confirming the arbitrators' Award, and that if the Award were confirmed, the attachment would become "essentially moot and unnecessary." (Transcript at 3.) On February 10 Judge Cannella vacated the attachment on the ground "that the attachment [was] unnecessary to the security of [Sperry]." N.Y. Civ.Prac. Law § 6223(a) (McKinney 1980); see Fed. R. Civ. P. 64 (law of forum state applicable to attachment). See note 1, supra. Judge Cannella also stayed Israel "from taking any further action to collect the proceeds of [the] letter of credit . . . or to remove the proceeds resulting from any payment of that letter of credit from their present location at Citibank" pending a hearing on Sperry's motion to confirm the arbitrators' award. (Order To Show Cause dated February 10, 1982, at 2.)

Sperry's motion to confirm the Award was heard before Judge Pollack on February 18, and was opposed by Israel principally on the ground that the Award was inconsistent with our decision in Sperry I, since the arbitrators allegedly had granted substantially the same relief Israel claimed we had held impermissible. Judge Pollack rejected all of Israel's arguments*fn3 in a reasoned opinion and confirmed the award.*fn4 On this appeal, Israel renews its contention that our decision in Sperry I bars the arbitrators' Award. We disagree and affirm the order of the district court.


It is beyond cavil that the scope of the district court's review of an arbitration award is limited. Under 9 U.S.C. § 9 (1976), "the court must grant . . . an order [confirming an arbitration award] unless the award is vacated, modified, or corrected as prescribed in [9 U.S.C. §§ 10 and 11 (1976)]." Section 10 permits the court to vacate an award only in specific situations, such as "where the award was procured by corruption, fraud, or undue means," § 10(a); "where there was evident partiality or corruption in the arbitrators," § 10(b); "where the arbitrators were guilty of [certain types of] misconduct . . . or of any other misbehavior by which the rights of any party have been prejudiced," § 10(c); or "where the arbitrators exceeded their powers," or failed to make "a mutual, final, and definite award upon the subject matter submitted," § 10(d).*fn5 In addition, an award may be set aside on "the nonstatutory ground of 'manifest disregard' of the law," Drayer v. Krasner, 572 F.2d 348, 352 (2d Cir.), cert. denied, 436 U.S. 948, 56 L. Ed. 2d 791, 98 S. Ct. 2855 (1978), but "this presuppose[s] 'something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand or apply the law,'" id. (quoting San Martine Compania de Navegacion, S.A. v. Saguenay Terminals Ltd., 293 F.2d 796, 801 (9th Cir. 1961)).*fn6

In the present case Israel argues that the arbitrators exceeded their powers, in violation of § 10(d), and that the Award was made in manifest disregard of the law. Israel bases these contentions on our decision in Sperry I, vacating the preliminary injunction issued by the district court and issuing our mandate promptly, which it construes as having

established (a) that, as a matter of law, Sperry was not entitled to any restraint for any period of time on Israel's right to the $15 million represented by the letter of credit, and (b) that Israel should have the immediate right to those funds without having to relitigate the issue before the Arbitrators.

(Israel's Brief in No. 82-7181, at 8; emphasis in original; other original emphasis omitted.) On this view of Sperry I, Israel argues that the arbitrators were barred from prohibiting Israel from drawing down the letter of credit, and that in making the Award the arbitrators exceeded their powers and manifestly disregarded such principles as res judicata, collateral estoppel, and law of the case. Israel's attack on the Award as violative of Sperry I must fail, however, for Israel has rather badly misstated our decision.

In Sperry I we reiterated the standard criteria that govern the district courts' granting of preliminary injunctions, see Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979) (per curiam), and ruled that Sperry had failed to prove the likelihood of irreparable injury required to obtain such relief, because the only potential harm it had shown was strictly monetary. Sperry I, 670 F.2d at 11-13. This was the only ground of our decision. Nowhere did we state that Israel had a right to the funds or suggest that Sperry had breached the Contract in such a way as to give Israel the right to draw down the letter of credit. Indeed, we expressly declined to state a view as to such issues as Sperry's likelihood of prevailing on the merits and the seriousness of the dispute as to the merits of Sperry's claim. See id. at 11 n.4. And the question of what powers the arbitrators might have to interpret the Contract or to rule in any way on the propriety of any certification Israel might make was not before us. To the extent, therefore, that Israel's contention that the arbitrators exceeded their powers or manifestly disregarded the law depends on the proposition that the Award was somehow foreclosed by Sperry I, it fails because of Israel's false premise.*fn7

Nor do we find merit in Israel's contention that under New York law the arbitrators had no power to prevent Israel's sole possession of proceeds of the letter of credit pending a decision on the merits of the contractual claims and counterclaims. Preliminarily, we note that, "in keeping with the practice that is customary for arbitration under the [American Arbitration] Association's Rules," (Israel's Brief in No. 82-7181, at 14) the arbitrators gave no explanation for the Award. We are thus left to theorize as to the basis of the Award, and New York law requires that all reasonable efforts be made to find a ground on which to sustain it. See Moyer v. Van-Dye-Way Corp., 126 F.2d 339, 341 (3d Cir. 1942) (applying New York law); Fudickar v. Guardian Mutual Life Insurance Co., 62 N.Y. 392, 401 (1875) ("It is a settled principle governing this subject, and which ought never to be lost sight of, that all reasonable intendments and presumptions are indulged in support of awards."). One quite reasonable explanation of the Award comes quickly to mind: that is, that the arbitrators' view was that any breach of the Contract by Sperry had not been so "clear and substantial" (Contract para. 59) as to allow Israel in good faith to draw down the letter of credit, and that any breach of the Contract by Israel was not so egregious as to relieve Sperry of its contractual obligation to provide security for its own performance of the Contract. We have been cited to no principle of law, from New York or elsewhere, preventing the arbitrators in such circumstances from ruling that the $15 million be held in the names of both parties until the contract disputes are determined.

Rather, New York law gives arbitrators substantial power to fashion remedies that they believe will do justice between the parties. Thus, in Sprinzen v. Nomberg, 46 N.Y.2d 623, 629, 415 N.Y.S.2d 974, 389 N.E.2d 456 (1979), the New York Court of Appeals stated as follows:

An arbitrator's paramount responsibility is to reach an equitable result, and the courts will not assume the role of overseers to mold the award to conform to their sense of justice. Thus, an arbitrator's award will not be vacated for errors of law and fact committed by the arbitrator . . . .

Under New York law arbitrators have power to fashion relief that a court might not properly grant. In Rochester City School District v. Rochester Teachers Association, 41 N.Y.2d 578, 394 N.Y.S.2d 179, 362 N.E.2d 977 (1977), the court reversed the vacation of an arbitration award that ordered the petitioner school district to grant sabbaticals to certain teachers, stating as follows:

In the final analysis "Arbitrators may do justice" and the award may well reflect the spirit rather than the letter of the agreement . . . . Thus courts may not set aside an award because they feel that the arbitrator's interpretation disregards the apparent, or even the plain, meaning of the words or resulted from a misapplication of settled legal principles. In other words a court may not vacate an award because the arbitrator has exceeded the power the court would have, or would have had if the parties had chosen to litigate, rather than to arbitrate the dispute. Those who have chosen arbitration as their forum should recognize that arbitration procedures and awards often differ from what may be expected in courts of law.

Id. at 582 (citation omitted). See also Sprinzen v. Nomberg, supra, 46 N.Y.2d at 632 (expressing doubt as to whether court would have enforced restrictive covenant at issue, but stating that courts will not "second-guess" arbitrator's conclusions); Lentine v. Fundaro, 29 N.Y.2d 382, 328 N.Y.S.2d 418, 278 N.E.2d 633 (1972) (arbitrators permitted to order unequal distribution of property despite contractual provision requiring equal distribution).

In sum, Sperry I did not foreclose the arbitrators' Award, and we are aware of no provision of law contravened by the Award. Accordingly, we concur in the district court's ruling that Israel has failed to advance any valid basis for denying Sperry's motion to confirm the Award.


The orders appealed from are affirmed. Sperry may recover its taxable costs from Israel in No. 82-7181. Israel may recover its taxable costs from Sperry in No. 82-7121.


Both orders affirmed.

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