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Toroyan v. Barrett

July 10, 2007



On June 2, 2006, Kevork Toroyan petitioned the New York State Supreme Court to confirm an arbitration award against Patrick Barrett, following a proceeding conducted before Professor Hans Smit, an arbitrator from the American Arbitration Association ("AAA"). After removing the petition to this Court, respondent Barrett opposed Toroyan's petition to confirm the arbitration award and moved to vacate the award on two grounds: (1) manifest disregard of the law and (2) evident partiality under 9 U.S.C. § 10(a)(2). For the reasons that follow, petitioner's motion to confirm the arbitration award is GRANTED and respondent's motion to vacate the arbitration award is DENIED.


The claims that are the subject of the arbitration arose from the parties' interest in Delma Power Company LLC ("Delma Power"), a company established to develop and operate electric power projects. Delma Power was created at the instigation of Toroyan, CEO of Consolidated Contractor Company N.V. ("CCC"), a company owned principally by Said Khoury and Hasib Sabbagh that does extensive business in the Middle East. Because there appears to have been internal opposition in CCC to the company becoming directly involved in electric power development, several officers of CCC along with Barrett and others set up Delma Power as an affiliate to engage in that business. Article 13.10 of the Delma Power Shareholders' Agreement provides, in relevant part:

Except as otherwise provided herein, each Member and the officers of the Company shall inform the other Members of any project development opportunities that appear to be within the general purposes of the Company . . . and provide the Company the opportunity to participate subject to such Member's and officer's ability to influence such third party. Members associated with MG [Morganti Group, Inc., which includes CCC] shall also inform the other Members of any such opportunities in which MG is involved and provide the Company the opportunity to participate.

(Mem. of L. in Supp. of Vacatur of the Arbitration Award ("Mot. to Vacate") 2 (quoting Shareholders' Agreement, Article 13.10).) The arbitration concerned claims by Barrett that certain Delma Power shareholders beached this provision. Specifically, Barrett alleged that CCC acquired an interest in an electric power development project in Gaza without informing Delma Power and providing it an opportunity to participate.

On October 20, 2004, Barrett filed a demand for arbitration pursuant to an arbitral clause in Article 13.10 of the Shareholders' Agreement*fn1 to address this claim. (Mot. to Vacate 4.) In accordance with the arbitral clause, Professor Hans Smit of Columbia University School of Law was selected as the sole arbitrator. (Id.) The AAA furnished all parties involved with Professor Smit's biographical information, including his affiliation with Columbia University. (See Aff. of Thomas G. Rohback ("Rohback Aff."), Ex. 1.) At the close of arbitration, Professor Smit issued an Interlocutory Award rejecting Barrett's claims and awarding costs to Toroyan and his co-parties, finding that Toroyan and his co-parties had not breached the Shareholders' Agreement.*fn2

(Interlocutory Award ¶¶ 51--58.) In the Final Award, dated May 3, 2006, Prof. Smit ordered Barrett to pay the opposing parties $129,227.50, including $29,227.50 for the costs of arbitration and $100,000.00 in legal fees (reduced from the $561,290.28 that had been requested). (Final Award ¶¶ 23--25.)

When Barrett failed to pay the ordered costs, Toroyan filed a petition to confirm the arbitration award ("Petition to Confirm") on June 2, 2006. After removing the action to this Court, Barrett filed a motion to vacate the award, arguing that that it was in manifest disregard of the law and that Prof. Smit's failure to investigate and disclose contributions to Columbia University by related parties amounted to evident partiality. (Mot. to Vacate 5.)


"A party petitioning a federal court to vacate an arbitral award bears the heavy burden of showing that the award falls within a very narrow set of circumstances, delineated by statute and case law." Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S ("Duferco"), 333 F.3d 383, 388 (2d Cir. 2003); see also Wallace v. Buttar, 378 F.3d 182, 183 (2d Cir. 2004) (scope of "federal court review of a decision issued by an arbitral panel . . . is highly constrained"). Barrett advances one common law and one statutory grounds for vacating the award. First, vacatur of an arbitration award is appropriate where there has been a manifest disregard of the law. See, e.g., Duferco, 333 F.3d at 388; Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216 (2d Cir. 2002). Second, under the Federal Arbitration Act, a district court may vacate an arbitration award "where there was evident partiality . . . in the arbitrators." 9 U.S.C. § 10(a)(2) (2006).*fn3 Barrett has failed to show that either grounds for vacating an arbitration award exist in this case.

I. Manifest Disregard of the Law

A. Legal Standard

"An arbitration award may be vacated if it exhibits a manifest disregard of the law." Goldman, 306 F.3d at 1216 (internal quotation marks and citations omitted). However, the Second Circuit considers vacatur on the grounds of manifest disregard of the law to be a doctrine of "last resort," reserved for instances where there is "some egregious impropriety on the part of the arbitrators." Duferco,333 F.3d at 389. A party seeking vacatur must show that: (1) "the law that was allegedly ignored was clear, and in fact explicitly applicable to the matter before the arbitrators"; (2) "the law was in fact improperly applied, leading to an erroneous outcome"; and (3) "the arbitrator [knew] of its existence, and its applicability to the problem before him." Id. at 390. A federal court should confirm an arbitration award so long as there is a "barely colorable justification" for the arbitrator's decision. ...

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