UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
May 3, 2012
B/E AEROSPACE, INC., PETITIONER AND CROSS-RESPONDENT,
JET AVIATION ST. LOUIS, INC. F/K/A MIDCOAST AVIATION, INC., RESPONDENT AND CROSS-PETITIONER.
The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.
OPINION AND ORDER
B/E Aerospace, Inc. ("B/E") petitions the Court to vacate a final award entered in favor of Jet Aviation St. Louis, Inc. F/K/A Midcoast Aviation, Inc. ("Midcoast") in an arbitration proceeding between the two parties. B/E contends that the Arbitration Panel erred in awarding consequential damages*fn1 and in awarding attorneys' fees.*fn2 Midcoast cross-petitions to confirm the arbitration award. For the rasons discussed below, B/E's petition to vacate is denied and Midcoast's cross-petition is granted.
B/E is a developer and manufacturer of interior products for commercial aircraft and business jets.*fn3 Midcoast installs interiors on private jets for owners and original equipment manufacturers.*fn4 In 2005, B/E contacted Midcoast regarding a business deal whereby B/E would develop seats and divans for Midcoast to install in aircraft; Midcoast would pay $1.4 million to B/E and would purchase the seating.*fn5 In October 2005, the parties signed a contract (the "Agreement") pursuant to which B/E agreed to provide goods and related services to bring the seating to market, "including dynamic testing and certification" of the seating.*fn6
Under the agreement, B/E was required to conduct "head impact criteria testing" to ensure that the seating and installation complied with Federal Aviation Administration ("FAA") regulations.*fn7 Midcoast paid B/E the required amount and installed the seating per B/E's instructions.*fn8 The parties do not dispute that B/E provided incorrect installation instructions to Midcoast and that, as a result, the seating was not certifiable by the FAA.*fn9 Midcoast disclosed the issue to the FAA, notified its customers to disable the affected seating, and participated in testing various solutions to correct the issue.*fn10 "Midcoast incurred over $3.3 million in non-recurring engineering costs and payments to its customers."*fn11
Midcoast requested payment in this amount from B/E, but B/E refused.*fn12
Midcoast began arbitration proceedings against B/E in May 2011. As called for in the Agreement, Midcoast and B/E each appointed one arbitrator. The arbitrators failed to agree on the third arbitrator, so, as per the Agreement, the American Arbitration Association ("AAA") appointed the third arbitrator.*fn13 B/E sought an injunction in the Southern District of New York in June 2011 to enjoin the arbitration, which was denied on July 1, 2011.*fn14 Five days later, Midcoast filed a motion to compel arbitration, which I dismissed without prejudice on August 31, 2011.*fn15 Midcoast then filed a motion to dismiss in September 2011. Citing the July 1 opinion, I denied all requested relief, dismissed Midcoast's motion as moot, and dismissed the case in an order dated September 26, 2011.*fn16 B/E appealed this decision, but has since withdrawn the appeal.
The arbitration proceeded and Midcoast sought damages for breach of
contract and negligent misrepresentation.*fn17 B/E
argued that Midcoast had "a non-delegable duty to certify the test
results" and that its failure to do so was the cause of its
damages.*fn18 The Arbitration Panel made the following
findings: (1) B/E breached its contract with Midcoast by providing
seating and installation instructions that did not comply with FAA
regulations;*fn19 (2) "B/E negligently
misrepresented the information it was required to provide to
Midcoast";*fn20 and (3)
B/E was legally liable for the incorrect testing data.*fn21
The Panel awarded damages against B/E in the amount of
$3,324,215 including: (1) payments to Midcoast's customers for
non-compliance in the amount of $1,550,000; (2) actual costs for
Midcoast to correct the error in the amount of $473,730; and (3) legal
fees and expenses Midcoast incurred in obtaining dismissal of the suit
B/E filed in the Southern District of New York in the amount of
On November 22, 2011, B/E sought to modify the award claiming there had been a clerical error.*fn22 The Panel rejected B/E's request and found that the request was a "thinly-disguised attempt to re-argue" its case.*fn23 Finding that the request was submitted by B/E in bad faith, the Panel awarded Midcoast attorneys' fees associated with the modification request.*fn24
On November 23, 2011, B/E filed the instant action seeking to vacate the award alleging, inter alia, that the Panel's award of consequential damages and attorneys' fees was in disregard of both New York law and the parties' Agreement.*fn25 Midcoast filed a cross-motion to confirm the final arbitration award.
III. APPLICABLE LAW
A. Vacatur of an Arbitration Award
"'It is well established that courts must grant an arbitration panel's
decision great deference.'"*fn26 "'[A]rbitration
awards are subject to very limited review in order to avoid
undermining the twin goals of arbitration, namely, settling disputes
efficiently and avoiding long and expensive litigation.'"*fn27
challenging an arbitration award "bears the heavy burden" of proving
the existence of grounds for vacatur.*fn28 "So long as
some ground for the arbitrators' award 'can
be inferred from the facts of the case, the award should be
The Federal Arbitration Act enumerates specific instances where an award may be vacated.*fn30 Additionally, the Second Circuit has recognized that a court may vacate an arbitration award rendered in "manifest disregard" of the law.*fn31
B. Manifest Disregard of the Law
"The party seeking to vacate an award on the basis of the arbitrator's alleged 'manifest disregard' of the law bears a 'heavy burden.'"*fn32 Review of awards for manifest disregard of the law "is highly deferential to the arbitrators," as "[m]ore searching review would frustrate the basic purpose of arbitration, which is to dispose of disputes quickly and avoid the expense and delay of extended court proceedings."*fn33 "A federal court cannot vacate an arbitral award merely because it is convinced that the arbitration panel made the wrong call on the law. On the contrary, the award 'should be enforced, despite a court's disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.'"*fn34
A reviewing court may vacate an arbitral award on these grounds only
in "those exceedingly rare instances where some egregious impropriety
on the part of the arbitrators is apparent . . . ."*fn35
To find manifest disregard the court undertakes three
inquiries: (1) "whether the law that was allegedly ignored was clear,
and in fact explicitly applicable to the matter before the
arbitrators"; (2) whether "the law was in fact improperly applied,
leading to an erroneous outcome"; and (3) whether the arbitrator
subjectively knew of the law and its applicability.*fn36
Recently, the Supreme Court called the viability of the manifest disregard doctrine into doubt with its decision in Hall Street Associates, LLC v. Mattel, Inc.*fn37 The Second Circuit subsequently confirmed in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp. that manifest disregard "remains a valid ground for vacating arbitration awards."*fn38 The Second Circuit made clear "that it reads Hall Street as 'reconceptualiz[ing]' manifest disregard 'as a judicial gloss on the specific grounds for vacatur' of arbitration awards under 9 U.S.C. § 10."*fn39
A. Vacatur of the Award - Manifest Disregard
1. Consequential Damages
B/E asks the court to vacate the arbitration award entered in favor of Midcoast on the grounds that the Panel "manifestly disregard[ed] New York law and the parties' Agreement."*fn40 B/E asserts that the Panel "awarded damages based on duplicative contract and tort claims in contravention of settled New York law."*fn41
The parties agree that for Midcoast to sustain its claim of
negligent misrepresentation under New York law, it must establish that B/E had a
legal duty independent from its Agreement with Midcoast.*fn42
B/E argues that the only duty it owed to Midcoast arose from
their contract, which would not support a negligent misrepresentation
claim under New York law.*fn43 However, the Panel
explicitly found that B/E and Midcoast had a "special relationship"
based in part on B/E's "presentations of its expertise" prior to the
parties' signing of the Agreement.*fn44
Even if the Panel made an error in its application of the law, manifest disregard would not be established, because there is no evidence that the Panel "intentionally defied [the law]."*fn45
While "not all representations made by a seller of goods or provider
of services will give rise to a duty to speak with care,"*fn46
"liability for negligent misrepresentation has been imposed .
. . on those persons who possess unique or specialized expertise . . .
such that reliance on the negligent misrepresentation is
justified."*fn47 The Panel found B/E to have such
specialized expertise,*fn48 thereby creating an
independent legal duty to Midcoast beyond their contractual
relationship.*fn49 The Panel further found that
Midcoast reasonably relied on the incorrect information provided by
B/E also argues that the Panel awarded consequential damages in contravention of the Agreement's clause limiting liability.*fn51 The Agreement stated: "Notwithstanding anything to the contrary in this Agreement, in no event shall Buyer or Seller be liable for any special, indirect, or consequential damages, including without limitation lost profits or lost revenues."*fn52 The Panel interpreted the Agreement as allowing the imposition of consequential damages for tort claims, because the limiting clause did not "'plainly and precisely state that the limitation of liability extends to negligence . . . .'"*fn53
In Net2Globe International, Inc. v. Time Warner Telecom of New York, the case on which petitioner primarily relies, the liability limitation clause stated: "In no event shall the Company . . . be liable for any incidental, indirect, special, or consequential damages . . . of any kind whatsoever regardless of the cause or foreseeability thereof."*fn54 This clause is inapposite to the instant case because the limitation of liability clause at issue here does not explicitly reference tort damages or "foreseeability."
Because the Panel provided adequate justification for its award of consequential damages and reasonably interpreted the parties' Agreement, B/E has failed to meet its heavy burden to vacate the award of consequential damages.
2. Attorneys' Fees
B/E also seeks to vacate the award of $84,543 in attorneys' fees, which Midcoast incurred defending the suit B/E filed in the Southern District of New York.*fn55 While Judge Barbara Jones denied B/E's requested injunction, she agreed with B/E that the court was the appropriate vehicle for "'parties [that] have agreed to arbitrate, but disagree as to the operation or implementation of that agreement.'"*fn56 After the injunction was denied, B/E "refused to dismiss the Federal case"*fn57 and Midcoast filed a motion to compel arbitration,*fn58 and ultimately a motion to dismiss.
B/E argues that the award of attorneys' fees was in manifest disregard of the law because the Agreement specified that "[e]ach party shall be solely responsible for its own attorneys fees."*fn59 However, the AAA rules were expressly incorporated into the parties' Agreement,*fn60 and AAA Rule 43(d) states: "The award of the arbitrator(s) may include: . . . an award of attorneys' fees if all parties have requested such an award or it is authorized by law or their arbitration agreement."*fn61 In their respective demand and answer, both Midcoast and B/E sought an award of attorneys' fees,*fn62 which makes the award permissible under Rule 43(d). Because of this, the Panel did not manifestly disregard New York law or the parties' Agreement.
For the foregoiing reasons B/E's petition to vacate the arbitration award is denied and Midcoast's cross-petition to confirm the award is granted. The Clerk of the Court is directed to close these motions [Docket Nos. 1, 11] and this case.