00 Civ. 5157 (RWS).
March 1, 2001.
Piper Marbury Rudnick Wolfe, New York, NY, Stanley McDermott III, ESQ. Miller Williamson, New Orleans, LA, Machale A. Miller, ESQ. Iliaura Hands, ESQ., for Petitioners.
Freehill, Hogan Mahar, New York, NY, Eugene J. O'Connor, ESQ. Alexander J. Goulandris, ESQ., for Respondents.
Petitioners, Possehl, Inc. and Allianz Versicherungs AG (collectively, "Possehl") have moved to vacate an arbitration award rendered in an arbitration between them and respondent Shanghai Hai Xing Shipping ("Shanghai" or the "Owner") on April 12, 2000, pursuant to the Federal Arbitration Act (the "FAA"), 9 U.S.C. § 10 and 12. Shanghai has cross-moved to confirm the award, and for sanctions, pursuant to Federal Rule of Procedure 11, 28 U.S.C. § 1927, and this Court's inherent power. For the reasons set forth below, the motion to vacate the award is denied, the motion to affirm the award is granted, and the motion for sanctions is denied.
Facts And Prior Proceedings
On July 23, 1996, Possehl commenced an arbitration proceeding against Shanghai as a result of alleged damage to cargo shipped by Possehl on the M/V Hua Nan, a vessel owned by Shanghai, under a cargo booking note of September 14, 1993. Possehl claimed damages of $106,272.85. As set forth in the majority opinion of the arbitrators,
[u]nfortunately, unsuccessful settlement efforts, plus the many extensive arguments advanced by counsel and related discovery demands made years after the events, have combined to delay an early resolution of this six year old, relatively straight-forward, cargo claim dispute.
The arbitration panel denied Possehl's claims in full and awarded $10,000 costs to Shanghai in the final award of April 12, 2000, which set forth the majority decision and the dissent.
Possehl received the award on April 16, 2000, and on July 12, 2000, filed and served the instant petition to vacate the award. Shanghai subsequently cross-moved to affirm the award. Oral argument was heard on November 1, 2000, at which time the matter was marked fully submitted.
The facts, as set forth in the award, are as follows:
Pursuant to a Booking Note dated September 14, 1993, patterned after and incorporating the terms of a prior Contract of Affreightment (COA) between them, the parties agreed to move 34,000 metric tons of magnesite, bauxite and aluminum oxide from Bayuquan and Zhanjaiang to Burnside, Brownsville and Puerto Ordaz. The cargo in question was packed into one ton "jumbo" bags, equipped with lifting straps to facilitate handling.
On September 14, 1993, the single deck bulkcarrier, MV HUA NAN of 40,543 DWT was fixed to perform the single voyage contemplated by the Booking Note which incorporated the prior COA. Clause 17 of the COA required "Shippers to put the mineral on board, free of expenses to Owners." Consistent with this clause, shippers, rather than Possehl, arranged and paid the loadport stevedore. However, Possehl had a representative of their Hong Kong office attend and supervise the loading arrangements which took place between October 10 and November 6, 1993. The Possehl representative was instrumental in deciding which cargo was fit for shipment and which was required to be replaced. He reported having observed the shipper's stevedores dragging the jumbo bags from the hatch square into the wings and corners of the ship's holds, using a "steel rope" pulley affixed to the bulkhead for this purpose. The Possehl representative noted "many" bags having been damaged in the process ". . . or lying the bags on its top, bottom or side." Moreover, contemporaneously issued Mate's Receipts noted that covers were torn on some two (2%) of the 5,960 jumbo bags loaded. Notwithstanding the known cargo damage and questionable condition of the stowage, "clean" onboard "to order" bills of lading were issued on behalf of the vessel, specifying Possehl as the notify party. An important feature of this case is that Possehl did not acquire title to the cargo until after same had been loaded and stowed aboard the HUA NAN.
The HUA NAN arrived Brownsville on or about December 24, 1993. At the request of Possehl, surveyors Ewig International Marine Corp. attended on board to report on the condition of the cargo in No. 5 hold. There is no evidence that the surveyor was previously informed of the damaged bags and haphazard stowage condition reported by Possehl's representative at Bayuguan. In any event, the surveyor found that a number of jumbo bags had fallen or been pushed over. He observed that the jumbo bags appeared to have been "hand shoved on over head trolley wire, which then allowed many to tip upside down," thus preventing access to the lifting straps. In order to reach the lifting straps, the longshoremen were required to dig under the cargo with hand shovels. During this process, many jumbo bags were unavoidably torn and contents spilled. The surveyor concluded that:
Based upon the mostly upside down position of the superbags in #5 hold, it can be assumed that the loading of the vessel out in the wings of the hold was not done in a proper manner. The superbags should have been secured . . . so as to prevent their movement and/or being pushed over . . . causing them to come to rest upside down. This caused the lift straps . . . to be in the wrong position . . . so that when a bag was lifted . . . the lift straps tore loose . . . The superbag then started tearing . . . spilling it's [sic] contents into the hold . . . causing product loss by comingling [sic] with other type goods.
The surveyor complimented the Brownsville stevedore, explaining that the longshoremen made every effort to minimize further damage and collect the spilled and commingled cargo for possible salvage sale. Unfortunately, no sale was possible and the commingled cargo was eventually dumped.
The panel majority noted that the parties disagreed, and that the panel was divided, regarding "the extent to which COGSA [the Carriage of Goods by Sea Act, 46 U.S.C. § 1300 et seq.] applies to the parties' dispute." However, "applying the COGSA standards argued by Possehl," the majority denied Possehl's claims in their entirety. In so ruling, the majority found that even though the stowage had been "arranged so imperfectly that additional damage and extra handling costs at discharge were inevitable . . . the conditions found and extra costs incurred at Brownsville were the unavoidable consequences of the faulty stowage performed by the shippers." The panel majority also emphasized Possehl's presumed knowledge that the cargo had been damaged at the loading port, stating, "[i]t is clear that the cargo represented by the clean bills of lading was actually damaged during loading and that Possehl was fully aware of this condition." The panel concluded that, independent of the other considerations discussed herein, § 1304(2)(i) of COGSA afforded Shanghai "a complete defense."
The dissenting arbitrator concluded that the majority improperly interpreted Clause 17 of the COA as shifting the risk of cargo damage at loading from the carrier, i.e., Shanghai, to the shippers, i.e., Possehl, and, furthermore, that "nothing in Clause 17 . . . alters in any way" the non-delegable duty imposed by COGSA on a carrier to carefully load and stow cargo. The dissenting member noted that the Second Circuit confirmed that this duty is non-delegable in Associated Metals Minerals Corp. v. M/V Arktis Sky, 978 F.2d 47 (2d Cir. 1992). Finally, the dissent concluded that burden was on the carrier, i.e., Shanghai, to segregate damage caused by a peril for which the carrier was not responsible from that caused by a peril for which it was responsible, and that the majority ignored this requirement.
Discussion I. The Standard Of Review
The FAA provides that a court "must grant . . . an order [confirming an arbitration award] unless the award is vacated. modified, or corrected as prescribed in sections 10 and 11 of this title." 9 U.S.C. § 9; see Ottley v. Schwartzberg, 819 F.2d 373, 375 (2d Cir. 1987). The grounds for vacating awards are narrow. Indeed, courts have consistently held that "`arbitration 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.'" Dirussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 821 (2d Cir. 1997) (citation omitted). Moreover, the burden is on the party seeking to vacate the award to establish one of the statutory grounds for that relief. See Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997). Thus, the Second Circuit "adhere[s] firmly to the proposition . . . that an arbitration 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.'" Landy Michaels Realty Corp. v. Local 32B-32J, 954 F.2d 794, 797 (2d Cir. 1992) (citation omitted).
In addition to the statutory grounds for vacatur set forth in the FAA, see 9 U.S.C. § 10, an award will be vacated if it is deemed to be in manifest disregard of the law. See Merrill Lynch, Pierce, Fenner Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986). "Review for manifest disregard is `severely limited.'" Greenburg v. Bear, Stearns Co., 220 F.3d 22, 28 (2d Cir. 2000) (quoting DiRussa, 121 F.3d at 821). In order to vacate an award on this ground, the court must find that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case." Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 202 (2d Cir. 1998) (citing Dirussa, 121 F.3d at 821).
These statutory grounds, which are not at issue here, are: (1) the award was procured by corruption, fraud, or undue means; (2) evident partiality or corruption in the arbitrators; (3) misconduct by the arbitrators in refusing to postpone a hearing despite sufficient cause shown, or in refusing to hear pertinent, material evidence, or other misbehavior which prejudiced the rights of a party; and (4) the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a).
II. This Proceeding Was Properly Initiated
Shanghai contends that Possehl did not serve its petition within three months of the date of the award, as required under the FAA. See 9 U.S.C. § 12. However, Shanghai's argument is based on a misinterpretation of the statutory requirement.
The FAA provides that notice of a motion to vacate an arbitration award must be served on the adverse party or his attorney within three months "after the award is filed or delivered." 9 U.S.C. § 12. "Delivery" means receipt of the award. Sargent v. Paine Webber Jackson Curtis, Inc., 882 F.2d 529, 531 (D.C. Cir. 1989).
The award was dated April 12, 2000, and Possehl's Notice of Petition to Vacate was served on Shanghai's counsel on July 12, 2000, i.e., on the 91st day. However, Possehl received the award on April 16, 2000. Therefore, Possehl had three months from April 16 to serve the petition on Shanghai, rendering the July 12, 2000, service timely.
Shanghai also urges that Possehl failed to meet the service requirements of 9 U.S.C. § 12, which states in relevant part that:
If the adverse party is a resident of the district within which the award was made, such service shall be made upon the adverse party or his attorney as prescribed by law for service of notice of motion in an action in the same court. If the adverse party shall be a nonresident then the notice of the application shall be served by the marshal of any district within which the adverse party may be found in like manner as other process of the court.
Shanghai fails to specify the alleged deficiency in service although, since service was made on Shanghai's counsel, the implication is that this was insufficient. This argument is without merit. Shanghai is "found" within the Southern District of New York within the meaning of § 12. Shanghai freely entered into a charter agreement requiring an arbitration in New York and throughout the arbitration purposely availed itself of the benefits of New York and the laws of New York. Service on its counsel is sufficient to satisfy the requirement of "service in like manner as other process of the court." 9 U.S.C. § 12. Furthermore, the service provisions of § 12 are permissive rather than exclusive.
"Section 12 is designed to ensure that a defendant is properly notified, thus avoiding the risk of surprise." Escobar v. Shearson Lehman Hutton, Inc., 762 F. Supp. 461, 463 (D.P.R. 1991) (service by mail sufficient). That purpose is satisfied by service on counsel for Shanghai in the arbitration.
III. The Arbitration Panel Did Not Manifestly Disregard The Law
Possehl contends that the award should be vacated on the grounds that the arbitrators manifestly disregarded the law. More specifically, Possehl maintains that the arbitrators were made aware of, but ignored, the law governing the non-delegable duty of an ocean carrier to carefully load and discharge cargo under COGSA, 46 U.S.C. § 1303(2), and the applicable authorities in this Circuit, namely, Arktis Sky, 978 F.2d 47, Nichimen Co. v. M/V Farland, 462 F.2d 319, 330 (2d Cir. 1972), and Demsey Assoc., Inc. v. S.S. Sea Star, 461 F.2d 1009, 1014-15 (2d Cir. 1972), abrogation on other grounds recognized by Seguros Illimani S.A. v. M/V Popi P, 929 F.2d 89, 93 n. 3 (2d Cir. 1991). Possehl stresses that it pointed out these legal authorities to the panel in its written submissions, so that the panel must have been aware of them. In effect, Possehl contends that the dissenting arbitrator's analysis was correct. Shanghai responds that at most the arbitrators made "an error in law," rather than manifestly disregarding the law. Shanghai further contends that the majority's conclusion that Shanghai made out an affirmative defense under § 1304(2)(i) of COGSA was correct, and that the non-delegable duty imposed by COGSA and outlined in Arktis Sky is inapplicable in light of the terms of the COA and Shanghai's status as a private, rather than public, carrier.
The Second Circuit has explained that, under COGSA, "a carrier is bound to exercise due diligence to . . . properly load, handle, stow and discharge the goods being shipped." Demsey, 461 F.2d at 1014 (citing 46 U.S.C. § 1303(1) and (2)). A shipowner may not contract out of the liability arising out of this duty, that is, it is non-delegable. 46 U.S.C. § 1303(8); Arktis Sky, 978 F.2d at 49-50; Demsey, 461 F.2d at 1014-15. A carrier may contract for the shipper or charterer to carry out the loading and stowing of cargo, but doing so does not shield the carrier from liability. Arktis Sky, 978 F.2d at 49-50; Demsey, 461 F.2d at 1014-15; Nichimen, 462 F.2d at 330.
The fact that the carrier's duty is non-delegable means that a shipper may establish a prima facie case against the carrier simply by establishing that the carrier received the cargo in good condition and the cargo arrived at its destination in a damaged condition. Arktis Sky, 978 F.2d at 51 (citing Demsey, 461 F.2d at 1014).
However, as noted in Arktis Sky, COGSA also provides for certain affirmative defenses which may be asserted by the shipper once the carrier has established a prima facie case. See 978 F.2d 51; see also Tubacex, Inc. v. M/V Risan, 45 F.3d 951, 954-56 (5th Cir. 1995) (discussing COGSA defenses available to carriers and relying in part on Arktis Sky analysis). Among those defenses is the one provided by § 1304(2)(i), which states:
Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from [an] act or omission of the shipper or owner of the goods, his agent or representative.
46 U.S.C. § 1304(2)(i); see Tubacex, 45 F.3d at 955-56; Arktis Sky, 978 F.2d at 51-52 and n. 3. This affirmative defense is available even where the damage was caused during loading and stowing, despite the carrier's non-delegable duty to exercise due diligence with respect to those activities. See Tubacex, 45 F.3d at 955-56 (approving analysis in Arktis Sky and stating, "[w]e see no conflict in the statute with applying the [§ 1304(2)(i)] defense even to the nondelegable duties of the carrier); Arktis Sky, 978 F.2d at 50-51 (one of affirmative defenses available to carrier is § 1304(2)(i)).
Arktis Sky and the other Second Circuit authorities relied upon by Possehl held that COGSA precludes a carrier from contracting out of this non-delegable duty and asserting such a contract provision as an affirmative defense to liability for damage to cargo during loading. See 978 F.2d at 51; Demsey, 461 F.2d at 1014-15; Nichimen, 462 F.2d at 330; see also Tubacex, 45 F.3d at 955 ("COGSA was designed to void overreaching clauses inserted by carriers in bills of lading unreasonably limiting the carrier's liability.") (emphasis in original) (citations omitted). However, these authorities did not render the § 1302(2)(i) defense unavailable. Thus, in concluding that Shanghai met its burden under § 1304(2)(i), the arbitration panel was addressing itself to a different issue than the one urged by Possehl.
The panel majority acknowledged Possehl's contentions that COGSA applied, that under COGSA Shanghai had a non-delegable duty to properly load and stow the cargo, and that Possehl had established a prima facie case for presumptive liability against Shanghai. The majority then stated that it would "apply the COGSA standards argued by Possehl," despite differences among the panel members as to the extent of COGSA's applicability, and concluded that Shanghai had met its burden to establish an affirmative defense. In support of this ruling, the majority relied on its findings that the damage was the "unavoidable consequence" of the faulty stowage performed by the shippers," i.e., Possehl's stevedores, as well as its conclusion that Possehl was fully aware that the damage occurred at the loading port.
Thus, the panel majority applied the relevant law, i.e., COGSA, and concluded that Shanghai had met its evidentiary burden under that law. Whether or not the panel's determination that Shanghai met its burden was correct is not a matter for this Court to decide. Even if that determination were factually or legally erroneous, such error would not constitute manifest disregard for clearly applicable law.
Shanghai has also urged that it acted as a private carrier in the underlying transaction and, therefore, that COGSA did not apply. Based on the arguments set forth by Possehl, this contention appears to be incorrect. However, given that the panel majority concluded that denial of Possehl's claim was warranted based on § 1304(2)(i), "independent of . . . other considerations," Shanghai's contention regarding the inapplicability of COGSA need not be addressed. Similarly, assuming arguendo that the dissenting panel member was correct that the majority misconstrued Clause 17 of the COA as shifting the risk to the shipper, Possehl, any such error is immaterial. The majority denied Possehl's claims based on the "independent" ground that Shanghai had established a § 1304(2)(i) defense.
Possehl also contends that the majority manifestly disregarded the law regarding the segregation of damages. Possehl, like the dissenting panel member, relies on the Supreme Court's decision in Schnell v. The Vallescura, 293 U.S. 296 (1934).
Vallescura held that "the carrier must bear the entire loss where it appears that the injury to cargo is due either to sea peril or negligent stowage, or both, and he fails to show what damage is attributable to sea peril." Id. at 306. However, the Second Circuit has explained that, under the burden-shifting rules of COGSA, once a carrier establishes an affirmative defense to the shipper's prima facie case of carrier liability, the burden returns to the shipper to establish that the carrier's negligence contributed to the damage or loss, and only then does the burden switch back to the carrier to segregate damages attributable to the excepted cause from damages attributable to the carrier's own negligence. Vana Trading Co., Inc. v. S.D. "Mette Skou", 556 F.2d 100, 105 (2d Cir. 1977); see also Tubacek, 45 F.3d at 954 (same). This analysis is not contrary to Vallescura and, indeed, the Second Circuit explicitly relied on that decision in its burden-shifting analysis. See Vana Trading, 556 F.2d at 105 (citing Vallescura, 293 U.S. at 306).
As just noted, the panel majority found that the cargo's condition was the "unavoidable consequence" of the faulty loading and stowage carried out by the stevedores employed by Possehl. Under the law as articulated in Vana Trading, once Shanghai established this affirmative defense, the burden shifted back to Possehl to establish that Shanghai's negligence contributed to the damage or loss. See 556 F.2d at 105. Although the panel majority did not state explicitly that it was proceeding through all of the steps of the burden-shifting analysis, its conclusion that the cargo damage was the "unavoidable consequence" of the actions of the stevedores hired by Possehl can only mean that it found that Possehl did not meet its burden to show negligence by Shanghai, thereby triggering Shanghai's burden to segregate damages. As before, whether or not the panel majority's findings were factually and legally correct is immaterial. The point is that the panel did not manifestly disregard clearly applicable law.
Awards may be remanded to arbitrators if they are "ambiguous or incomplete." Folkways Music Publishers, Inc. v. Weiss, 989 F.2d 108, 112 (2d Cir. 1993). However, the panel majority's analysis is not so ambiguous as to warrant a remand.
IV. Sanctions Are Not Warranted
Shanghai seeks monetary and non-monetary sanction under Rule 11, 28 U.S.C. § 1927, and this Court's inherent power, based on the contention that Shanghai's petition is patently frivolous. This contention is without merit, and sanctions are not warranted.
Therefore, for the reasons set forth above, the motion to vacate the award is denied, the cross-motion to affirm is granted, and the motion for sanctions is denied. This proceeding is dismissed with leave to reopen by letter in the event further action by way of enforcement is required.
It is so ordered.