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Arbitration Nuts & Bolts: Vacating Arbitration Awards — Part II: Corruption, Fraud and Undue Means

December 19th, 2009 Awards, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure, Uncategorized 6 Comments » By Philip J. Loree Jr.

In this Part II of our Nuts & Bolt feature on vacating arbitration awards (Part I is here) we briefly look at the first statutory ground for vacating an award under the Federal Arbitration Act:  where “[t]he award was procured by corruption, fraud, or undue means. . . .”  9 U.S.C. 10(a)(1).  Cases vacating awards on Section 10(a)(1) are rare, probably because the circumstances that would trigger relief are themselves rare.     

Section 10(a)(1) is an excellent expression of how Section 10 is designed to provide relief in situations where putting a court’s  imprimatur on an award would deprive one of the parties of the benefit of its freely-bargained-for arbitration agreement.   It says that corruption, fraud, or undue means in the procurement of an award, whether perpetrated by the arbitrators or a party, spoils the award (assuming the aggrieved party timely moves to vacate).  There is nothing particularly controversial about that; we suspect few would contend that parties who agree to arbitrate impliedly consent to arbitration resulting in an award procured through outright chicanery.    

The burden for obtaining relief under Section 10(a)(1) is heavy.  Fraud and corruption are serious allegations, to say the least.  And “undue means” has been construed to be a bird of the same feather:  Like fraud and corruption it requires “proof of intentional misconduct” or “bad faith,” and “connotes behavior that is immoral if not illegal. . . .”  See, e.g., PaineWebber Group, Inc. v. Zinsmeyer Trusts P’ship,  187 F.3d 988, 991 (8th Cir. 1999) (quotations and citations omitted).   Given the gravity of all of this, three requirements must generally be satisfied to make out a claim under Section 10(a)(1):  “(1) clear and convincing evidence of fraud [, corruption or undue means][;] (2) that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration[;] and (3) that due diligence would not have prompted the discovery of the fraud [corruption or undue means] during or prior to the arbitration.”   Int’l Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); see, e.g., Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 ( 11th Cir .1988).

Section 10(a)(1) says that the “award” must be “procured” by the fraud, corruption or undue means, and that suggests a causal nexus between the proscribed conduct and the award.  While the conduct must “materially relate to an issue in the arbitration,” must it also be outcome determinative?  In other words, must the party seeking relief show that the award would have been different but for alleged fraud, corruption or undue means, or is it enough to show that it tainted the proceedings simply because it related materially to one of the issues at stake? 

The circuits are split on this point.  Some courts require the challenger to show that the corruption, fraud or undue means “caused the award to be given.”  See, e.g.,  A.G. Edwards & Sons, Inc. v. McCullough, 967 F.2d 1401, 1403 (9th Cir. 1992).  Others say that the challenger is not required to “establish that the result of the proceedings would have been different had the fraud [, corruption, or undue means]  not occurred.”  See, e.g., Bonar, 835 F.2d at 1383.   

Section 10(a)(1) is probably the least commonly invoked ground for vacating an arbitration award.  That said, it provides an important safety valve to address rare, but extremely important cases where an award is the product of  corruption, perjured testimony or other egregious misconduct, and where the challenger was unable to address the problem before the arbitrators. 

The next installment of this series shall address a more commonly invoked ground for vacatur:  evident partiality.

         

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6 Responses to “Arbitration Nuts & Bolts: Vacating Arbitration Awards — Part II: Corruption, Fraud and Undue Means”

  1. paul bennett marrow says:

    I have never run across a fact pattern suggesting undue means. Can you suggest one?

  2. Hello, Paul — thanks for your comment.

    I cannot recall offhand a case where a court upheld a challenge on undue means grounds. That said, the courts in the A.G. Edwards and United Parcels Service cases cited in the post rejected undue means claims.

    There have been a fair number of cases that have considered motions to vacate under Section 10(a)(1), and I’ll let you know should I come across one where a court vacated an award on undue means grounds.

    Best wishes for the Holiday Season,

    Phil

  3. Hi Phil.

    Nice article. While I can’t recall the cite, I think I may have read a case about an unlicensed attorney (e.g., NY attorney doing an arbitration in CA where he is not licensed) constituted undue means.

  4. Philip J. Loree Jr. says:

    Steve,

    Thanks for your note. That fact pattern sounds vaguely familiar to me, too.

    I think it was one of those cases that brought to the forefront the importance of addressing in ethics rules the multi-jurisdictional aspects of law practice here in the U.S. In terms of its use as a ground for vacatur based on “undue means,” I doubt the unauthorized practice of law was really the sort of thing the statute was designed to address, but the court’s rationale was probably at least plausible.

    I hope things are going well and that the New Year brings prosperity for all!

    Phil

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