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Archive for the ‘Corruption or Undue Means’ Category

Corruption, Fraud or Undue Means | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide

September 16th, 2020 Bad Faith, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Awards, Corruption or Undue Means, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Fraud, Fraud or Undue Means, Grounds for Vacatur, Judicial Review of Arbitration Awards, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Small Business B-2-B Arbitration, Vacatur No Comments »

corruption, fraud and undue meansSection 10(a)(1) of the Federal Arbitration Act authorizes courts to vacate awards where “the award was procured by corruption, fraud, or undue means. . . .” 9 U.S.C. § 10(a)(1). Cases vacating awards on Section 10(a)(1) grounds are rare, presumably because the circumstances that would trigger relief are relatively rare.

Section 10(a)(1) is an excellent example 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). See 9 U.S.C. § 10(a)(1).    

There is nothing particularly controversial about that. Persons who agree to arbitrate do not implicitly consent to awards procured through chicanery. And who would want to agree to arbitrate if they would have no recourse against such an award? (See here.) 

“Fraud” and “corruption” describe dishonest, illegal, and deceptive conduct, whereas “undue means” arguably broader in scope. But “[t]he term ‘undue means’ must be read in conjunction with the words ‘fraud’ and ‘corruption’ that precede in the statute.” PaineWebber Group, Inc. v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 991 (8th Cir. 1999) (citing Drayer v. Krasner, 572 F.2d 348, 352 (2d Cir. 1978)). To establish “undue means” courts therefore require “proof of intentional misconduct” or “bad faith,” interpreting “undue means” as “connoti[ing] behavior that is immoral if not illegal.” PaineWebber, 187 F.3d at 991 (quotations and citations omitted).

The burden for obtaining relief under Section 10(a)(1) is heavy. It must be “abundantly clear that [the award] was obtained through ‘corruption, fraud, or undue means.’” Karppinen v. Karl Kiefer Machine Co., 187 F.2d 32, 34 (2d Cir. 1951); accord Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99, 106-07 (2d Cir. 2013). That “abundantly clear” requirement is often described as one of “clear and convincing evidence of fraud or undue means. . . .” International Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); accord Renard v. Ameriprise Fin. Servs., Inc., 778 F.3d 563, 569 (7th Cir. 2015); MCI Constructors, LLC v. City of Greensboro, 610 F.3d 849, 858 (4th Cir. 2010); A.G. Edwards Sons, Inc. v. McCollough, 967 F.2d 1401, 1404 (9th Cir. 1992); Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 (11th Cir. 1988).

In addition to establishing “corruption, fraud or undue means” by clear and convincing evidence, a Section 10(a)(1) claimant must demonstrate: (a) “that that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration[;] and [b] that due diligence would not have prompted the discovery of the fraud [corruption or undue means] during or prior to the arbitration.” United Parcel Serv., 335 F.3d at 503; Renard, 778 F.3d at 569; MCI Constructors, 610 F.3d at 858; A.G. Edwards, 967 F.2d at 1404; Bonar, 835 F.2d at 1383; see Karppinen, 187 F.2d at 35.

A party will ordinarily be deemed to waive the right to vacate the award under Section 10(a)(1) if it failed to exercise due diligence in discovering the corruption, fraud or undue means during the arbitration; if it discovered the improper conduct during the arbitration but did not seek relief from the arbitrators; if it unsuccessfully sought relief and failed to object to the arbitrator’s pre-final-award denial of relief; or if the denial of relief was first made in the final award, to preserve its objection by informing the arbitrators that a failure to grant relief would constitute grounds for vacating the award. 

As respects the materiality requirement, Section 10(a)(1) says that the “award” must be “procured” by “corruption, fraud or undue means,” which arguably 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 an issue 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 PaineWebber, 187 F.3d at 994 (“there must be some causal relation between the undue means and the arbitration award”); A.G. Edwards & Sons, Inc., 967 F.2d at 1403 (“the statute requires a showing that the undue means caused the award to be given”). Others say that the challenger is required to show a “nexus” between the conduct and the award—that is, materiality—but need not “establish that the result of the proceedings would have been different had the fraud[, corruption, or undue means] not occurred.” See, e.g., Odeon Capital Grp. LLC v. Ackerman, 864 F.3d 191, 196  (2d Cir. 2017) (citing cases); 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, dishonest misconduct, and where the challenger was unable to address the problem adequately before the arbitrators.

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

Please note. . .

This guide, including prior instalments, and instalments that will follow in later posts, does not purport to be a comprehensive recitation of the rules and principles of arbitration law pertinent or potentially pertinent to the issues discussed. It is designed to give clients, prospective clients, and other readers general information that will help educate them about the legal challenges they may face in arbitration-related litigation and how engaging a skilled and experienced arbitration attorney can help them confront those challenges more effectively.

This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they elect voluntarily to do so.

If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should request legal advice from an experienced and skilled attorney or law firm with a solid background in arbitration law.

Contacting the Author

If you have any questions about arbitration, arbitration-law, arbitration-related litigation, this article, or any other legal-related matter, please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. has 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

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Can a Party Obtain Post-Judgment Relief from a Confirmed Arbitration Award Procured by Fraud?

May 26th, 2015 Arbitration Practice and Procedure, Arbitration Risks, Asbestos-Related Claims, Bad Faith, Confirmation of Awards, Corruption or Undue Means, Definition of Occurrence, Federal Courts, Federal Rules of Civil Procedure, Final Awards, Grounds for Vacatur, United States Court of Appeals for the Second Circuit, United States District Court for the Southern District of New York Comments Off on Can a Party Obtain Post-Judgment Relief from a Confirmed Arbitration Award Procured by Fraud?

Introduction

Relief from an Arbitration Award Procured by Fraud

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Section 10(a)(1) of the Federal Arbitration Act authorizes Courts to vacate arbitration awards that were “procured by fraud, corruption or undue means.”  9 U.S.C. § 10(a)(1). (For a discussion of Section 10(a)(1), see L. Reins. & Arb. Law Forum post here.) But a motion to vacate an arbitration award procured by fraud (or otherwise) is subject to a strict three-month deadline, and Section 10, unlike certain of its state-law counterparts, does not provide for tolling of the three-month deadline on the ground the challenging party did not know or have reason to know it had grounds to allege the arbitration award was procured by fraud. Compare 9 U.S.C. § 10(a)(1) with 2000 Revised Uniform Arbitration Act § 23(b) (Uniform Law Comm’n 2000) (If “the [movant] alleges that the award was procured by corruption, fraud, or other undue means, [then, in that].  .  .   case the [motion] must be made within 90 days after the ground is known or by the exercise of reasonable care would have been known by the [movant].”);  1955 Uniform Arbitration Act § 12(b) (Uniform Law Comm’n 1955) ( “[I]f predicated upon corruption, fraud or other undue means, [the motion to vacate] shall be made within ninety days after such grounds are known or should have been known.”).

Once an award has been confirmed, it has the same force and effect as any other judgment of the court. See 9 U.S.C. § 13. Federal Rule Civ. P. 60(b) provides that “[o]n motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or
proceeding for the following reasons:.  .  .  (3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party.  .  .  .” Fed. R. Civ. P. 60(c) provides that “[a] motion under Rule 60(b) must be made within a reasonable time—and for reasons (1), (2), and (3) [i.e., fraud, misrepresentation or misconduct] no more than a year after the entry of the judgment or order or the date of the proceeding.” Fed. R. Civ. P. 60(c).

So can a challenging party obtain relief from a confirmation judgment if: (a) an award-challenging party contends the Court entered judgment oin an arbitration award procured by fraud; (b) by extension, the judgment confirming the award was itself procured by fraud; (c) the award-challenging party did not know or have reason to know it was at the wrong end of an arbitration award procured by fraud until after the three-month statute of limitations for vacating an award had elapsed; and (d) the award-challenging party makes a timely motion for post-judgment relief under Fed. R. Civ. P. 60(b)? According to a district court judge of the U.S. District Court for the Southern District of New York, the answer is “no.”

 

Arrowood Indem. Co. v. Equitas Insurance Ltd., No. 13-cv-7680 (DLC), slip op. (S.D.N.Y. May 14, 2015)

No Post-Judgment Relief from Arbitration Award Procured by Fraud (Alleged or Otherwise)

Background

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Arrowood arose out of an excess-of-loss treaty Arrowood’s predecessor(s) in interest had entered into with Underwriters at Lloyd’s in the 1960s. The terms of the treaty were apparently part of, or incorporated into, a “Global Slip,” which the Court, without much elaboration, described as “a complex contractual  reinsurance program.” The Global Slip was first negotiated in 1966 and effective January 1, 1967 through December 31, 1968. It was apparently renewed a number of times thereafter, though the court does not say for what period or periods. The renewal agreements were “substantially similar” although they “contain[ed] new contractual language.” Slip op. at 2.

The Global Slip covered (apparently among other things) losses in excess of $1 million incurred under Arrowood’s casualty insurance policies under three different types of coverage. At issue was “Common Cause Coverage,” which covered losses arising out of an “occurrences” during the contract term, provided the occurrence or occurrences were the “probable common cause or causes” of more than one claim under the policies. The Global Slip also contained a “First Advised” clause, which said that “this Contract does not cover any claim or claims arising from a common cause, which are not first advised during the period of this Contract.”

yay-1299629-digitalLike so many other liability insurers, Arrowood began receiving, adjusting and settling asbestos bodily injury claims beginning in the 1980s. Underwriters at Lloyd’s London insisted that Arrowood present its asbestos reinsurance claims on a per claimant per exposure-year basis, absorbing one $1 million retention each year against the total asbestos claim liabilities allocated to that year under the Underwriters’ per claimant per exposure-year allocation methodology.

In 2008 Arrowood, after reviewing the contract language, stopped using exclusively the Underwriters-prescribed asbestos personal-injury claim reinsurance allocation methodology, which it had followed for almost 25 years, and began presenting a number of claims under the Common Cause Coverage provision of the Global Slip . Because those claims were not, “first advised” in the years 1967 or 1968, the Underwriters denied them.

The Arbitration and Confirmation Proceedings

One of the parties demanded arbitration in October 2010, and a tripartite panel was appointed. The Underwriters argued, among other things, that: (a) the parties’s 25-year course of dealing evidenced a binding agreement on how asbestos claims would be presented to the Underwriters; (b) some claims fell exclusively under employer’s liability coverage; and (c) Common Cause Coverage  did not apply because the requirements of the First Advised Clause were not satisfied. Continue Reading »