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Recent Decisions and Developments Involving ADR – October 2012

Arbitration clause in Bill of Lading not enforceable

The plaintiffs alleged that a shipment of fruit from Morocco to New Bedford arrived in moldy condition. A defendant who chartered the vessel sought a stay or dismissal to allow for arbitration. However, the Court found that the plaintiffs were not bound by the arbitration clause and thus the defendant’s motion was denied.

The arbitration clause at issue read… ‘Any dispute arising under this Charter Party to be referred to the arbitration in London, according to English Law, one arbitrator to be nominated by the Owners and the other by the Charterers, and in case the arbitrators shall not agree then to the decision of an Umpire to be appointed by them the award of the arbitrators or the umpire to be final and binding upon both parties.’

The issue became whether the arbitration clause contained in the charter party agreement, incorporated as it is into the bill of lading, is enforceable against the plaintiffs.  The Court found that the validity of agreements to arbitrate entered into between parties from different countries is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Convention is implemented by Chapter Two of the Federal Arbitration Act. The Convention as set forth in Chapter Two of the Federal Arbitration Act requires, as a preliminary matter, that an arbitration clause be part of an ‘agreement in writing’ in order to be enforceable.

The Court found that the Plaintiff was not bound by the arbitration clause contained in the charter party agreement because the bill of lading does not meet the requirements for an ‘agreement in writing’ under Chapter Two.  Maroc Fruit Board S.A., et al. v. M/V Vinson, et al, (7 pages) (Tauro, J.) (USDC) (Civil Action No. 1:10-10306-JLT) (July 11, 2012).

Arbitration – Denial of Motion to modify arbitration award upheld

A Superior Court judge denied a motion by a defendant to modify an arbitrator’s award.  Upon appeal pursuant to G.L.c. 251, §13, the Court upheld the denial despite finding some questionable conclusions by the arbitrator.

The defendant had sought modification of the arbitrator’s award arguing that (a) the c. 93A award in favor of  the plaintiff Broderick rested upon the invalid grounds (i) that he had been serving as Broderick’s attorney furnishing services in the open market, and (ii) that the true relationship of the parties as joint venturers precluded application of c. 93A liability; and (b) that the arbitrator had wrongly failed to award him prejudgment interest of approximately $84,500 upon the $301,591 capital deficiency of Broderick.  The Superior Court judge concluded that these contentions did not fall within the narrow grounds for modification of an arbitral award.  On appeal the Court stated that their review confines itself to determinations of (1) whether the arbitrator has committed any error itemized in G.L.c. 251, §13(a)(1)-(3), such as miscalculation of figures, misidentification of persons or property, or action upon a matter not submitted to him, or defects of form; (2) whether the arbitrator has delivered an award totally devoid of factual and legal support in the record, … and (3) whether the arbitrator has rendered a result in violation of public policy, citing Superadio, Ltd. Partnership v. Winstar Radio Prods., LLC, 446 Mass. 330, 334 (2006).

The Court found that none of these exceptional grounds to be present stating that …”Lombardi does not claim that the arbitrator travelled beyond the bounds of the arbitration agreement. He does not argue that the result violates a public policy as distinguished from his private interests. Finally, he does insist that the challenged elements of the arbitrator’s decision lack support in evidence and law. The role of Lombardi in the treatment of the disputed property deeds was arguable. We cannot modify even though we may have concluded differently from the arbitrator. The refusal of the arbitrator to award interest upon the joint venture capital account deficit accumulated by Broderick is arguable also. While the arbitrator could have rendered a more explicit explanation of that decision, the record does permit us to infer that the volume and complexity of dealings between the two parties over the course of the years left the calculability of interest indefinite and unreliable.”

Broderick v. Lombardi, et al.  (5 pages) (Appeals Court – Unpublished) (No. 11-P-854) (Aug. 29, 2012).

Arbitration – Employment  Constructive discharge

In a case where two employees with heart conditions filed suit claiming that the defendant employer constructively discharged them, the USDC judge found that the dispute must be referred to an arbitrator pursuant to language of a Problem Resolution Policy instituted by the employer.

The plaintiffs contended that enforcing such an arbitration clause in the circumstances involved would not be ‘appropriate’ under the ADA. …, and argued that that defendant failed to provide appropriate notification that they were required to arbitrate their claims before seeking a judicial remedy, in so far as the language of the Policy was ambiguous such that a reasonable person could read it and conclude that the Policy presented an optional alternative to litigation, and that defendant did not otherwise explain that the Policy required them to arbitrate claims before proceeding to court.

However, the Court found the plaintiffs’ argument is contradicted by the plain language of the Policy and that for the arbitration agreement to be binding, defendant is not required to show that plaintiffs actually understood their obligations under the Policy, only that they gave plaintiffs ‘the information sufficient to put a reasonably prudent employee on adequate notice of the agreement to arbitrate.’ … Here, defendants clearly met that standard. Plaintiffs received a copy of the Policy and signed a form certifying that they reviewed the Policy, had an opportunity to ask questions about it, and understood how they were required to resolve disputes. … The fact that plaintiffs cannot remember signing the certification or reading the Policy does not ‘rebut defendant[’s] overwhelming evidence that [they] did, in fact, have actual knowledge of the Policy and its terms.’ …”

Salvi, et al. v. TRW Automotive U.S. LLC,  (10 pages) (Saylor, J.) (USDC) (Civil Action No. 11-40085-FDS) (Jan. 30, 2012).

Arbitration clause doesn’t cover applicant seeking job

A mandatory arbitration clause in an employment application was unenforceable against a pregnant woman who brought suit after being denied a job, the 1st U.S. Circuit Court of Appeals has ruled in a 2-1 decision. The employer argued that the arbitration clause unambiguously covered all disputes with job applicants. But the 1st Circuit disagreed, holding that because the clause was ambiguous, and because the party that drafted it had all the bargaining power, it should be construed against the employer.

“[N]othing in the arbitration clause refers to ‘applicants,’” Judge Kermit V. Lipez wrote for the court. “Instead every reference is to ‘your employment, ‘the employment process,’ or ‘pre-employment disputes.’ Accordingly, there is a reasonable basis for [the applicant’s] belief that she would only be bound by the arbitration clause if ultimately hired.”

The plaintiff Gove completed an online application for a position with the defendant that included a mandatory arbitration clause stating that “any dispute between you and CSD with respect to any issue prior to your employment, which arises out of the employment process” would be resolved through arbitration. Gove placed a checkmark in a box that indicated her assent to the agreement and submitted the application.

Gove later interviewed for the position with CSD, when visibly pregnant.  She was asked when she was due to deliver and if she had other children. She was not hired and Gove filed a complaint with the Maine Human Rights Commission, which found reasonable grounds to conclude that she had been denied the position because of her pregnancy.   Gove sued CSD in U.S. District Court, alleging discrimination on account of her gender and her pregnancy.

CSD moved to compel arbitration, citing the arbitration clause in the application. But Judge George Z. Singal denied the motion, finding the clause invalid due to ambiguity as to whether it covered an applicant who was not hired and concluding under Maine contract law that such an ambiguity must be construed against the party that drafted the agreement.

CSD appealed and the 1st Circuit determined, in contrast to the trial court, that the provision itself was not invalid and that if had Gove been hired, it was conceded that she would have been required to arbitrate disputes stemming from events occurring prior to employment. “Thus, she is arguing that her employment by CSD is a condition precedent to her obligation to arbitrate,” Lipez said. “However, the nonoccurrence of a condition precedent does not render an agreement invalid. It simply means that the duty to perform does not arise.”  Turning to the issue of scope, Lipez noted that in normal circumstances the 1st Circuit would give significant weight to the federal policy of presuming arbitrability. But since CDS did not argue that policy on appeal, arguing exclusively that the agreement itself unambiguously applied to job applicants who were not ultimately hired, the federal policy would not be considered. Instead, the 1st Circuit applied Maine contract law construing a contractual provision against the party that drafted it. “Gove argues that the clause’s references to the ‘employment process’ and ‘pre-employment disputes’ should be read literally,” Lipez said. “Under her reading, if one is never employed by CSD, then a dispute cannot be ‘pre-employment’ or related to the ‘employment process’ and the arbitration clause is inapplicable.”

The court found that it was reasonable for Gove to believe that she would only be bound by the arbitration clause if she was hired. Accordingly, Lipez said, the provision was indeed ambiguous.

Additionally, the court found, Gove was in no position to bargain over the terms of the application. Instead, she was required to accept the arbitration clause as part of the online application with no meaningful way to clarify its meaning. While the court conceded that Maine law — like federal law — has a broad presumption in favor of arbitration, it emphasized that where there is a significant disparity of bargaining power, as there was here, the equitable rule construing the contract against the drafter trumps that presumption. “Because of [this] obligation under Maine law, we conclude that Gove is not required to arbitrate her claims,” Lipez wrote.

Judge Juan R. Torruella dissented, disagreeing with the majority’s determination that CSD had waived arguments based on the federal policy favoring arbitration.

The case underlines the principle that employers must draft their agreements carefully and precisely.

Arbitration – Fee dispute

Where a Superior Court judge confirmed an arbitration award that resolved a fee dispute between the plaintiff and the defendant law firm, the arbitrator did not refuse to hear material evidence, so the confirmation order should be affirmed.

“… [Defendant] Goodwin [Procter] moved to exclude evidence that [plaintiff] Northland sought to introduce to show that one of Goodwin’s senior partners had disclosed confidential information about Northland to an investor, in violation of the law firm’s duty of loyalty and in breach of its obligation of confidentiality. … After reviewing the case law and considering the arguments made by the parties, the arbitrator determined that the evidence was immaterial and should be excluded. On October 19, 2010, the arbitrator issued a decision, awarding Goodwin approximately forty-five percent of the legal fees it was seeking from Northland.

“… Northland argues that the arbitration award should have been vacated rather than confirmed because the arbitrator ‘refused to hear evidence material to the controversy,’ which is one of the bases for vacatur enumerated in G.L.c. 251,§12(a)(4), inserted by St. 1960, c. 374, §1.

“To begin with, we disagree with Northland’s contention that this court is empowered to engage in more searching inquiry in its review of an arbitration award simply because what has been arbitrated is an attorney’s fee dispute. We read Marino v. Tagaris, 395 Mass. 397 (1985), as an exercise of the Supreme Judicial Court’s supervisory power — a power committed by statute only to that court, see G.L.c. 211, §3 — rather than as calling for more searching inquiry in the ordinary course of arbitration awards in attorney’s fee disputes.

“In any event, even if more searching inquiry were called for, Northland has failed to demonstrate that the arbitrator ‘refused to hear evidence material to the controversy.’ G.L.c. 251, §12(a)(4). The arbitrator’s decision not to admit the evidence was made after a full offer of proof and oral argument. Even if the evidence were material, the arbitrator’s decision does not amount to a ‘refus[al]’ to hear it. … The statute speaks of ‘refus[ing] to hear evidence material to the controversy,’ not of erroneous determinations not to admit material evidence or ‘failures’ to hear material evidence. We therefore do not read the statute to create a special rule by which, contrary to the ordinary principles of review of arbitration awards, we may vacate an arbitrator’s award simply because we decide that evidence we determine to be ‘material’ was erroneously excluded from the arbitration.

“For aught that appears in the record, the arbitrator in this case may simply have concluded that the alleged breach of fiduciary duty, which caused no injury to Northland, provided no defense to Goodwin’s fee claim, and that the proffered evidence, which the arbitrator evaluated, was therefore not material to the issue before him. Even if the decision by the arbitrator to exclude the evidence were based upon an error of law, a point on which we express no opinion, an error of law does not provide a basis for a court to vacate an arbitration award. …”

Northland Investment Corporation v. Goodwin Procter LLP (4 pages) (Rubin, J.) (Appeals Court) Case heard by Haggerty, J., and a motion for partial relief from judgment or to alter or amend the judgment considered by her. (Docket No. 11-P-1555) (July 25, 2012).

UM Arbitration plaintiff entitled to pre-award interest

10:43 am Thu, July 19, 2012
The estate of a woman who was seriously hurt in an automobile accident was entitled to pre-award interest on an arbitration award in the woman’s underinsured motorist (UM) claim, the Appeals Court has ruled. An arbitrator awarded no interest all, reserving the issue for the Superior Court. A Superior Court judge, in confirming the arbitration award, awarded post-award interest but declined to award pre-award interest.

But the Appeals Court ordered that the arbitration award be amended to included pre-award interest.

“A claim for underinsurance benefits properly is considered to be a contract action,” Judge Joseph A. Trainor wrote for the court. “In her motion to confirm the award, the plaintiff properly requested that preaward interest be added from the filing date of her application to compel arbitration. We see no reason why preaward interest should not be added to the arbitrator’s award in these circumstances as part of the damages the plaintiff is ‘legally entitled to recover’ under [Ch. 175, Sec. 111D, which mandates arbitration when UM disputes can’t settle].”

The court also ruled, in an issue of first impression, that the issue of pre-award and post-award interest in arbitrated UM claims can indeed be reserved for consideration by a Superior Court judge. Additionally, the court found that pre-award interest should be calculated based on net, as opposed to gross, damages.

The original plaintiff was severely injured in a motor vehicle accident on Jan. 4, 2002. Before she died on June 9, 2003, she settled her personal injury claim for the $100,000 policy limit.   After her death the executor of her estate brought a claim for underinsured motorist benefits against the defendant Plymouth Rock Assurance Corporation. The parties could not agree on the amount of damages. On December 31, 2007 the executor Bolman filed an application in Superior Court to compel arbitration. The case was arbitrated in March 2010 and in May of 2010 the arbitrator issued a decision awarding $150,000 in gross damages. The parties agreed that they would resolve any offsets among themselves. The arbitrator also wrote in the final paragraph of his decision that the parties agreed to have any question of interest determined “by the court.”  $42,000 was sent by the insurer to the estate, deducting $108,000 for the $100,000 tort payment recovered and $8,000 paid in personal injury protection benefits.

The plaintiff filed a motion in Superior Court to confirm the arbitrator’s award, seeking both pre-award and post-award interest.  She also sought to have the interest payments calculated based on the $150,000 gross award rather than the $42,000 net award.  The insurer opposed the motion, arguing that the plaintiff was not entitled to pre-award interest and that any interest award should be calculated based on the net award.

Superior Court Judge Richard E. Welch III awarded post-award interest based on the net award but declined to award pre-award interest.

The Appeals Court first found that pre-award interest is indeed permissible under state law and – by extension – the Plymouth Rock policy, noting that the SJC held in its 2002 decision in Connecticut Valley Sanitary Waste Disposal, Inc. v. Zielinski that “’the entitlement of a party to preaward interest is a decision that is within the purview of arbitrators.’”  Pre-award interest compensates prevailing parties for the loss of use of money that they should have had to begin with and shouldn’t have had to chase, and thus are truly part of compensatory damages, the judge continued. As a result, he said, such interest awards can be part of the damages a plaintiff is “’legally entitled to recover’” under Sec. 111D.

The Court then found that the interest issue in a UM arbitration can be reserved by an arbitrator for consideration by a judge. “Generally, in a proceeding to confirm an arbitration award, a judge may not alter an arbitrator’s decision that allows, denies or fails to mention preaward interest,” Trainor acknowledged. He also conceded that the Appeals Court had on other occasions vacated trial judges’ additions of pre-award interest to arbitration awards.  But in those cases, Trainor wrote, the arbitration awards were completely silent on the issue of pre-award interest, while in this case the arbitrator clearly referenced the parties’ agreement that a judge would resolve the interest issue.

The court found that pre-award interest should have been awarded in this particular case, characterizing the claim as a “contract action.” In contract actions, interest is automatically added to damages at the

The Court however noted that  “[i]t is worth reiterating that any determination that preaward interest shall be added … is … applicable only in circumstances where the interest issue has been reserved, as here.” Had the issue not been reserved, he said, “the determination made by the arbitrator, including silence on the issue, would not be reviewable, either here or below.”

Finally, the court concluded, the pre-award interest should be calculated based on the amount of the net award, not the gross award as the plaintiff had requested.

Class-wide arbitration claim allowed without an express agreement

The 1st U.S. Circuit Court of Appeals has held that an arbitrator, and not a judge, must decide if an arbitration agreement allows for a dispute to move forward individually or on a class-wide basis.

The plaintiff franchisor argued that the U.S. Supreme Court’s 2010 ruling in Stolt-Nielsen S.A. v. AnimalFeeds International Corp,. 130 S. Ct. 1758 (2010), required the express consent of the parties before arbitration could proceed as a class action. But the 1st Circuit disagreed, holding not only that an agreement silent on the class-action question did not control, but also that the arbitrator was properly in a position to decide the intent of the parties.

“We … reject the … precept, on which [the franchisor’s] argument depends, that there must be express contractual language evincing the parties’ intent to permit class or collective arbitration,” Chief Judge Sandra L. Lynch wrote for the court. “Stolt-Nielsen imposes no such constraint on arbitration agreements.”

The defendant owners association represented a group of franchisees that had entered into agreements with plaintiff Fantastic Sams Franchise Corp, a franchisor of a chain of hair salons known as Fantastic Sams.  In 2011, the owners’ association filed a demand for arbitration against the franchise corporation, seeking declaratory and injunctive relief on behalf of its members for breach of contract and violations of Chapter 93A. In response, the franchise corporation filed suit in U.S. District Court in Boston, seeking to stay the arbitration demand and compel the owners’ association to bring its claims on an individual basis.  The district court allowed FSFC’s petition as to some of the license agreements at issue, based on the terms of those agreements which contained provisions stating that any arbitration between the franchise corporation and owners’ association must be done individually.  That decision was not at issue in the appeal.

However, it denied relief as to ten other agreements, which contained different language. FSFC appealed this denial contending that the Stolt-Nielsen decision holds as a matter of law that no class or collective arbitration may proceed unless the arbitration agreement expressly authorizes those forms of proceedings.

However, the Court found…..“FSFC reads Stolt-Nielsen too broadly” and that “The parties in Stolt-Nielsen stipulated that their agreement was unambiguously ‘silent’ on class arbitration, not merely in the sense that the agreement made no express reference to class arbitration, but because ‘they had not reached any agreement on the issue.’

“We thus reject the very different precept, on which FSFC’s argument depends, that there must be express contractual language evincing the parties’ intent to permit class or collective arbitration. Stolt-Nielsen imposes no such constraint on arbitration agreements.

The Court further reject FSFC’s argument the arbitration agreements at issue here are ‘silent’ on class arbitration, within the meaning of the ‘silence’ recognized in Stolt-Nielsen, and thus preclude FSRO’s action. FSFC’s argument fails because the agreements at issue here are not ‘silent’ in the same sense that the agreement was silent in Stolt-Nielsen. Furthermore, the Supreme Court has not extended Stolt-Nielsen to the type of associational action brought by FSRO, which is different in many respects from the class-action arbitration at issue in Stolt-Nielsen.  We cannot conclude, under the auspices of Stolt-Nielsen, that as a matter of law the broad arbitration clause at issue here precludes arbitration of this issue. …

The Court also felt their conclusion is reinforced by the sweeping language of the arbitration clauses at issue here, and that the question of whether the parties to this arbitration agreement ‘agreed to authorize’ an action like FSRO’s, Stolt-Nielsen, 130 S. Ct. at 1776 n.10, is one for the arbitrators to decide.”

Fantastic Sams Franchise Corporation v. FSRO Association Ltd., et al. (18 pages) (Lynch, C.J.) (1st Circuit) Appealed from a decision by Gorton, J., in the U.S. District Court for the District of Massachusetts (Docket No. 11-2300) (June 27, 2012).