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September 16th, 2020Bad 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
Section 10(a)(1) of the Federal Arbitration Act authorizes courts to vacate awards where aEURoethe award was procured by corruption, fraud, or undue means. . . .aEUR? 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 courtaEUR(TM)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.)
aEURoeFraudaEUR? and aEURoecorruptionaEUR? describe dishonest, illegal, and deceptive conduct, whereas aEURoeundue meansaEUR? arguably broader in scope. But aEURoe[t]he term aEUR~undue meansaEUR(TM) must be read in conjunction with the words aEUR~fraudaEUR(TM) and aEUR~corruptionaEUR(TM) that precede in the statute.aEUR? PaineWebber Group, Inc. v. Zinsmeyer Trusts PaEUR(TM)ship, 187 F.3d 988, 991 (8th Cir. 1999) (citing Drayer v. Krasner, 572 F.2d 348, 352 (2d Cir. 1978)). To establish aEURoeundue meansaEUR? courts therefore require aEURoeproof of intentional misconductaEUR? or aEURoebad faith,aEUR? interpreting aEURoeundue meansaEUR? as aEURoeconnoti[ing] behavior that is immoral if not illegal.aEUR? 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 aEURoeabundantly clear that [the award] was obtained through aEUR~corruption, fraud, or undue means.aEUR(TM)aEUR? 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 aEURoeabundantly clearaEUR? requirement is often described as one of aEURoeclear and convincing evidence of fraud or undue means. . . .aEUR?International Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); accordRenard 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 aEURoecorruption, fraud or undue meansaEUR? by clear and convincing evidence, a Section 10(a)(1) claimant must demonstrate: (a) aEURoethat 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.aEUR? 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 arbitratoraEUR(TM)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 aEURoeawardaEUR? must be aEURoeprocuredaEUR? by aEURoecorruption, fraud or undue means,aEUR? which arguably suggests a causal nexus between the proscribed conduct and the award. While the conduct must aEURoematerially relate to an issue in the arbitration,aEUR? 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 aEURoecaused the award to be given.aEUR? See PaineWebber, 187 F.3d at 994 (aEURoethere must be some causal relation between the undue means and the arbitration awardaEUR?); A.G. Edwards & Sons, Inc., 967 F.2d at 1403 (aEURoethe statute requires a showing that the undue means caused the award to be givenaEUR?). Others say that the challenger is required to show a aEURoenexusaEUR? between the conduct and the awardaEUR"that is, materialityaEUR"but need not aEURoeestablish that the result of the proceedings would have been different had the fraud[, corruption, or undue means] not occurred.aEUR? 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.
