Smarter Tools Inc. v. Chongqing SENCI Import & Export Trade Co., No. 18-cv-2714 (S.D.N.Y. Mar. 26, 2019) [click for opinion]

Smarter Tools Inc. (“STI”), a Virginia corporation, executed a purchase agreement to buy thousands of gas-powered generators from Chongqing SENCI Import & Expert Trade Co. (“SENCI”), a Chinese entity, for resale in the United States. In June 2013, STI stopped selling the generators because they were not California Air Resources Board (“CARB”) compliant. STI was later fined $507,000 by CARB in connection with sales of the generators. STI also claims that it was forced to end generator sales throughout the United States because they were not EPA compliant.

When STI failed to pay SENCI for some of the generators it received, SENCI submitted the dispute to arbitration to recover the balance of over $3 million owed under the purchase agreement. STI counterclaimed to recover the fine it paid to CARB, costs associated with storing and returning unsaleable generators, lost profits, and damage to STI’s goodwill. Following a hearing in New York, the parties requested a “reasoned award” from the arbitrator.

In February 2018, Arbitrator James M. Rhodes issued a final award of only six pages. In a “Factual Background and Findings” section, the arbitrator determined that SENCI’s claims were “well-founded and supported by the evidence.” The arbitrator then rejected STI’s counterclaims, finding that “[h]aving heard all of the testimony, reviewed all of the documentary proofs and exhibits, I do not find support for STI’s claims … nor do I find the testimony of Expert Witness Zukerman … to be credible.” The award made no findings as to whether any generators provided by SENCI were defective or non-compliant.

In proceedings before the Southern District of New York, STI requested that the court vacate the award pursuant to Section 10(a) of the Federal Arbitration Act. First, STI argued that the arbitrator had exceeded his authority by failing to issue a reasoned award. Second, STI argued that the arbitrator manifestly disregarded the law by failing to apply the UN Convention on Contracts for the International Sale of Goods (the “CISG“). SENCI filed a cross-petition for confirmation of the award.

The court explained that a reasoned award is one that sets forth the basic reasoning of the arbitral panel on the central issue or issues raised before it, but need not delve into every argument made by the parties. The court concluded that the award rendered in favor of SENCI did not meet the standard for a reasoned award because it contained no explanation for rejecting STI’s claims. The court found that the only reason given was the negative credibility determination as to STI’s expert witness. However, such a determination did not provide a basis for dismissal of STI’s claims as STI had not relied on its expert’s testimony in support of its argument that SENCI promised to deliver CARB-compliant generators, an argument that the award did not address at all.

Thus, the court held that, because the parties agreed that the award should be reasoned, the arbitrator had exceeded his authority in issuing an award that did not meet that standard. The court rejected, however, STI’s motion to vacate the award based on manifest disregard of the law. The court found that there was no indication that the arbitrator refused to apply the CISG to the dispute, or had ignored governing provisions of the CISG.

Ultimately, the court denied both STI’s motion to vacate the award and SENCI’s motion to confirm the award. It determined that the proper remedy was to remand the award to the arbitrator for clarification of his findings. This determination was based on prior cases where courts had found that a court’s power to vacate an award because of an arbitrator’s failure to address a crucial issue necessarily includes a lesser power to remand the case to the same arbitrator for a determination of that issue.

A version of this post originally appeared in the May 2019 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

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