Vacating An Arbitration Award: Part II
May 31, 2019
You may have recently read on this blog that “vacating an arbitration award is an uphill battle.” As my college Hamutal G. Lieberman discussed, there are only two instances when an arbitration award may be vacated: (1) instances involving fraud, corruption or misconduct of the arbitrators or (2) where an arbitration award exhibits “manifest disregard of the law”. While Haumtal discussed the latter ground, a recent opinion by the Honorable Andrew Borrok, addressed the former.
In Sorghum Inv. Holdings Ltd. v China Commercial Credit, Inc., despite the uphill battle, the Court granted a motion to vacate an arbitration award because it was procured by fraudulent and undue means.
A petitioner seeking to vacate an arbitration award on the basis that it was procured by fraud must plead that (1) respondent engaged in fraudulent activity; (2) even with the exercise of due diligence, petitioner could not have discovered the fraud prior to the award issuing; and (3) the fraud materially related to an issue in the arbitration.
Also, an arbitration award may be vacated if it was procured by undue means. Undue means is where the award is “the result of immoral, if not necessarily illegal conduct, which is underhanded or conniving but falls short of corruption or fraud.”
As the petitioner only must demonstrate that there is a nexus between the alleged fraud and the decision of the arbitrator, the Court in Sorghum found the arbitration award was procured by fraud or undue means because the arbitrator explicitly relied on respondent’s attorney’s false declaration. The Petitioner was able to show, through discovery obtained in a related action after the award, that the attorney’s false statement that he had “no record of any escrow deposit” was critical in the arbitrator’s decision. Because the statement was clearly false and the arbitrator relied on it, the Court found the award was procured by fraud or undue means.
The takeaway here is that even though vacating an arbitration award is an uphill battle, the Court can still provide a safety net if the other side doesn’t play by the rules.