T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc. - 592 F.3d 329 (2d Cir. 2010)

Rule:

Arbitration is a matter of contract, and parties are certainly free to empower their arbitrators to reconsider an award. Functus officio is merely a default rule, operative if the parties fail to provide otherwise. There is no legal bar to authorizing arbitrators to reconsider their decisions, and some rules for arbitrators do authorize reconsideration.

Facts:

Pursuant to two sales contracts dated February 25 and April 25, 2005, petitioner-appellant T.Co Metals, LLC ("T.Co") agreed to sell respondent-appellee Dempsey Pipe & Supply, Inc. ("Dempsey"), approximately 2440 metric tons of twenty-foot, plain-end steel pipe, to be produced in Chile and sent to Philadelphia in four shipments arriving over the spring and summer of 2005. Each contract provided that “Seller was not responsible for consequential loss or damage.” The contracts also contained an arbitration clause. Upon delivery, Dempsey discovered that a substantial amount of the pipe it received was bowed or bent to the point of being out of tolerance for straightness. T.Co sent Dempsey an invoice for $ 1,993,145.53, of which Dempsey paid $ 1,655,105.81. T.Co commenced arbitration and claimed damages against Dempsey for $ 338,039.72, the amount of payment that Dempsey had withheld. Dempsey filed a counterclaim that included a demand for $ 1,895,052 in damages due to the diminished value of the defective steel pipe that Dempsey accepted. In response, T.Co argued that Dempsey's counterclaim was an attempt to recover lost profits, which it asserted were defined as consequential damages under New York law and thus were not recoverable pursuant to the parties' contract. In April 2007, the arbitrator issued the Original Award, which included an award of $ 338,039.72 to T.Co for the outstanding unpaid invoices, and an award of $ 420,357 to Dempsey for the diminished value of the defective pipe. In its Amended Award, the arbitrator agreed with a handful of T.Co's correction requests, and reduced Dempsey’s award from $ 420,537 to $ 340,587. T.Co and Dempsey separately filed applications in the Southern District of New York to modify or vacate the Amended Award. In its application, T.Co alleged that the arbitrator's decision to award diminution damages to Dempsey constituted manifest disregard of the law, requiring that portion of the award to be vacated. Dempsey's application argued that the corrections entered by the arbitrator were not clerical errors within the meaning of ICDR Article 30(1), and therefore the arbitrator exceeded his authority in amending the award to account for those errors. The district court rejected T.Co’s argument and accepted Dempsey's contention that the arbitrator lacked the authority to correct the award as he did since the revisions violated the functus officio doctrine. T.Co challenged the decision, arguing that the arbitrator acted in "manifest disregard of the law" by awarding diminution-in-value damages to Dempsey despite the parties' contractual provision barring consequential damages. Demspey did not appeal, but has moved before this Court for reasonable attorneys' fees based on the contention that T.Co's manifest disregard claim is frivolous for purposes of Federal Rule of Appellate Procedure 38 and 28 U.S.C. § 1912.

Issue:

1. Did the arbitrator arbitrarily act when it awarded diminution-in-value damages to Dempsey despite the parties' contractual provision barring consequential damages?
2. Were the revisions made by the arbitrator in the Amended Award violative of the functus officio doctrine?

Answer:

1) No. 2) No.

Conclusion:

The court agreed with the district court that the arbitrator reasonably interpreted New York law to permit Demspey to recover the diminution in value of the pipe under N.Y. U.C.C. Law § 2-714(2) notwithstanding a provision barring consequential damages in the parties' contract. However, T.Co's claim of manifest disregard was not so totally lacking in merit as to warrant the award of legal fees. The court disagreed with the district court that the arbitrator exceeded his powers by revising the original award. The functus officio doctrine only applied absent an agreement by the parties to the contrary. The parties had empowered the arbitrator to determine the scope of his reconsideration authority, and the arbitrator acted consistent with his interpretation of the arbitration rules which allowed him to correct errors. Accordingly, the court reversed the district court's decision to vacate the amended award and vacated the district court's ruling confirming the original award. The court remanded with instructions that, upon application, the amended award was to be confirmed.