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Arbitration Award in Yacht Construction Contract Upheld

In CAT CHARTER, LLC v. SCHURTENBERGER, 23 Fla. L. Weekly Fed. C106a (11th Cir. July 13, 2011), the U.S. Court of Appeals for the Eleventh Circuit issued a detailed opinion on what is required in rendering an arbitration award. It is a "must read" for lawyers and parties that insert arbitration clauses in their yacht construction clauses.

Facts

This case arises out of a dispute over the construction of a yacht. Daniel and Patricia Ryan are Massachusetts citizens who, in anticipation of retirement and with an eye toward the construction of a vessel, formed a Delaware limited liability corporation, Cat Charter, LLC (“Cat Charter”). The Ryans, through Cat Charter (collectively, the “Plaintiffs”), agreed to pay Mutihull Technologies, Inc. (“MTI”), a Florida business owned solely by Walter Schurtenberger (collectively, the “Defendants”), to construct a vessel to be known as the Magic. But the Defendants never delivered the Magic, despite receiving roughly $2 million from the Plaintiffs. As a result, the parties entered into binding arbitration pursuant to their written agreement, which stated in pertinent part:

"The parties agree that any dispute between themselves arising out of this agreement or the performance thereof shall be settled by binding arbitration according to the rules and procedures of the American Arbitration Association and that proper venue of such arbitration shall be Key West, Florida. Further the parties agree that the substantially prevailing party shall recover the cost of such arbitration and reasonable attorney's fees; the arbitration award may be entered in any court of competent jurisdiction."

The Plaintiffs filed their Statements of Claim with the American Arbitration Association (the “AAA”), assertingd six separate claims against the Defendants: (1) deceptive and unfair trade practices under Fla. Stat. § 501.201; (2) rescission; (3) breach of contract; (4) fraud or alternative misrepresentation; (5) breach of fiduciary duty; and (6) civil remedy for criminal practices under Florida law. The Defendants answered, denying the Plaintiffs' claims and arguing that the construction of Magic had proceeded according to the terms of the "cost plus" contract entered into in 2005. Both parties requested an award of reasonable attorneys fees.  

Following discovery, a five-day hearing, and post-trial briefing, the Panel issued a unanimous arbitration award (the “Award”) on December 7, 2009. The Award stated, in pertinent part:

"1. On the claim of the Claimants, CAT CHARTER, LLC; DANIEL RYAN; and PATRICIA RYAN (hereinafter collectively “Claimants”), for violation of the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”), we find that Claimants have proven their claim against Respondents, MULTIHULL TECHNOLOGIES, INC. (hereinafter “MTI”), and WALTER SCHURTENBERGER (“SCHURTENBERGER”), by the greater weight of the evidence;
2. On the claim of the Claimant, CAT CHARTER, LLC, for breach of contract by Respondent MTI, we find that Claimant, CAT CHARTER, LLC has proven its claim against MTI by the greater weight of the evidence;
3. All other claims of the Claimants are hereby denied. All counter-claims of the Respondents, MTI and SCHURTENBERGER, are denied;
4. On the claim of the Claimants for entitlement to attorney's fees in this arbitration proceeding and entitlement to an award of arbitration expenses and costs, inclusive of the arbitrators' fees and costs, we find that Claimants are the substantially prevailing parties in this arbitration and are entitled to an award of such fees and costs against the Respondents, MTI and SCHURTENBERGER.
5. On the claim of the Respondents for entitlement to attorney's fees and costs in this arbitration, we find that Respondents are not the substantially prevailing parties in this arbitration, and said claim is denied;
6. On the claim by Claimants for civil theft which the Arbitrators have denied, the Arbitrators find that Claimants raised a claim that had substantial fact and legal support pursuant to Fla. Stat. § 772.104(3). More specifically, we find that the issues relating to missing resin and the cost of the skiff presented substantial fact issues raised by Claimants, justifying denial of any attorney's fees for Respondents; . . . "

The Panel then ordered the Defendants to “jointly and severally pay” the Plaintiffs more than $2 million in damages, fees, costs, and interest. The Panel also granted the Plaintiffs a first lien on the Magic.

The Trial Court

The Plaintiffs filed a motion to confirm the Award in the District Court for the Southern District of Florida. The Plaintiffs attached to this motion the Award, their Amended Statement of Claim to the Panel, and a host of other exhibits. They made no mention of the agreement requiring the Panel to provide a reasoned award, and they presented no argument regarding the sufficiency of the reasons provided. The Defendants responded with a motion to vacate the Award on the ground that the Panel exceeded its authority by failing to issue a reasoned award as required by the parties' agreement. The Defendants never complained to the Panel regarding the form of the Award or requested a modification of the Award after it was delivered; they first raised their concern over the lack of reasons provided by the Panel in their motion to vacate.

The District Court vacated the arbitration award, agreeing with the Defendants that the Panel had exceeded its powers within the meaning of the law by failing to provide a satisfactorily reasoned award. Cat Charter LLC v. Schurtenberger, 691 F. Supp. 2d 1339, 1344-45 (S.D. Fla. 2010) [22 Fla. L. Weekly Fed. D224a]. The court further ruled that remand to the Panel was barred by the operation of the common law doctrine functus officio. Id. at 1345. This doctrine means that the parties would be required to begin a new arbitration proceeding before a new panel in order to settle the controversy surrounding the Magic. In other words, the district court determined that the Award was so deficient that it warranted sending the parties back to square one, ostensibly granting the Defendants a second bite at the apple because of a perceived technical defect in the form of the Award.

The Eleventh Circuit

The Eleventh Circuit held that the Panel's actions survive scrutiny under the law. The Court reasoned "[t]he context of the Panel's statements and the fact that the Award provides detailed reasons regarding one claim, however, lead us to disagree with the Defendants. Put simply, the controversy here turned primarily upon credibility determinations made by the Panel. Either the transaction proceeded along the lines of a duly executed contract -- the Defendants' story -- or the transaction surrounding construction of the Magic was punctuated by misrepresentations and dubious behavior on the Defendants' part -- the Plaintiffs' story." The Court found that "in the swearing match between the Plaintiffs and the Defendants, the Panel found the Plaintiffs' witnesses to be more credible. We certainly cannot say that this statement is devoid of any statements offered as a justification; the reason for the Plaintiffs' victory is plainly provided."

Thus, the Eleventh Circuit reversed and remanded the trial court's decision, as  it found the Award was a reasoned one.

Conclusion

It is imperative that the parties to a contract that calls for arbitration have a clear indication of how that arbitration is to proceed. If it is under arbitration rules that allow the parties to decide how the arbitration to proceed, it is recommended that findings of fact and conclusions of law be requested, so there is some expanded reasoning as to why an arbitration panel finds as it does. Without findings of fact and conclusions of law, the courts are left to try and figure out why a panel ruled as it did.
If you are interested in receiving a complete copy of this decision or wish to reach me, you may do so at miamipandi@comcast.net or motero@houckanderson.com.

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