In Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Ltd., et al., the Second Circuit affirmed the district court’s order denying Smarter Tools, Inc.’s (STI) petition to vacate an arbitration award and granting Chongqing Seni Import & Export Trade Co. Inc. and Chongqing AM Pride Power and Machinery Co., Ltd.’s (collectively, SENCI) cross-petition to confirm the award.

STI is engaged in the business of buying and selling tools and power products. SENCI produces and sells gas-powered generators. STI and SENCI entered into contracts for STI’s purchase of thousands of generators from SENCI. The purchase orders for the generators included an arbitration provision “providing that any dispute arising from the contracts would be resolved by arbitration, to be conducted in New York City under the International Commercial Dispute Resolution Procedure of the American Arbitration Association.” After disputes arose between the parties regarding the generators, SENCI initiated arbitration to collect amounts due from STI. STI filed a counterclaim contending that several of the generators were defective and failed to comply with applicable state and federal regulations, resulting in damages to STI. The parties agreed the arbitrator should provide a reasoned award. After the hearing, the arbitrator rendered an award, which (i) included a brief description of the proceedings, (ii) excluded the testimony of STI’s expert witness and five exhibits related to that testimony, and (iii) included two findings. The arbitrator awarded SENCI approximately $2.4 million and denied all of STI’s claims against SENCI.

STI filed a petition to vacate the arbitration award contending it was not a “reasoned award” as required, and that the arbitrator “manifestly disregarded the law.” SENCI filed a cross-petition to confirm the award. The district court found the arbitrator’s award did “‘not meet the standard for a reasoned award because it contains no rationale for rejecting STI’s claims’” and “‘the arbitrator exceeded his authority in issuing an award that does not meet the standard of a reasoned opinion.’” The district court remanded the matter to the arbitrator for clarification of his findings. The arbitrator then issued a final amended award providing the same relief for the parties, but also including a further explanation of why STI’s counterclaims failed. STI again moved to vacate the amended award, and SENCI moved to confirm the award. The district court found the arbitrator’s amended award provided sufficient details to constitute a reasoned award and granted SENCI’s cross-petition to confirm the award and denied STI’s petition to vacate.

In affirming the district court’s order, the Second Circuit first noted the opinion in Porzio v. Dresdner, Kleinwort, Benso, N. Am., LLC, 497 F.3d 133 (2d Cir. 2007) confirming the “extremely deferential standard of review” that should be applied in reviewing arbitral awards “[t]o encourage and support the use of arbitration by consenting parties.” The court noted “‘[o]nly a barely colorable justification for the outcome reached by the arbitrators is necessary to confirm the award.’” The court then rejected STI’s argument that the doctrine of functus officio barred the district court from remanding the matter to an arbitrator for a reasoned award. The doctrine of functus officio provides “once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreement by the parities, to redetermine those issues”. The court found “where, as here, a district court determines that the arbitrator failed to produce an award in the form agreed to by the parties, remand for a properly conformed order is a permissible choice. It simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued after the hearing.”

The court also rejected STI’s argument that vacatur was mandated under the FAA. The court held that “applying the strong presumption in favor of enforcing an arbitration award, the arbitrator’s failure to render a reasoned award does not fall within a narrow reading of Section 10(a)(4) and did not require vacatur of the original award.” The court found “where, as here, the parties agree that the arbitrator will produce a reasoned award, the failure to provide one renders the award ‘imperfect in matter of form not affecting the merits of the controversy.’ 9 U.S.C. §11(c).” Finally, the court rejected STI’s claim that the district court also erred in not finding the arbitrator acted in “manifest disregard of the law” finding those claims groundless.

Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Inc., et al., No. 21-724 (2d Cir. Jan. 17, 2023)