Second Circuit Affirms Sanctions for Avoiding Arbitration

We recently noted an opinion in the District Court for the Southern District on New York, protecting the integrity of the arbitration process by sanctioning a party that had sought to vacate an arbitration award with no grounds whatsoever, except a desire to delay its effect.  Recently the Second Circuit Court of Appeals visited the other end of the FAA judicial review process, in affirming the levying of sanctions upon a party that  initiated litigation in an effort to avoid or delay its clear obligation to arbitrate.

Amaprop Limited v. Indiabulls Financial Services Ltd. involved a party, IFSL (an Indian company), that was named respondent in an arbitration proceeding pursuant to an agreement that was part of a financing plan.  Six weeks after the arbitration commenced, IFSL sought a temporary stay of arbitration proceedings before the High Court of Judicature of Bombay, which issued an ex parte injunction against the arbitration’s continuing.  Claimant Amaprop filed an action in U.S. District Court for the Southern District of New York, and obtained an order compelling arbitration and enjoining IFSL from proceeding with the Bombay Court action.  Amaprop later sought and was awarded fees, and IFSL appealed that sanction.

The Court of Appeals characterized IFSL’s behavior as “a sophisticated party’s apparently bad-faith refusal to arbitrate a complex commercial dispute, notwithstanding an express arbitration agreement.” 

Most tellingly, the court relied upon public policy in affirming the sanctions: “[W]e agree with the district court that the federal policy of enforcing sophisticated parties’ arbitration agreements weighs in favor of fee awards against parties who attempt, without legitimate legal basis, to circumvent arbitration.”

IFSL had “misleadingly redacted” language from the arbitration provision when it argued before the district court, and its legal position was not colorable.  The court also criticized the misleading characterizations made by IFSL before the Bombay court.  Moreover, IFSL acted in bad faith when it sought and was granted additional time by the arbitration panel in order to frame a statement of defense, and then used that time to perfect its request for injunctive relief in Bombay, without notice to the panel or to Amaprop.

These cases suggest that the courts are willing not only to compel arbitration and to enforce arbitral awards — they are also willing to deter parties and counsel who attempt to avoid those obligations without legal basis and in bad faith.

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