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October 1997
Vol. 8, No. 3
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Contents
ATTORNEYS' FEES IN NEW YORK ARBITRATION
John C. Koster
New York arbitrators have not to date generally awarded attorneys' fees to the prevailing party in an arbitration unless the charterparty arbitration clause specifically empowers them to do so (as is the case with many Tanker Charter Party form arbitration clauses). This is in accordance with the law of New York (and some other states), which precludes an award of attorneys' fees absent specific enabling language in the arbitration clause or agreement.
Recent judicial decisions herald a change in existing law where the underlying arbitration clause is broad ("any and all disputes," etc.), and where the claim is subject to the Federal Arbitration Act. The Federal Arbitration Act covers most charter party arbitrations. Atlas Chartering Services, Inc. v. World Trade Group, Inc., 453 F. Supp. 861 (S.D.N.Y. 1978) (enforceability of arbitration agreement in maritime contract between foreign corporations is governed by Convention). Recent cases have arisen primarily in the field of securities arbitrations, but the reasoning of these decisions is equally applicable to maritime arbitrations involving charter parties.
Where the agreement to arbitrate falls under the Federal Arbitration Act or the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 201 et seq., the Federal Arbitration Act creates a "body of substantive law of arbitrability applicable to any arbitration agreement within coverage of the Act." PaineWebber, Inc. v. Bybyk, 81 F.3d 1193, 1198 (2d Cir. 1996) (quoting Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed. 2d 765 (1983)). These cases hold that a broadly worded arbitration clause will enable a New York arbitration panel to entertain a claim for attorneys' fees.
PaineWebber v. Bybyk
In PaineWebber v Bybyk, the plaintiffs opened an investment account with defendant and executed a client agreement with a standard form arbitration clause providing for the arbitration of "any and all controversies which may arise" concerning the account. The agreement was governed by the Federal Arbitration Act. The agreement also contained a choice of law clause which provided "[the] agreement and its enforcement shall be construed and governed by the laws of the State of New York." Alleging PaineWebber failed to supervise their account and breached its fiduciary duty, the Bybyks demanded arbitration and sought an award of attorneys' fees and punitive damages. PaineWebber argued that certain of the Bybyk's claims were time-barred and commenced a court action to stay the arbitration and to enjoin the Bybyks from seeking punitive damages and attorneys' fees.
The District Court dismissed PaineWebber's action on the ground that the parties' arbitration agreement reserved to the arbitrators the question of whether, inter alia, the Bybyks' claims for punitive damages and attorneys' fees were arbitrable. On appeal, the Second Circuit agreed, holding that the parties' intent, manifest in the arbitration clause, was that all questions of arbitrability, including the timeliness of the Bybyk's claims and their entitlement to attorneys' fees, were to be determined by the arbitrators.
Choice of Law
The Second Circuit rejected PaineWebber's argument that the contractual choice of New York law signified the parties' intent to be bound by New York state law governing the power of arbitrators to determine questions of arbitrability and to award attorneys' fees and punitive damages. 81 F.3d at 1200. Although New York law may restrict the power of arbitrators to award punitive damages and attorneys' fees, arbitrators in New York whose authority arises under the Federal Arbitration Act are not similarly restricted. The Court relied on the United States Supreme Court's recent decision in Mastrobuono v. Shearson Lehman Hutton, Inc., ___ U.S. ___, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995), a case which also involved an agreement with a New York choice of law provision and an arbitration clause. The brokerage house in Mastrobuono argued that the New York choice of law clause precluded an award of punitive damages because under New York law arbitrators are not empowered to award punitive damages. The Supreme Court disagreed and held that the choice of law provision, standing alone, did not denote a specific intent by the parties to exclude punitive damages or to be bound by the "special rules [that] limited the authority of the arbitrators." Thus the Second Circuit in Bybyk concluded regarding attorneys' fees: "Mastrobuono, squarely on point, supports the Bybyks' contentions that, under the Federal Arbitration Act, [the Bybyks] are not prevented by the New York choice of law provision from arbitrating issues of timeliness and attorneys' fees." 81 F.2d at 1200. The result turned upon federal law embodied in the Federal Arbitration Act.
Scope of Agreement
In Bybyk the Second Circuit determined that the language of the Bybyks' arbitration agreement with respect to arbitral disputes was "elastic enough to encompass disputes over whether a claim is timely and whether a claim is within the scope of arbitration." 81 F.3d at 1199. The Court further held:
... The Agreement provides that ‘any and all controversies' shall be submitted to arbitration; there is no express limitation with respect to attorneys' fees. For reasons already stated, a choice of law provision will not be construed to impose substantive restrictions on the parties' rights under the Federal Arbitration Act, including the right to arbitrate claims for attorneys' fees. See Mastrobuono, ___ U.S. ___, 115 S.Ct. at 1218-19. Therefore, PaineWebber cannot rely on the New York choice-of-law provision to prevent the Bybyks from seeking in arbitration a remedy that is not foreclosed by the Agreement. (Emphasis added)
81 F.3d at 1202.
Additional Cases
Other cases have followed a similar approach regarding attorneys' fees. In Cowen & Co. v. Technoconsult Holdings Ltd., 1996 U.S. Dist. LEXIS 9763 (S.D.N.Y.), petitioner Cowen sought to stay arbitration permanently and to prevent arbitrators from awarding attorneys' fees. The agreement at issue provided for arbitration of "any controversy arising out of or related to any of [the securities] accounts ..." and contained a New York choice of law clause. The Court concluded that neither the arbitration clause nor the choice of law provision restricted the parties' right under the Federal Arbitration Act to arbitrate a claim for attorneys' fees and, thus, denied the application. Similarly, in A. S. Goldmen & Co. v. Bochner, 1996 U.S. Dist. LEXIS 10373 (S.D.N.Y.), a party moved to stay arbitration of a demand for attorneys' fees in a pending arbitration. The Court relied upon Bybyk in denying the cross-motion. See also, Merrill Lynch, Pierce, Fenner & Smith v. Adler, 651 N.Y.S.2d 38 (1st Dept. 1996) (Under Mastrobuono, clause requiring arbitration of "all controversies" contemplated an award of attorneys' fees by Panel).
Given recent court decisions, it is highly likely New York arbitrators will soon begin awarding legal fees in maritime arbitrations even where the arbitration clause does not specifically refer to legal fees. The Second Circuit Court of Appeals has now confirmed arbitrators possess the authority to do so.
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PRODUCTS LIABILITY: IS IT "OTHER PROPERTY"?
YES, SAYS THE SUPREME COURT
by William
N. France
In Saratoga Fishing Co. v. J.M. Martinac & Co., 117 S.Ct. 1783, 138 L.Ed.2d 76, 65 U.S.L.W. 4429 (1997) the Supreme Court has held, over a dissent, that a subsequent purchaser of a fishing vessel can recover in tort from the vessel's builder for loss of a skiff, seine nets, and electronic gear added to the vessel by the initial purchaser. The initial purchaser, Joseph Madruga, bought the vessel new from J.M. Martinac & Co., and added the skiff, seine nets, etc. which permitted him to use the vessel as a tuna seiner. He later resold the vessel with the added equipment to the plaintiff. The vessel and added gear were destroyed in a fire caused by the vessel's defective hydraulic system. Under the law of the Supreme Court's East River Steamship case, if this added equipment constituted a part of the vessel (product) there could be no recovery. If it constituted "other property," then recovery could be available.
The EAST RIVER Case
The Saratoga Fishing Co. case is a significant clarification of the general maritime law's "economic loss doctrine" adopted by the United States Supreme Court in East River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858 (1986). In East River plaintiffs were bare-boat chartered owners of steam turbine tankers who brought suit against the turbine manufacturer, Delaval, in contract and in tort, for defects in the design and construction of the turbines which resulted in damage to the turbines and loss of use of the vessels. Claims under the construction contract were time-barred leaving plaintiffs only with tort claims. A unanimous Supreme Court held that no products liability claim, whether founded on negligence or strict liability, could be asserted in admiralty when the malfunctioning of a defective product purchased in a commercial transaction damaged only the product itself and the only injury claimed is economic loss. One of the principal considerations underlying the Court's decision was the desirability of limiting tort protection to those situations in which contract-warranty protection was not feasible, since otherwise "...contract law would drown in a sea of tort."
Saratoga Fishing
The Supreme Court, however, in Saratoga Fishing has held that items added to the M/V Saratoga by the initial purchaser were "other property" and that the initial purchaser's later resale of the vessel with the "other property" did not change the character of the items added. The Court of Appeals for the Ninth Circuit, had denied recovery against builder for these items, reasoning that the East River case obligated it to define the defective "product" by considering what the plaintiff had purchased and might have asked its seller to warrant, had the plaintiff given the matter thought. The majority rejected that reasoning commenting: "why should a series of resales, after replacement and additions of ever more physical items, progressively immunize a manufacturer to an ever greater extent from the liability for foreseeable physical damage that would otherwise fall upon it? If recovery were denied to plaintiff, said the majority, the result would turn on the mere fortuity of whether a defective product causes harm to added equipment before or after an initial user (who added the equipment) resells the product. The majority concluded that relegating risks of harm to contract remedies was not as satisfactory a solution in the context of resale after an initial use.
The M/V Saratoga was the third in a series of seven vessels built by Martinac for Madruga and Madruga had participated in the design of the series of vessels and had supervised their construction by Martinac. While the M/V Saratoga was functional as a vessel, it was not suited for its specifically designed purpose as a tuna seiner until Madruga installed the seine, skiff and electronics equipment. Had Madruga not used the M/V Saratoga before he sold it, plaintiff would have been barred from recovering from Martinac for the added equipment. Under those circumstances Madruga would have been considered the manufacturer of the vessel as a tuna seiner. The dissent pointed out, however, that the majority's "initial-user" rule simply made recovery turn on a different fortuity; namely, whether or not the party adding the additional equipment uses the product before selling it. The dissent claimed that the majority had not carefully considered whether the initial purchaser, Madruga, was really in the business of designing, assembling, and distributing fully equipped tuna seiners.
Restatement (Second) Torts
The dissent preferred the more predictable "last-402A-seller" rule based on Section 402A of the Restatement (Second) Torts (1964) which defines a "product" as that which is sold by the last person in the distribution chain who is "engaged in the business of selling such a product." Such a rule, wrote the dissent, does not depend on either fortuity and would be more consistent with the trend of economic loss cases to focus on what the plaintiff bargained to purchase and the character of the plaintiff's loss. The dissent also noted what it termed an impressive line of lower court cases holding in commercial contexts that purchasers of products damaged by defective components cannot recover in tort from component manufacturers on the theory that the remainder of the product is "other property." The rationale of those cases, said the dissent, was in conflict with the majority's holding.
The effects of Saratoga Fishing on the economic loss doctrine in maritime law are unpredictable. At the least, litigation over definitions of "product" and "other property" will continue.
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PAPAI THE SAILOR? NO, SAYS THE SUPREME COURT
by Andrew V. Buchsbaum
Continuing its unprecedented interest in the contours of Jones Act seaman status, the Supreme Court narrowed the boundaries of the "fleet doctrine" in Harbor Tug and Barge Co. v. Papai, 117 S. Ct. 1535, 137 L.Ed.2d 800 (May 12, 1997) by requiring common ownership and control of the fleet. Thus, Respondent Papai, hired out of the Inland Boatman's Union hiring hall for a one day painting job aboard a docked tug, could not rely upon his previous jobs on unrelated vessels to prove his connection to an "identifiable group of vessels," and was unceremoniously stripped of the seaman status awarded him by the appellate court below.
In Chandris, Inc. v. Latsis, 515 U.S. 347 (1995), the Supreme Court discussed the employment-related connection to a vessel in navigation necessary to qualify as a seaman under the Jones Act. Besides contributing to the functioning of the vessel or to the accomplishment of its mission (an issue not disputed in Papai), a putative seaman is required to show "a connection to a vessel in navigation (or to an identifiable group of such vessels) that is substantial in terms of both its duration and its nature." The phrase "identifiable group of such vessels" is a recognition of the fleet doctrine, first articulated by the Fifth Circuit Court of Appeals in Braniff v. Jackson Ave.-Gretna Ferry, Inc., 280 F.2d 523 (5th Cir. 1960), which allowed a finding of seaman status based upon an injured employee's connection to a group of vessels rather than a particular vessel.
Recognizing his tenuous connection to the tug being painted, and seeking the more liberal benefits afforded by the Jones Act, Papai urged the Supreme Court to consider his union employment on 12 other vessels owned by three different employers over a 2 1/4 year period before his injury, including work as a deckhand. In declining his invitation, the Supreme Court limited the "identifiable group of vessels" to those "subject to common ownership or control." The mere fact that each of Papai's employers hired its workers from the same union hall was deemed insufficient to afford Papai seaman status.
In sum, the Supreme Court has now provided additional guidance to the age-old question first asked of Respondent's namesake, Popeye the Sailor, upon his comic debut in 1929: "Are you a sailor?" (to which Popeye the Sailor responded "D'j'a think I'm a cowboy?"). Perhaps it would have best behooved Papai the painter to remember that "I yam what I yam and that's all that I yam."
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ADMIRALTY JURISDICTION IN INTERMODAL TRANSPORT
by John W. Wall
In Transatlantic Marine Claims Agency v. Ace Shipping Corp., 109 F.3d 105 (2d Cir. 1997), the United States Court of Appeals for the Second Circuit recently held that a claim for cargo damage during the transcontinental rail leg of an intermodal shipment from New York to Korea via Seattle could come within the federal courts' admiralty jurisdiction only if the parties to the bill of lading had contemplated that the cargo would be transported entirely by water. "Mixed" contracts containing both admiralty and non-admiralty obligations are usually not within federal admiralty jurisdiction. The Court held the two recognized exceptions to the "mixed" contract rule to be inapplicable. The first exception concerns contracts where the non-maritime obligations are severable from the maritime obligations and the second exception concerns contracts where the non-maritime obligations are "merely incidental" to the maritime obligations. The Second Circuit followed a lower court's decision that "transportation from coast to coast across the United States may not be considered incidental." Because it was not clear from the bills of lading whether the parties intended transportation from New York to Seattle to be by land or by water, the Court remanded the case to the District Court for a determination of the parties' intent at the time of the contract.
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"The Law of Marine Collision," by Healy & Baillie founding partner Nicholas J. Healy and Professor Joseph C. Sweeney of Fordham University School of Law, has been completed, and has reached the galley proof stage. Cornell Maritime Press expects to publish it before the end of the year.
While a number of books on the current International Collision Regulations ("COLREGS") have appeared since the COLREGS became effective in 1977, the forthcoming book will be the first comprehensive text on the law of collision since 1961, when the most recent edition of Marsden's "Collisions at Sea" was published.
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SECOND OCTOGENARIAN AT HEALY & BAILLIE
The Firm honored Gordon W. Paulsen at a luncheon at India House in New York City on Monday, September 8th, 1997 to celebrate Gordon's 80th birthday. He has been a partner with the Firm since January 1985. Previously he had been senior partner at Haight Gardner Poor & Havens from which he resigned in 1985. He had joined Haight Gardner as an associate upon having been graduated from Columbia Law School in June of 1949. Gordon was President of the U.S. Maritime Law Association from 1982 to 1984.
On behalf of the Firm, Managing Partner John D. Kimball thanked Gordon for his many contributions. Founding partner Nicholas J. Healy, himself 87, welcomed Gordon to the octogenarian club.
Gordon spoke warmly of his association with Healy & Baillie. Congratulations, Gordon, thank you, and many more!
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Healy & Baillie actively continues its practice of having attorneys from other parts of the world spend time at the Firm to become better informed about U.S. law and arbitration. These visiting attorneys in turn contribute knowledge and legal experience accumulated in their own countries. Everyone benefits through a better understanding of the differences and similarities between U.S. law and that of other jurisdictions.
Among those countries presently represented at Healy & Baillie are China, Germany and Cyprus. Ulrich Scholz comes to us from Cologne, Germany, with the law firm of Deringer, Tessin, Herrmann & Sedemund. Grace Hou is visiting from Shanghai, China, and was previously a legal consultant to Sinclair Roche & Temperley in their Shanghai office. Alexandros Economou who has just arrived from Cyprus is associated with Chrysses Demetriades & Co., and finally Kerstin Schmidt from Hamburg, Germany, who will be with us until the end of November as part of her "Referendarzeit." Kerstin has worked at Zoepffel & Schneider and Wessing Berenberg Gossler Zimmermann Lange in Hamburg and also spent a summer with Sinclair Roche & Temperley in Hong Kong.
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We are pleased to welcome Brad L. Berman, effective October 15, 1997, as a member of the Firm. Brad is the President of the Connecticut Maritime Association and holds a law degree from New York Law School (1983) and an MBA from City University of New York (1984). He is a member of the New York, Connecticut and Florida bars, with extensive expertise in ship finance and corporate law. Brad's previous experience included associations with Seward & Kissel and Hill, Betts & Nash.
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Kellianne Greenwood joined Healy & Baillie on September 2. She received her J.D. from Tulane Law School, and a B.A. from Loyola University. Kellianne is fluent in Russian and proficient in French.
Sarah B. Herlihy joined Healy & Baillie on September 8. She received her J.D. from Boston College Law School, and a B.A. from Bryn Mawr College.
Howard M. Wagner joined Healy & Baillie on September 15. Howard received a J.D. from Boston University School of Law and a B.A. from University of Maryland at College Park.
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NOTE: "Mainbrace," our Firm's cable address, in nautical terminology means the brace or rope sustaining the main yard on a ship. The Staff of "Mainbrace" consists of Nicholas J. Healy, Gordon W. Paulsen, John C. Koster, Matthew A. Marion, Betty M. Waterman and Renee Kintzer.
New York Office: 29 Broadway New York, NY 10006-3293 Telephone: (212) 943-3980 Telecopier: (212) 425-0131 |
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MAINBRACE
HEALY & BAILLIE
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NEW YORK, NEW YORK 10006-3293
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