T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc.

592 F.3d 329

T.CO METALS, LLC, Petitioner-Appellant, v. DEMPSEY PIPE & SUPPLY, INC., Respondent-Appellee.

Docket No. 08-3894-cv(L).

Docket No. 08-3897-cv(CON).

Docket No. 08-4379-cv(XAP)^*.

United States Court of Appeals, Second Circuit.

Argued: June 24, 2009.

Decided: January 14, 2010.

Alfred J. Kuffler (Stephen W. Armstrong and Lathrop B. Nelson, III, on the brief), Montgomery, McCracken, Walker & Rhoads, LLP, Philadelphia, PA, for Petitioner-Appellant.

Marc J. Goldstein, Marc J. Goldstein Litigation & Arbitration Chambers, New York, NY, for Respondent-Appellee.

Before: MINER, LIVINGSTON, Circuit Judges, and TRAGER, District Judge.^**

LIVINGSTON, Circuit Judge:

Petitioner-Appellant T.Co Metals, LLC ("T.Co") appeals from judgments of the United States District Court for the Southern District of New York (Crotty, J.) resolving two consolidated actions commenced by T.Co and Respondent-Appellee Dempsey Pipe & Supply, Inc. ("Dempsey"), in which the parties sought, inter alia, to vacate, modify, and correct an arbitration award pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 10-11. Conducted according to the International Dispute Resolution Procedures of the American Arbitration Association's International Centre of Dispute Resolution ("ICDR"), the arbitration concerned a dispute over allegedly defective steel pipe that T.Co delivered to Dempsey pursuant to two sales contracts between the parties. Arbitrator Paul D. Friedland issued a final award on April 20, 2007 ("Original Award"). Both parties then petitioned the arbitrator to amend the Original Award pursuant to ICDR Article 30(1). On May 30, 2007, the arbitrator issued an order ("Amendment Order") accepting a small portion of the requested changes and ordering that the Original Award be amended accordingly. The arbitrator then issued an amended award on June 4, 2007 ("Amended Award"). Both T.Co and Dempsey filed petitions in the district court to modify or to vacate the Amended Award in part. The district court denied T.Co's petition and granted in part and denied in part Dempsey's petition.

T.Co raises two issues on appeal. First, T.Co argues 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. The district court's ruling to the contrary, T.Co contends, resulted from an erroneous interpretation of the Supreme Court's recent decision in Hall Street Associates, L.L. C. v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008). Second, T.Co takes issue with the district court's order vacating the Amended Award and confirming the Original Award on the ground that the arbitrator exceeded his powers by ordering that certain errors be corrected in the Original Award. The district court concluded that the arbitrator's revisions, which benefitted T.Co, violated the functus officio doctrine, which limits the power of arbitrators to act once they have completed the duties assigned to them. Dempsey 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.

On the first issue, we agree with the district court's refusal to vacate the arbitrator's damage award to Dempsey on the ground of manifest disregard. We decline, however, to award attorneys' fees to Dempsey. We find the second issue more difficult to resolve. Ultimately, however, we conclude that the district court erred in applying the functus officio doctrine to the arbitrator, as the arbitrator was acting on the parties' petitions for reconsideration, and he revised the award pursuant to his interpretation of the arbitral rules pursuant to which the parties had agreed the arbitration would be conducted. We conclude that the arbitrator's interpretation of these rules was entitled to deference and that, applying that deference, the arbitrator did not exceed his powers by granting in part T.Co's request that certain errors be corrected in the award.

Accordingly, we affirm in part and reverse in part the judgment of the district court. We vacate the order confirming the Original Award and remand with instructions that, upon application, the Amended Award should be confirmed.

Background

I. The Commercial Dispute

Pursuant to two sales contracts dated February 25 and April 25, 2005, T.Co agreed to sell Dempsey approximately 2440 metric tons (or 2690 short 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. Among other things, each contract provided that "Seller is not responsible for consequential loss or damage." J.A. 27, 30. The contracts also contained an arbitration clause, reading in part as follows:

Any ... dispute, claim or controversy between [T.Co and Dempsey] which cannot be resolved through negotiations within a period of 30 days ... shall be referred to and finally resolved by arbitration under the [i]nternational arbitration rules of the American Arbitration Association [(hereinafter "ICDR Articles")]. Arbitration will take place in New York, N.Y. USA and proceedings will be conducted in English. The award of the Arbitration tribunal will be final and subject to no appeal. The costs and expenses of the prevailing party (including, without limitation, reasonable attorney's fees) will be paid by the other party.

Id. The contracts designated the "Laws of the State of New York" as their governing law. Id.

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.¹ Nevertheless out of the four shipments of pipe it received Dempsey ultimately rejected only a small portion of the second shipment, choosing to keep the rest of the delivered pipe and to straighten the defective pipe itself.² The contract price for the pipe was $780 per short ton. After straightening the defective pipe, Dempsey was able to sell it at $922 per short ton.

T.Co sent Dempsey an invoice for $1,993,145.53, of which Dempsey paid $1,655,105.81. In June 2006, 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 are defined as consequential damages under New York law and thus are not recoverable pursuant to the parties' contract. In its written submissions to this Court, Dempsey acknowledges that it did ask the arbitrator to award Dempsey consequential damages in the form of lost profits, contending that the contractual exclusion of consequential damages had been superseded by an oral agreement between the parties. But Dempsey asserts it also argued in the alternative that, if the arbitrator decided that the consequential damages provision remained in force, Dempsey was still entitled to recover damages for the diminished value of the pipe, since those damages constituted "benefit-of-the-bargain" damages under section 2-714(2) of the New York Uniform Commercial Code ("N.Y. U.C.C."), which provides that "[t]he measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount."

II. The Original Arbitration Award

On April 20, 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.

When analyzing Dempsey's claim for damages, the arbitrator agreed with T.Co that the consequential damages exclusions in the contracts remained in effect. Nevertheless, the arbitrator also concluded that N.Y. U.C.C. § 2-714(2) provided the appropriate measure of damages for nonconforming goods where, as here, the fair market value of the goods as accepted was ascertainable.³

The arbitrator proceeded to apply § 2-714(2)'s formula — i.e., that damages equal the value of the goods as warranted minus the value of the goods as accepted, measured at the time and place of acceptance. The arbitrator calculated the value of the pipe as warranted by looking both to invoices of steel pipe sellers that supplied entities like Dempsey and to evidence regarding the price at which pipe was being sold by firms similarly situated to Dempsey. On this basis, the arbitrator determined that the value of the pipe as warranted was $1000 per short ton. After additional calculations and evaluation of the evidence, the arbitrator determined the value of the nonconforming pipe at the time and place of acceptance to be $737 per short ton. Under § 2-714(2)'s formula, then, Dempsey was entitled to $263 ($1000-$737) per short ton, or $420,537 total for the 1599 short tons of pipe that the arbitrator determined were nonconforming.

III. The Amended Arbitration Award

Both parties promptly submitted applications to the arbitrator to amend the Original Award pursuant to ICDR Article 30(1), which permits the arbitrator to "correct any clerical, typographical or computation errors or make an additional award as to claims presented but omitted from the award." In response, the arbitrator issued an order ("Amendment Order") on May 30, 2007, rejecting most of the challenges to the Original Award but agreeing with a handful of T.Co's correction requests and ordering that the Original Award be amended accordingly.

In the Amendment Order, the arbitrator noted T.Co's...