Arbitration: 11th Circuit Reasserts Standard for Binding Nature of Arbitrator's Order (Web)

In a case of first impression, the Eleventh U.S. Circuit Court of Appeals in Centurion Air Cargo Inc. v. United Parcel Serv. Co., Nos. 04-11632, 04-12922, 2005 WL 1865448 at *2 (11th Cir. Aug. 9, 2005)(available at www.ca11.uscourts.gov/opinions/ops/200411632.pdf), adopted the approach of the Fourth and Fifth Circuits and held that an arbitrator’s order is binding on the parties unless they expressly agree otherwise, and further, that to be effective, an arbitrator’s order does not require court affirmation.

Centurion, the plaintiff, was an air cargo and transportation services corporation based in Miami, Florida. Centurion entered into a purchase agreement with United Parcel Service under which UPS purchased substantially all of Centurion’s assets. Under the purchase agreement, Centurion was required to indemnify UPS for liabilities in excess of $200,000 arising from an action against Centurion in Costa Rica.

Under the purchase agreement, UPS was required to make monthly installment payments to Centurion for certain transitional services. The purchase agreement gave UPS a right of offset if UPS should obtain a final, nonappealable judicial order or binding arbitral decision that Centurion was obligated to indemnify UPS for liabilities arising from the Costa Rica litigation. The post-closing agreement applied UPS’s right of offset to the monthly installment payments. Id. at *1.

Several months after Centurion and UPS entered into the purchase agreement, the plaintiff in the Costa Rica litigation attached UPS’s assets in Costa Rica, and garnished UPS’s Costa Rica revenue, in anticipation of a final judgment against Centurion. In response, UPS filed an emergency motion before the American Arbitration Association seeking to force Centurion to post a bond of more than $821,000 with the Costa Rican court to dissolve the attachment and garnishment. The arbitrator ordered Centurion to post the bond. Centurion and UPS then petitioned the district court to vacate or confirm the arbitrator’s order.

While Centurion and UPS were waiting for the district court’s decision, UPS’s July installment payment came due. UPS informed Centurion that it would exercise its offset right, and would set off its monthly installment payment by the amount of the bond. UPS then posted it own bond with the Costa Rican court. Id. at *1.

The district court confirmed the arbitrator’s order. But Centurion refused to post a bond with the Costa Rican court and filed suit against UPS for breach of the purchase agreement and post-closing agreement. Centurion’s claims were based on UPS’s set off of its July installment payment.

UPS moved for summary judgment as to the purchase agreement, and the court granted the motion, holding that UPS acted within its rights by setting off the July installment payment. UPS then moved for summary judgment as to the post-closing agreement, and the court granted the motion, based on Centurion’s prior contention in the suit that the post-closing agreement could only have been breached if UPS set off its installment payment without complying with the purchase agreement. Centurion appealed. Id. at *2.

The Eleventh Circuit considered Centurion’s claim that UPS was not entitled to exercise its right of offset, because the arbitrator’s order was not a binding arbitral decision at the time UPS set off its July installment payment. Centurion based its claim on the fact that at the time of the set off, the district court had not yet decided whether to vacate or confirm the arbitrator’s order. Id. at *2.

The Court noted that the Supreme Court had declared a strong federal policy in favor of arbitration, and further, that other circuits had held that an arbitrator’s order does not require a court’s confirmation to be effective. Id. at *2. The Court stated that it would not contravene federal policy and would join the approach of the Fourth and Fifth Circuits. The Court held that an arbitrator’s order is binding on the parties unless the parties expressly agree otherwise, and that to be effective, an arbitrator’s order does not require affirmation from a court. Id. at *3

Accordingly, the Court found that the arbitrator’s order was binding on Centurion and UPS at the time UPS exercised its right of offset.

-- Kristien M. Kahn, Associate, Dewey Ballantine LLP