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Litigation: Courts Award Sanctions for Unsuccessful Challenges to Arbitral Awards

Although there is a statute that authorizes federal courts to sanction lawyers and parties for bringing baseless lawsuits or motions (28 U.S.C. ? 1927), it is very rare that courts actually invoke the statute. One area, however, in which parties and lawyers risk being sanctioned is in connection with challenges to arbitral awards that amount to nothing more than an argument that the arbitrator reached an incorrect result.

B.L. Harbert International LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir.2006) was a case in which the plaintiff challenged an adverse arbitration award arising out of a dispute over a construction project. The challenge was on the ground that the arbitrator manifestly disregarded the law. The district court disagreed and entered judgment enforcing the award. The plaintiff appealed. The Eleventh Circuit explained that the plaintiff's argument was nothing more than a disagreement with the arbitrator's decision, which is not a basis for vacating an arbitral award.

The Eleventh Circuit went on to state as follows: "[T]his Court is exasperated by those who attempt to salvage arbitration losses through litigation that has no sound basis in the law applicable to arbitration awards. The warning this opinion provides is that in order to further the purposes of the FAA and to protect arbitration as a remedy we are ready, willing, and able to consider imposing sanctions in appropriate cases. . .Courts cannot prevent parties from trying to convert arbitration losses into court victories, but it may be that we can and should insist that if a party on the short end of an arbitration award attacks that award in court without any real legal basis for doing so, that party should pay sanctions."

In 2007, the Tenth Circuit likewise warned those spurned by an arbitration award that it would impose sanctions in appropriate cases of groundless challenges to awards in its decision in Lewis v. Circuit City Stores, Inc., 500 F.3d 1140, 1153 (10th Cir.2007). More recently, the court acted on its warning. DMA Int'l Inc. v Qwest Communications Int'l, Inc, 585 F.3d 1341 (10th Cir. 2009) involved a challenge to an arbitral award on grounds of manifest disregard of the law. The court explained that the underlying dispute was a typical contract dispute, there were arguments to be made on both sides and that, therefore, even if it were convinced that it would have decided the contractual dispute differently, that would not be nearly enough to set aside the award.

The Tenth Circuit went on to state: "If we permit parties who lose in arbitration to freely re-litigate their cases in court, arbitration will do nothing to reduce congestion in the judicial system; dispute resolution will be slower instead of faster; and reaching a final decision will cost more instead of less." The court recognized that it was imposing a significant financial burden on the plaintiff but nevertheless imposed attorneys' fees and costs as a way of advancing the national policy in favor of arbitration.

Most recently, a district court in the Southern District of New York issued sanctions against a law firm that "succeeded in undermining the purpose of arbitration and protracting this dispute into a three year, multi-million dollar litigation" in Prospect Capital Corp. v. Emnon, Case. No. 08 Civ. 3721 (LBS) (S.D.N.Y. March 9, 2010).

These cases provide an important lesson. A party considering whether to start a lawsuit seeking to challenge an arbitration award must, even more so than in connection with starting other types of lawsuit, seriously consider the strength of her case. If the challenge is nothing more than a baseless attempt to reverse the result reached by the arbitrators, the challenging party risks being sanctioned.

David Zaslowsky

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