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A federal court in New York upheld an arbitration award finding that the arbitrator did not manifestly disregard the law and did not exceed his authority in determining the meaning of fair market value because his power to grant remedies was not restricted by the agreement between the parties.
In Sanluis Developments, L.L.C. v. CCP Sanluis, L.L.C., 2007 WL 2219115 (S.D.N.Y. Aug. 2, 2007), CCP Sanluis and AIP-Sanluis were formed in part to make an equity investment ("the Respondents") in Sanluis Developments, Sanluis Investments, and Sanluis Corporacion (collectively, "the Company"). Pursuant to an operating agreement entered into by the parties, Sanluis Investments ("the Petitioner") was designated a Class A shareholder and CCP Sanluis and AIP-Sanluis were designated Class B shareholders of the Company.
A concurrent agreement provided that, in the event the company was not sold within five years, the fair market value of Class B ownership units should be determined by an investment bank if the parties could not agree to their value.
After five years and no sale, a dispute arose regarding what criterion, specifically inclusion of a liquidation preference, should be provided to the investment bank for determination of the fair market value of Class B shares. The Respondents invoked arbitration with the International Chamber of Commerce (ICC) in accordance with the parties' agreement.
An award was issued in favor of the Respondents. In the award, the arbitrator determined the fair market value of the Class B units to include the liquidation preference.
The Petitioners filed a petition to vacate the award on multiple grounds, all revolving around the argument that the liquidation preference was only payable upon liquidation, not simply where Class B purchases were made by Class A shareholders.
First, the Court rejected the Petitioner's contention that the arbitrator had manifestly disregarded the law. They failed to establish that the arbitrator appreciated but ignored applicable law. However, the Petitioners asked the court to instead apply the "essence of the agreement" doctrine to show manifest disregard, which requires a demonstration that the arbitrator interpreted the contract in contradiction with its plain language.
The Court found that even if the essence of the agreement doctrine were found to apply, though it traditionally only applied in collective bargaining agreements, the Petitioner did not make the required showing. The arbitrator's reading of the contract cannot be overruled simply because the Petitioner did not agree with the interpretation.
Second, the Court further rejected the Petitioner's contention that the arbitrator exceeded his authority. Such a finding is rare. Here, the arbitrator was granted the power to determine the meaning of fair market value by the terms of reference in the arbitration agreement. However, the parties made no explicit restriction on what could be used to make the determination, nor what remedies could be appropriately granted by the arbitrator.
In absence of such a restriction, the arbitrator was empowered to determine what "fair market value" meant. Thus, the Court held that he did not exceed his authority by choosing his own definition of what the term encompassed.
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