FIRST RICO ARBITRATION AWARD UPSET

On March 23, New York arbitrators awarded a voyage charterer triple damages from a vessel owner who had converted the charterer’s oil cargo for bunker fuel.

The award in the case of the tanker Triumph (SMA No. 2642) was the first arbitration to use the federal Racketeer Influenced Corrupt Organization Act, known as RICO, and was the subject of a recent Sea Law column that appeared in this newspaper on April 12.

The arbitration involved a cargo shortage on a voyage aboard the Triumph. Two of the three arbitrators found that at some unknown time, modifications had been made in a cargo tank that could divert cargo to the vessel’s bunker tanks. The arbitration panel’s majority also found that four other cargo shortages were sustained aboard the vessel on other chartered voyages. Furthermore, the Triumph’s managing company controlled three other vessels that sustained similar cargo losses. The majority concluded that the vessel owner converted the cargo in violation of RICO.

The third arbitrator issued a 23-page dissent claiming that the Triumph award would transform every isolated and sporadic act of fraud into a racketeering activity. The dissenter stated that the voyage charterer had been harmed by the vessel owner only once. Furthermore, the charterer was not a party to the other voyage charters mentioned in the majority decision.

The vessel owner recently moved in federal court (84 Civ. 3299) to vacate the award because the panel exceeded its powers by hearing evidence not relate to the voyage and charter in question. The panel also was accused of misbehavior and acting in manifest disregard of the

The U.S. District Court for the Southern District of New York held on July 10 that the panel, empowered to consider any and all disputes under the charter, was competent to consider the RICO claim. However, the court vacated the award because the majority exceeded their powers by looking at occurrences on other voyages to satisfy elements of the RICO statute. Vacating the award on this ground made it unnecessary to decide the remaining allegations.

The court decision is interesting in that it involves the interpretation of two federal statutes, the Arbitration Act and RICO, that have never been analyzed together.

In the United States there is a strong federal policy favoring arbitration. The federal Arbitration Act covers certain maritime transactions (charter party disputes) involving interstate and foreign commerce.

Arbitration is a final determination without appeal of a dispute between parties that have agreed to arbitrate. The main purpose of arbitration is to expedite the disposition of disputes without the restrictive formal characteristics and expenses associated with court proceedings. Furthermore, commercial parties generally believe that arbitration awards are more in line with business practices because of the commercial expertise of arbitrators.

A court’s power to review an arbitration award is severely limited because to do so would make an award the beginning of litigation , instead of the end. The federal Arbitration Act allows only four possible grounds for vacating an arbitrator’s award: corruption or fraud, partiality by the arbitrators, misconduct by the panel, or arbitrators acting in excess of their powers. Some courts have found a “manifest disregard of the law” to be another ground for vacating .

RICO is one part of the complex federal “Organized Crime Control Act,” which contains both civil and criminal RICO provisions. RICO was enacted to eradicate the effects of organized and white collar crime. The act applies to a vast array of fraudulent activities and permits aggrieved private citizens to collect triple damages, costs and attorney fees.

To state a civil RICO claim, the claimant must allege it suffered an injury to its business or property because the defendant, while involved in certain enterprises, engaged in a pattern of racketeering activity. A pattern requires at least two acts, the last of which occurred within 10 years after the commission of the prior act.

Indications are that the Triumph decision will be appealed. It then will have to be determined if the Arbitration Act and RICO are compatible when both are applied to a voyage charter dispute.

RICO permits the aggrieved party to look back 10 years to find two racketeering acts. But under the Arbitration Act an award may be vacated if the arbitrators exceed their powers by looking to occurrences on other voyages. How the appeals court deals with this issue will set the course for resolution of similar future voyage charter party disputes.


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