SH Tankers Ltd. v. Koch Shipping Inc.

• Decision Date: 19 June 2012
• Docket Number: 12 Civ. 00375 (AJN)
• Parties: SH TANKERS LIMITED, Petitioner, v. KOCH SHIPPING INC., Respondent.
• Court: U.S. District Court — Southern District of New York

SH TANKERS LIMITED, Petitioner,

v.KOCH SHIPPING INC., Respondent.

12 Civ. 00375 (AJN)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Dated: June 19, 2012

OPINION AND ORDER

ALISON J. NATHAN, District Judge:

Petitioner SH Tankers Limited ("SH Tankers") filed a petition to (1) compel Respondent Koch Shipping Inc. ("KSI") to prosecute its counterclaims in their pending arbitration, or, in the alternative, (2) vacate an interim ruling of the arbitration panel staying further proceedings until SH Tankers complies with a Partial Final Award ordering it to post security for KSI's counterclaims. KSI opposes that petition and cross-petitions to confirm the Partial Final Award. For the following reasons, SH Tankers' petition is DENIED and KSI's cross-petition is GRANTED.

III. BACKGROUND¹

On April 4, 2010, Somali pirates hijacked the M/V Samho Dream ("Vessel"), an oil supertanker carrying roughly $170 million worth of crude oil, as it made its voyage from Iraq to the United States Gulf. (Pet. ¶¶ 6, 10; Pet. Ex. A, at 2). The pirates held the Vessel and its crew hostage for seven months until finally releasing them on November 6, 2010, in return for approximately $9 million ransom. (Pet. ¶ 10; Honan Aff ¶ 9).

The Vessel is owned by Petitioner SH Tankers. (Pet. ¶ 6). In February 2010,Respondent KSI chartered the Vessel from SH Tankers under a time charter party, which remained in effect throughout the Vessel's detention. (Pet. ¶ 7; Honan Aff. ¶¶ 2, 8). After the Vessel was seized, SH Tankers claimed that KSI was responsible under the charter party for negotiating and paying the ransom. KSI disagreed. (Pet. ¶ 18). Ultimately, Garex, SH Tankers' marine war-risk underwriter,² paid the ransom. (Honan Aff. ¶ 9). SH Tankers initiated arbitration before a panel of three arbitrators ("Panel") from the Society of Maritime Arbitrators,³ and, in February 2010, submitted claims for $11.8 million, seeking to recover the ransom paid by Garex and other expenses. (Pet. ¶ 20). KSI, alleging that the hijacking was SH Tankers' fault, submitted various counterclaims seeking $13.4 million. (Pet. ¶¶ 19-20).

During the arbitration, on April 1, 2011, KSI — citing concerns about SH Tankers' financial stability — applied to the Panel for an order requiring SH Tankers to post security for KSI's counterclaims. (Pet. ¶ 21; Textor Decl. Ex. F). In a "Partial Final Award" issued July 15, 2011 ("Security Award"), the Panel unanimously granted KSI's request. (Pet. Ex. A [Security Award], at 3). The Panel found that there was a likelihood that KSI would prevail on the merits, (id. at 5), but that, given the "precarious state of [SH Tankers'] finances . . . the only avenue of funds for KSI, should it be successful on the merits, would be the security KSI seeks." (Id. at 4). It therefore ordered SH Tankers to post — within 45 days — $14.2 million in security for KSI's counterclaims. (Id. at 3). SH Tankers never did, and KSI filed a motion to dismiss SH Tankers' claims for, inter alia, its failure to comply with the Award. (Pet. ¶ 23; Textor Decl. Ex. KK).

At an organizational hearing on October 12, 2011 — weeks after its deadline to complywith the Award had passed — SH Tankers informed the Panel that it would not post the security. (See Honan Supp. Aff. Ex. 1 ("Hr'g Tr."), 1400-01, 1449). It also informed the Panel that Garex was funding SH Tankers' participation in the arbitration, but that Garex would not post security on SH Tankers' behalf. (Id. at 1343-46, 1386-87). Also at the hearing, the Panel denied KSI's motion to dismiss, but ruled — without objection from SH Tankers — that it would "defer" hearing SH Tankers' affirmative claims until either SH Tankers or Garex posted security. (Id. at 1393). KSI, on the other hand, was to go forward with presenting its counterclaims, against which SH Tankers could still defend. (Id.).

KSI, however, opposed to proceeding with its counterclaims unsecured, wrote to the Panel on October 17, 2011, asking the Panel to "stay the arbitration proceedings sine die" until SH Tankers — or Garex, the "real beneficiary" of SH Tankers' claims — posted security. (Pet. Ex. B). SH Tankers opposed the request. (Textor Decl. Ex. UU). On October 19, 2011, in an email to the parties labeled "Panel Ruling," the Panel unanimously granted KSI's request to stay the proceedings until SH Tankers posted security for KSI's counterclaims. (Pet. Ex. C ("Panel Ruling")). The Panel noted that "[SH Tankers], or more accurately its underwriter, has chosen not to" comply with the Security Award, and that forcing KSI to proceed without security would cause it "to incur very substantial legal expense without any real possibility of satisfying a favorable award." (Id.). The Panel therefore ruled that, "out of a sense of fairness and commercial good sense," the proceedings would be stayed until security was posted. (Id.). The Ruling concluded: "The Panel remains constituted. . . . Should [SH Tankers] or its underwriter choose to secure KSI's counterclaims as previously directed, the Panel will proceed to hear and decide the claims and counterclaims as promptly as possible." (Id.).

On October 24, 2011, SH Tankers sought reconsideration of the Panel Ruling. (TextorDecl. Ex. WW). The Panel denied the application on October 31, 2011, stating: "The Panel has carefully weighed counsels' exchanges with respect to [SH Tankers'] request for reconsideration and unanimously re-affirms its ruling of October 19, 2011, granting [KSI's] request for a stay of these proceedings sine die." (Textor Decl. Ex. AAA). In an email sent November 2, 2011, addressing payment of its interim fees, the Panel reaffirmed that it "remains constituted in the event the parties wish to continue these proceedings." (Textor Decl. Ex. BBB).

IV. GOVERNING LAW

SH Tankers is a foreign business entity. (Pet. ¶ 1). The arbitration is taking place in the United States. (Id. ¶ 5). As such, the parties' claims are subject to both Chapter 1 of the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16 (governing domestic arbitration), and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("Convention"), June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38, as implemented by Chapter 2 of the FAA, 9 U.S.C. §§ 201-08 (governing nondomestic arbitration). See Scandinavian Reins. Co. v. St. Paul Fire & Marine Ins. Co., 668 F.3d 60, 71 (2d Cir. 2012). Therefore, the provisions of Chapter 1 apply here "except to the extent that [they] conflict[] with the Convention or Chapter 2," in which case the latter provisions control. Phoenix Aktiengesellschaft v. Ecoplas, Inc., 391 F.3d 433, 435 (2d Cir. 2004) (citing Parsons & Whittemore Overseas Co. v. Societe Generale de L'Industrie du Papier (RAKTA), 508 F.2d 969, 973 (2d Cir. 1974)); see 9 U.S.C. § 208.

V. DISCUSSION

A. Petition to Compel Arbitration

SH Tankers petitions this Court for an order under Section 4 of the FAA⁴ "compellingKSI to proceed with prosecuting its counterclaims in the arbitration." (Pet. 11). SH Tankers contends that KSI has "refused to arbitrate" within the meaning of Section 4 by obtaining an indefinite stay of the arbitration and declining to proceed once the stay was in place.

Section 4 of the FAA provides, in relevant part, that "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement." 9 U.S.C. § 4. Under Section 4, "the role of courts is limited to determining two issues: i) whether a valid agreement or obligation to arbitrate exists, and ii) whether one party to the agreement has failed, neglected or refused to arbitrate." LAIF X SPRL v. Axtel, S.A. de C.V., 390 F.3d 194, 198 (2d Cir. 2004) (quoting Jacobs v. USA Track & Field, 374 F.3d 85, 88 (2d Cir. 2004)). "A party has refused to arbitrate if it 'commences litigation or is ordered to arbitrate the dispute by the relevant arbitral authority and fails to do so.'" Id. (brackets omitted) (quoting Jacobs, 374 F.3d at 89). But "[c]learly, unless the respondent has resisted arbitration, the petitioner has not been 'aggrieved' by anything," and there is nothing for the court to compel. PaineWebber Inc. v. Faragalli, 61 F.3d 1063, 1067 (3d Cir. 1995) (emphasis added); see also LAIF X SPRL v. Axtel, S.A. de C.V., 310 F. Supp. 2d 578, 581 (S.D.N.Y.) ("[Petitioner] is not entitled to an order compelling [respondent] to arbitrate, since [respondent] is already participating in the ongoing arbitration."), aff'd, 390 F.3d 194 (2d Cir. 2004); Koreska v. Perry-Sherwood Corp., 253 F. Supp. 830, 832 (S.D.N.Y. 1965) ("[I]t is clear that [this court] cannot compel arbitration . . . since the parties have already submitted to arbitration . . . ."), aff'd per curiam on op. below, 360 F.2d 212 (2d Cir. 1966).

Here, KSI has not refused to arbitrate within the meaning of Section 4 — it neither commenced litigation in lieu of arbitration nor refused to comply with a Panel order to arbitrate.See Jacobs, 374 F.3d at 89. In fact, it was SH Tankers that cast the first litigation stone by filing this action protesting KSI's decision to abide by the Panel's Ruling. See id. ("Indeed, it is petitioner who, by filing this action, seeks to avoid the [arbitrators'] determination . . . ."). But KSI's refusal to forfeit a favorable ruling — obtained within arbitration — is hardly a refusal to submit to arbitration. See LAIF X SPRL, 390 F.3d at 200 ("True, [respondent] has sought a stay of the arbitration, but it has made that application in the arbitral forum. It has thus submitted itself to the arbitral forum . . . ."); Jacobs, 374 F.3d at 89.

At bottom, it is the Panel that granted the stay by whom SH Tankers feels "aggrieved." But SH Tankers "cannot use Section 4 as a vehicle to seek review of the [Panel's] decision about how to proceed with the arbitration process." Jac...