The parties to a failed merger agreed to arbitrate the issue of damages resulting from the inability to complete the merger. As part of the arbitration, one of the parties made a declaration specifically disavowing any knowledge of a certain escrow payment that was to have been made as part of the efforts to complete the merger. As a result, the arbitrator concluded, relying on that declaration, that the escrow payment was never made so that the other party breached the merger agreement. Discovery in a related action, however, disclosed that the declaration was inaccurate and that its maker had lied. The court, applying the Federal Arbitration Act (the “FAA”), vacated the arbitration award.
After first explaining that it applied the FAA and not New York’s rules because the merger involved international commerce, the court went on to note the well-worn standard that its ability to review an arbitration award was extremely limited and that it would be compelled to uphold such an award even where the arbitrator provided “‘even a barely colorable justification for the outcome reached.’” Despite this high bar, the court also recognized that some conduct would support vacatur. Where fraud was the basis to vacate, the fraud must have been material and not discovered before the award was issued. There also must be a showing that there is a connection between the fraud and the award. Even something less than outright fraud, which the court called “undue means,” could support vacatur.
In this case, the declarant’s failure to disclose the truth permitted the court to vacate the award as having been procured by fraud or undue means.
Sorghum Inv. Holdings, Ltd. v. China Commercial Credit, Inc.