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by Andrew Flake

For a family vacation last week, we spent time in the Caribbean, with its sweeping vistas of sky and ocean, and ships large and small catching trade winds in their sails. Naturally, when I came across a decision this week, from our Court of Appeals, that was both arbitration-related and nautical, I was intrigued.

It is a case “about the sale of a boat that went awry.” The parties were Spirit, the prospective buyer of a custom-built “Aegean yacht,” and Yale, its owner. After signing and notarizing deal documents, Yale’s representative inspected the boat, only to discover it had no name or identification number on its hull (a HIN), apparently in violation of Florida law. On that basis, Spirit tried to back out, and arbitration ensued.

After a two-day hearing and briefing, the arbitrator determined a sale had indeed occurred, that no grounds for rescission of the transaction existed, and that the seller was entitled to the $220,000 purchase price held in escrow.

Near the northernmost point of Barbados, where the Caribbean Sea meets the Atlantic Ocean.

Photograph by your humble author.

On appeal, Spirit invoked the fourth basis for vacatur under the Federal Arbitration Act (FAA), that the arbitrator has “exceeded his powers.” It particularly emphasized and argued that the sale, based on a Florida statute regarding ship registration, was illegal.

The Eleventh Circuit rejected this challenge, emphasizing that it was irrelevant whether it disagreed with the arbitrator’s legal conclusions: “…[i]t is not enough … to show that the arbitrator committed an error—or even a serious error. …Because the parties bargained for the arbitrator’s construction of their agreement, an arbitral decision even arguably construing or applying the contract must stand, regardless of a court’s view of its (de)merits.” All of the issues were within the scope of the parties’ arbitration clause, and the arbitrator stayed anchored to the contract’s provisions and plain language.

The Court also rejected the effort to turn “exceeded their powers” into “violated public policy.” Spirit argued that the arbitrator’s award violated public policy by mandating a criminal act, and that a federal court should not be compelled to adopt an arbitrator’s determination of whether an act is illegal when doing so would result in the federal court compelling illegal and criminal acts. I can see the appeal of Spirit’s concern that, by ordering the sale to go through, or rejecting the effort to rescind it, it placed Spirit out of compliance with Florida law.

But as the Court noted, the only question for a court to consider in vacating an award under FAA § 10(a)(4) is whether the arbitrator exceeded her powers under the parties’ agreement, not whether the award violates public policy or is illegal. The arbitrator also found no HIN number was required and that could apply for registration and, if it wished, to have a HIN issued. And those were determinations of Florida law that a court, on vacatur, could not disturb.

How about a different situation, one in which no such findings existed and it was apparent to the Court that the transaction was unlawful? For example, what if a federal statute had explicitly set out that any sale of a vessel lacking a HIN would be void? I think we might have a closer case there — but given the “very narrow” construction of what it means under Section 10(a)(4) for arbitrators to “exceed their powers,” such arguments are always going to mean sailing against the wind.

[The case is SPIRIT OF THE EAST, LLC, a Fla. limited liability company, Plaintiff-Appellant, v. YALE PRODUCTS, INC., a Fla. for-profit corporation, ALAN LEIGH, an individual, Defendants-Appellees., 2023 WL 2890013 (11th Cir., decided April 11, 2023).]