Hearsay ... the Journal of the Bar Association of Queensland
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Issue 72 - Mar 2015
Arbitrators Order Armstrong to Pay US$10Million Print E-mail

la_intro.jpgPerjury must never be profitable. Justice in courts of law and arbitration tribunals is impossible when parties feel free to deliberately deceive judges or arbitrators.

So began the judgment of the majority of the arbitral panel in Lance Armstrong & Tailwind Sports Corp. v SCA Promotions Inc & SCA Insurance Specialists Inc (“SCA”) in an award handed down on 4 February 2015.

The parties to the arbitration were in turn parties to various agreements, most notably a contract pursuant to which SCA agreed to pay to Lance Armstrong and his company a certain amount contingent on Armstrong winning the 2004 Tour de France. Armstrong won the race, his sixth win in what was to become an unprecedented run of seven victories.

SCA however refused to pay, alleging that Armstrong had won the 2004 race using prohibited means. Arbitration was commenced and a panel comprising a nominee of each side and a neutral chairman was appointed. The dispute went to hearing, and during the hearing Armstrong denied under oath that he had ever used performance-enhancing drugs, including in the 2004 race. Before the arbitral panel handed down its award, the parties settled the dispute on terms set out in a settlement agreement. It was a term of the settlement that SCA pay the Armstrong parties US$7.5 million.

In the settlement agreement, the parties expressly agreed that the same arbitral panel would have jurisdiction to hear and determine any future disputes between them, in effect including a further arbitration agreement

It is notorious that the United States Anti-Doping Agency (“USADA”) subsequently found that Armstrong had indeed won the Tour, not only in 2004 but in each other year as well, by using prohibited means – in short by illegally doping. He subsequently was stripped of his victories and publicly admitted having doped and having previously lied about not doping.

The most recent award resulted from SCA bringing the matter back before the arbitral panel seeking “sanctions” against Armstrong and his company.

The arbitral tribunal was comprised of a nominee of the SCA parties, Mr Richard Chernick, a nominee of the Armstrong parties, the former State Senator Hon Ted Lyon and an independent Chairman, former Judge Richard Faulkner.

The majority, consisting of the SCA nominee and the independent chairman, found that the panel had jurisdiction to adjudicate upon disputes between the parties. That was expressly conferred by the settlement agreement and, so they found, was confirmed by the fact that the Armstrong parties had themselves previously brought claims before the panel seeking sanctions against SCA.

More controversially, the majority found that the panel had jurisdiction to award monetary sanctions against Armstrong. They said: 1

The Tribunal accepts that the authority of arbitrators to award monetary sanctions is not universally accepted. The Dissent explains why Senator Lyon is not alone in asserting that arbitrators lack such authority. However, arbitrators have long been accepted as having the authority to take actions that fit well within the rubric of "sanctions." Tribunals have assessed or transferred the allocation of arbitration fees, administrative fees and costs upon arbitral miscreants, assessed attorney's fees upon disruptive parties and even threatened to or actually drawn "adverse inferences" against parties refusing to produce evidence thereby effectively penalizing and sanctioning parties in arbitrations before them. The Majority is satisfied that this Tribunal has the jurisdiction and authority, indeed, the duty to award sanctions against Claimants for the egregious breach of their contractual obligations to SCA, their obligations to this Tribunal and their calculated affront to the integrity of the arbitration process which Claimants themselves initiated.

la2.jpgThe majority held there to be a duty implied into the contract on a party to not “frustrate or impede” any other party’s performance of the contract. They held that the obligations of parties to be truthful, to not commit perjury and to not intentionally submit fraudulent evidence in arbitrations came within the kinds of obligations implied into such contracts.

The majority went on to find that the conduct of Armstrong had involved an intentional breach of the obligations owed by them, which prevented the SCA parties and the arbitration tribunal itself from performing their contractual obligations.

In deciding to impose sanctions, the majority said:

Ample evidence was adduced at the hearing through documents and witnesses that Claimants commenced this proceeding knowing and intending to lie; committed perjury before the Panel with respect to every issue in the case; intimidated and pressured other witnesses to lie; or influenced others to help them lie and to hide the truth; used a false personal and emotional appeal to perpetuate their lies to the Panel; used perjury and other wrongful conduct to secure millions of dollars of benefits from Respondents; used lies and fraud to falsely claim that the Panel exonerated them, thereby further allowing them to profit further from additional endorsements and sponsorships; expressed no remorse to the Panel for their wrongful conduct; and continued to lie to the Panel throughout the final hearing even while admitting to prior falsehoods and other wrongful conduct. Claimants admitted in substantial part the substance of all (but the last) of the foregoing conduct.

The amount of the sanction was arrived at by adding the amount paid by SCA pursuant to the "Consent" Final Award of February 8, 2006 ($7,500,000.00) and attorneys' fees and costs in excess of $2,000,000.00 that SCA had reasonably incurred, which fees and costs were noted as continuing. In addition, the majority noted that the actions of the Armstrong parties had caused the SCA parties to incur “additional costs insusceptible of precise calculation.”

The majority expressly stated that:

These figures are not cited as a calculation of "damages" but rather as one measure of the harm generally caused by Claimants' conduct.

The majority, and thus the tribunal, awarded sanctions in the sum of $10,000,000.00 against the Armstrong parties.

There was a strong dissent by Senator Lyon, which he commenced:

In Book III of his Politics, Aristotle wrote that it is well that we have a government of laws and not of men because even the best men are overruled by their passion.

I respectfully dissent from the sanctions awarded to [SCA} in this case because I believe the majority’s award is not based on the law.

He noted that the consent award was not based upon any testimony, but that the arbitral tribunal simply implemented the settlement agreement arrived at by the parties. Senator Lyon said:

Under governing Texas law, the parties' agreement is clear, it is comprehensive, and it should be binding. As both sides' attorneys expressed during their opening statements to the Panel, for this Panel to reopen this arbitration and sanction Armstrong would be unprecedented.

It is in fact unprecedented. No arbitration panel in Texas or our nation has ever stretched back so far in time to issue such a sanction. This Panel has no authority to sanction Armstrong under the Contract signed by the Parties. The agreement to arbitrate any disputes between the parties contains no language that would allow the arbitrators to sanction Armstrong after their negotiated settlement waived all rights to challenge the award and expressly disclaimed any reliance on any prior statements or conduct by the parties.

The majority's ruling - that because Tailwind and Armstrong moved for sanctions based on conduct to enforce the Settlement Agreement and based upon the Panel's ongoing order concerning confidentiality, which occurred after the arbitration concluded, somehow opened the proceedings to be re-litigated eight years or to infinity after a Final Settlement Agreement was made and effectuated - is unprecedented and farfetched and (as the majority freely admits) not based on any Texas law.

The amount of the sanction is almost exactly that which SCA paid to settle with Claimants and what SCA paid in attorney's fees and costs. To say that this is a sanction when it mirrors almost exactly what SCA paid is incorrect. In substance, the majority's sanction is an unwarranted, unlawful reversal of a settlement agreement that was made and effectuated nine years ago. There is an old saying that if it looks like a duck, walks like a duck and quacks like a duck, it's a duck. This is a duck and it is no more or less than SCA trying to overturn an agreement SCA voluntarily entered into in February 2006 to get its money back because Armstrong lied about performance enhancing drugs in the 2005-2006 proceedings.

The final decision by the Panel reminds me about the "do right rule." It doesn't matter what the law is, let's just do what is right. Arbitrators, like judges, don't have that luxury, and the Panel exceeded its authority by indulging itself here.

The SCA parties have commenced proceedings in the Texas District Court to confirm the award. That seems likely to be opposed and press reports indicate that the Armstrong parties may file a cross-petition to have the award vacated.

Australian Position

The procedure adopted in this case, as with the award itself, will not be entirely familiar to Australian lawyers. The more conventional approach in Australia in circumstances where an award has been procured by fraud will be to seek the assistance of the court to have the award set aside, either pursuant to s 34(2)(b)(11) of the Commercial Arbitration Act 2013 (Qld) or its interstate equivalents, or under s 19 of the International Arbitration Act 1974 (Cth) and Article 34 of the Model Law. 2

Of course, a court judgment procured by fraud is liable to be set aside by the court. 3 That may include a consent order.4

Where money has been paid pursuant to a judgment that is subsequently set aside, whether on appeal or otherwise, a restitutionary or equitable claim may arise for recovery of what was paid, together with interest. 5 Damages may be assessed where an equitable order, such as an injunction or appointment of a receiver, made on an interim or interlocutory basis is later found not to have been justified or is set aside. Such a claim is founded upon the undertaking usually required to be given as a condition of the making of such an order. 6

Of course, perjury may also result in a prosecution for a crime: Criminal Code (Qld), s 123.

The curiosity, from an Australian perspective, in the Armstrong case was the awarding of the amount of $10 million, not expressed to be as damages or compensation, but as a “sanction”, even though demonstrably calculated in such a way as to compensate the SCA parties. Senator Lyon in dissent was strongly critical of the award for that reason, among others.

All that can be said with some confidence is that this is unlikely to be the last word on the matter. The proceedings to enforce the award and the possible setting aside of the award are likely to be productive of some interesting insights into arbitration law and the scope of arbitrators’ powers to regulate, or perhaps “police” their own processes.

Adrian Duffy

 

Footnotes 

  1. at p 13
  2. see generally in relation to setting aside awards: Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214; Emerald Grain Australia Pty Ltd v Agrocorp International Pte Ltd (2014) 314 ALR 299
  3. Cabassi v Vila (1940) 64 CLR 130, 147; McDonald v McDonald (1965) 113 CLR 529, 533, 535, 540, 542; DJL v The Central Authority (2000) 201 CLR 226, 244-5 [35]-[38]; Johns v Cosgrove (2002) 1 Qd R 57, [92]-[95]; Hansen Yuncken Pty Ltd v Ian James Erikson trading as Flea’s Concreting & Anor (No 2) [2010] QSC 457; as to the English position see Chantiers de L’Atlantique SA v Gaztransport & Technigaz SAS [2011] EWHC 3383 (Comm) per Flaux J at [52]-[62]
  4. Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691; Wilson Four Pty Ltd v Sihota & Anor [2014] QSC 257. See discussion by Jackson J at [36]-[54]
  5. Commonwealth v McCormack (1984) 155 CLR 273; Holdcroft v Market Garden Produce Pty Ltd [2011] 2 Qd R 381, [37]
  6. National Australia Bank Ltd & Ors v Bond Brewing Holdings Ltd & Ors [1991] 1 VR 386, 571ff


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