Posted by: nplblog | 18th May, 2015

Arbitration and Opportunism — Aditi Bagchi

Post by Aditi Bagchi

A few weeks ago the Sixth Circuit decided Shy v. Navistar Int’l, Corp., in which a retiree trust fund sued Navistar for allegedly manipulating its corporate structure to avoid payments to the fund required under a consent decree. Navistar paid large sums to the fund for several years, culminating in a $71.6 million payment in 1999. Thereafter the payments abruptly stopped. The fund claims Navistar created a variety of entities to shield its substantial profits from the reach of the consent decree.

At issue in the federal case was not the merits of the fund’s breach of contract claim but its right to pursue the claim in court, given an arbitration provision that covered disputes over the “information or calculation[s]” provided by Navistar. The district court had found that the arbitration term applied but that Navistar had waived its right to insist on arbitration as a result of its conduct in litigation. The appellate court agreed that the arbitration term applied but reversed the finding of waiver. A dissenting judge argued that the arbitration term did not apply, but that even if it did, Navistar waived arbitration by failing to raise it until its prospects in litigation began to fade.

The case raises important questions about the implications of bad faith behavior. The question of whether the arbitration term applies to the dispute is highly debatable given the ambiguous language of the decree. Similarly, whether Navistar waived arbitration seems unclear under existing 6th circuit case law on arbitration waiver. The majority was moved, on both questions, by the federal policy in favor of arbitration embodied in the Federal Arbitration Act. However, in this case, the scope of the arbitration clause as well as the ease of waiver implicate another, arguably more fundamental policy commitment in the regulation of contract, that is, the aim of minimizing opportunism.

Normally, courts pursue this end by way of interpreting contracts to flat out prohibit opportunism. Most obviously, in the context of a claim for breach of the duty of good faith, a court will read a contract not to permit conduct inconsistent with the initial bargain. But here the court cannot even reach the question of whether Navistar breached the consent decree before resolving the earlier questions of arbitration scope and waiver. To what extent should allegations of opportunism inform those legal analyses? At least here, where the court arguably had (or should have had) a special interest in preserving the integrity of a judicially imposed consent decree, credible allegations of bad faith might have favored a narrow reading of an ambiguous arbitration term.

In addition to the underlying allegations with respect to the consent decree, the fund claimed, and the dissent agreed, that Navistar did not forthrightly raise the affirmative defense of arbitration but held it in reserve until things went badly for it in federal court. The majority seemed sympathetic to Navistar’s “posturing”, which is apparently to be expected of litigants in its position. The relevant test is whether Navistar’s conduct shows it did not rely on the arbitration term, and whether the fund was prejudiced by its tactics. Those questions should be understood beyond the traditional waiver framework to get at the essential matter of procedural bad faith. Did Navistar behave in a way that the agreed upon procedure for handling disputes did not contemplate? Did its delay eat away at the value of the consent decree for the (presumably elderly) retirees for whom the trust was established?

Parties cannot design contracts that literally rule out all opportunistic behavior. And so courts fill in the gaps ex post, imputing a duty to act in good faith. That duty does more than just give rise to independent breach of contract claims. In a case like Shy, courts may need to construe arbitration terms narrowly, and the conditions of their waiver more liberally, in order to vindicate the general policy against opportunism.

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