Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 10

FACTS NYKCool A.B., based in Stockholm, Sweden, is one of the world's largest providers of maritime transportation. Pacific Fruit, Inc., exports cargo from Ecuador. NYKCool and Pacific entered into a written contract with a two-year duration, under which NYKCool agreed to transport weekly shipments of bananas from Ecuador to California and Japan. At the end of the period, the parties agreed to extend the deal. Due to a disagreement over one of the terms, a new contract was never signed, but the parties continued trading.
After nearly four more years of performance between 2005 and 2008, a dispute arose over unused cargo capacity and unpaid freight charges. An arbitration panel of the Society of Maritime Arbitrators found that Pacific Fruit was liable to NYKCool for more than $8 million for breach of contract. NYKCool filed a petition in a federal district court to confirm the award. The court ruled in NYKCool's favor, and Pacific Fruit appealed. Pacific Fruit contended that the arbitration panel had "manifestly disregarded" the law when it concluded that the parties had an enforceable contract.
ISSUE Did continuing to substantially perform the terms of a prior written contract concerning weekly shipments establish that the parties had formed a binding agreement to extend their contractual obligations?
DECISION Yes. The U.S. Court of Appeals for the Second Circuit affirmed the judgment of the lower court.
REASON In order to vacate an arbitration award for manifest disregard of the law, a court must find that the arbitrator knew the relevant law and intentionally refused to apply it. The reviewing court could find no shocking impropriety on the part of the arbitration panel, so there could be no review of whether the arbitrator misconstrued a contract.
The federal appellate court agreed with the arbitration panel's statement that, "The parties' substantial partial performance on the contract weighs strongly in favor of contract formation." Moreover, the court noted that the panel's conclusion that the "parties' substantial performance" weighed in favor of contract formation was relatively undisputed. After all, for two years, NYKCool transported 30 million boxes of cargo for Pacific Fruit during more than one hundred trips, plus it received $70 million in payments-even though there was no written contract in place. Clearly, the parties' behavior during 2005 and 2006 strongly suggested that both believed themselves subject to a binding agreement.
For critical analysis-Legal Consideration What circumstance in this case demonstrates most strongly Pacific Fruit's belief that it had no contract with NYKCool ?