ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Thursday, August 25, 2005

Cases: Indeminification for required bond

Florida_flag_2 An arbitrator’s order to post a bond is a “binding arbitral decision” for purposes of a contract clause requiring indemnity for such decisions, according to a recent decision by the U.S. Court of Appeals for the Eleventh Circuit, applying Florida law.

In the case, UPS had bought Centurion Air Cargo in 1999.  At the time, Centurion was locked in
litigation with another company, Carga Aerea.  Under the terms of the deal, Centurion was to retain all liability for the litigation.  The contract provided that if UPS were liable for any amounts in that litigation, Centurion would indemnify it.  It further provided that “if [UPS] obtains a final, nonappealable judicial order or binding arbitral decision in [UPS’s] favor that [Centurion] is obligated to indemnify [UPS],” UPS could deduct those amounts from certain ongoing payments it was making to Centurion.

Subsequently, UPS’s assets were attached and its revenues garnished as part of the Carga Aerea litigation.  UPS and Centurion were already in arbitration on other matters, and UPS filed an emergency motion with the arbitrator, asking him to order Centurion to post an $821,000 bond that would allow UPS to get its assets unencumbered.  The arbitrator ordered Centurion to post the bond, but it refused to do so.  UPS then took the money out of the payments it owed to Centurion, posted a bond in Centurion’s name, and freed up its assets.

The question before the court was whether an arbitrator’s order to post a bond pending final determination of an action is a “binding arbitral decision.” that Centurion was “obligated to indemnify” UPS.  This was a case of first impression, said the court.  It noted that UPS was obliged to show under the contract language that (1) the arbitral order was final, and (2) it obligated Centurion to indemnify UPS.  The first part was easy; an arbitral order, said the court, is presumed final unless the parties have specifically agreed otherwise.  As to the second, the court reasoned that the arbitrator’s order had given Centurion a duty to post the bond.  UPS had undertaken to perform the duty that Centurion should have performed.  Thus it was entitled to indemnity.  Summary judgment for UPS was affirmed.

Centurion Air Cargo, Inc. v. UPS Co., 2005 U.S. App. LEXIS 16586 (11th Cir. Aug. 9, 2005).  [Frank Snyder]

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