## Facts

- Sperry International Trade, Inc. contracted with the Government of Israel to design and construct a communications system for the Israeli Air Force.
- The contract required arbitration of all disputes under American Arbitration Association rules.
- The contract also required Sperry to procure a clean, irrevocable letter of credit from Citibank in Israel’s favor for approximately $15 million, drawable under specified conditions.
- By 1981, performance deteriorated; Sperry alleged Israel hindered performance and breached, while Israel asserted Sperry failed to perform.
- Sperry initiated AAA arbitration in New York; Israel counterclaimed.
- In earlier litigation, a federal preliminary injunction preventing Israel from drawing on the letter of credit was reversed because Sperry failed to show irreparable harm.
- After that reversal, Israel demanded payment under the letter of credit.
- Sperry sought provisional relief from the arbitrators to preserve the proceeds pending the merits decision.
- The arbitrators issued an interim award directing the proceeds be held in a joint escrow account rather than paid exclusively to Israel.
- The district court confirmed the interim award under the Federal Arbitration Act, and Israel appealed.

## Issues

1. Whether the arbitrators exceeded their powers under the Federal Arbitration Act by ordering that letter-of-credit proceeds be held in joint escrow.
2. Whether the prior appellate decision reversing a judicial preliminary injunction for lack of irreparable harm barred arbitrators from ordering comparable provisional relief.
3. Whether New York letter-of-credit law prevented arbitrators from restricting Israel’s exclusive access to the proceeds pending resolution of the contract dispute.

## Decision

- The court affirmed the district court’s confirmation of the arbitral interim award and affirmed the related appeal on that basis.
- The escrow order was within the arbitrators’ powers conferred by the contract’s broad arbitration clause.
- The prior decision on judicial preliminary-injunction standards did not preclude arbitrators from ordering an interim status-quo measure.
- The arbitrators did not act in manifest disregard of New York law governing letters of credit.

## Legal Principles

- Judicial review of arbitral awards under the Federal Arbitration Act is highly limited; vacatur for “exceed[ing] their powers” requires a clear showing that the award falls outside the parties’ submission or reflects manifest disregard of controlling law.
- When parties agree to arbitrate all disputes arising from a contract, arbitrators have broad remedial authority, including ordering interim measures to preserve assets connected to the dispute so the arbitration remains effective.
- A court’s denial of preliminary injunctive relief for failure to show irreparable harm does not determine the permissible scope of interim relief an arbitral tribunal may order under the parties’ agreement.
- In a contract dispute involving a letter of credit procured solely because the contract required it, arbitrators may, as between the parties, direct preservation of honored proceeds in escrow pending the merits, so long as the award does not contravene a clear legal prohibition or alter the bank’s independent payment obligations.

## Conclusion

The Second Circuit held that arbitrators acting under a broad arbitration clause could order letter-of-credit proceeds held in joint escrow as interim relief, and that confirming such an award was proper because it neither exceeded arbitral authority nor reflected manifest disregard of law, even though a prior judicial injunction had been reversed for lack of irreparable harm.


Sperry Int’l Trade, Inc. v. Gov’t of Isr., 689 F.2d 301 (2d Cir. 1982)