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Arbitral Award Confirmed As Being Rational and Supported by the Record

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  • Posted on: May 15 2019

Arbitration is an alternative form of dispute resolution. Most often, parties will voluntarily agree to arbitrate their disputes, instead of allowing a judge or jury in a court of law to do so. Rent-A-Ctr., W, Inc. v. Jackson, 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State. Matter of Smith Barney Shearson v. Sacharow, 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id. at 49-50. (citations omitted).

Sometimes, however, arbitration can be compulsory. In those instances, the obligation to arbitrate arises not through voluntary agreement, but through statutory mandate. MVAIC v. Aetna Cas. & Sur. Co., 89 N.Y.2d 214, 223 (1996), citing Insurance Law § 5105(b); § 5221(b)(6).

The distinction between voluntary and compulsory arbitration is important when one party seeks to vacate an arbitral award under CPLR § 7511. [This Blog discussed vacatur under CPLR § 7511 (here).]

An arbitration award may be vacated on three narrow grounds: “it violates a strong public policy, is irrational, or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” Matter of United Fed. of Teachers, Local 2, AFT, AFL-CIO v. Bd. of Educ. of City School Dist. of City of N.Y., 1 N.Y.3d 72, 79 (2003) (citations omitted).

Where arbitration is pursued by the parties’ voluntary agreement, the arbitrator’s factual and legal determinations are conclusive and not subject to judicial review in the absence of fraud, corruption, or other misconduct. MVAIC, 89 N.Y.2d at 223. Errors of fact or law committed by the arbitrator, or his/her misconstruing evidence or arguments, are insufficient grounds for setting aside or disregarding a voluntary arbitration award. 23A Carmody-Wait 2d § 141:273 (2019); Merrill Lynch, Pierce, Fenner & Smith, Inc. v Graef, 34 A.D.3d 220 (1st Dept. 2006) (holding that it is “well settled” that arbitration award may not be vacated for arbitrator’s errors of law or fact).

Where arbitration is compulsory, the courts impose closer judicial scrutiny of the arbitrator’s determination under CPLR 7511(b). MVAIC, 89 N.Y.2d at 223 (citations omitted). To be upheld, an award in a compulsory arbitration proceeding must have evidentiary support and cannot be arbitrary and capricious. Id. (citations omitted).

In National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., 2019 N.Y. Slip Op. 31262(U) (Sup. Ct. N.Y. County May 6, 2019) (here), the Court addressed the foregoing issues in confirming an arbitral award pursuant to CPLR § 7510.

National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc.

Background

National Union, and a companion action, involved insurance claims made by TransCanada Energy USA, Inc. and TC Ravenswood Services Corp. (collectively, “TransCanada”) to ACE INA Insurance (“ACE”), Arch Insurance Company (“Arch”), and other insurance companies for damages arising from an incident at TransCanada’s Ravenswood, New York power plant. In National Union, the insurance companies sought a judgment declaring that they were not obligated to pay the claims, while in the companion case, the claimants sought a declaration of coverage and damages.

On March 2, 2016, the Court granted TransCanada’s motions for partial summary judgment in both actions, and awarded it a judgment declaring that the insurance policy at issue covered the incident and a claim for loss of capacity sales; the Court denied the insurance companies’ motion for partial summary judgment seeking a declaration that the lost sales were not covered by the policy. On September 19, 2017, the decision was affirmed by the Appellate Division, First Department. See 153 A.D.3d 1153.

As a result of the First Department’s ruling, by the end of 2017, the only remaining insurance company defendants were Ace and Arch (collectively, “ACE/Arch”).

On March 2, 2018, TransCanada and ACE/Arch stipulated to certain damages (the “March 2018 Stipulation”). The parties did not, however, agree as to: (1) the amount of the time element deductible; (2) the amount of TransCanada’s capacity revenue losses; or (3) the date on which prejudgment interest started to accrue on a portion of TransCanada’s claim.

On March 29, 2018, counsel for TransCanada advised the Court that the parties had agreed to proceed to binding arbitration in lieu of a jury trial and to reduce the arbitrator’s ruling to a final judgment for entry in the action.

While the parties had agreed to binding arbitration, the arbitrator, nonetheless, inquired whether the parties had a formal written agreement to arbitrate. In response, TransCanada’s counsel advised that the final award would be included in the damages calculations to be submitted to the Court for inclusion in a final judgment.

On September 10, 2018, the parties stipulated to the prejudgment interest, and reserved the other two issues for the arbitration, which was scheduled to proceed on September 2018. The same day, ACE/Arch submitted to the arbitrator their proposed form of award, which incorporated the figures for the ancillary revenue and energy revenue losses stipulated to in the March 2018 stipulation.

During the arbitration, in connection with the proposed final award, counsel advised the arbitrator that the damages numbers were undisputed and that they had stipulated to the ancillary loss and energy loss.

In the proposed award that [TransCanada] submitted to the arbitrator, the energy loss was incorrectly stated to be $609,683 and the ancillary loss was incorrectly stated to be $1,429,833. The parties stipulated that those were the claim amounts, not the loss amounts.

On September 21, 2018, the arbitrator issued an award. On October 3, 2018, TransCanada argued that the arbitrator made erroneous findings as a result of incorrect amounts presented by ACE/Arch for TransCanada’s business interruption losses.

TransCanada asked that ACE/Arch correct the error in the award. By letter dated October 5, 2018, ACE/Arch denied any error.

The parties wrote to the arbitrator about the alleged error, and by email dated October 30, 2018, the arbitrator denied TransCanada’s request to modify or correct the award.

By order to show case, ACE/Arch moved, pursuant to CPLR 7510, for an order confirming the arbitration award, among other relief. TransCanada opposed the motion.

ACE/Arch argued that the award should be confirmed absent a basis for vacating or modifying it pursuant to CPLR 7511(b)(1) or (c), which limits a court’s ability to vacate an arbitrator’s award to certain narrow grounds.

TransCanada asserted that CPLR §§ 7511 and 7510 did not apply because the parties had not agreed to their application. Rather, TransCanada claimed that the applicable standard of review was akin to that employed in reviewing the decision of a judicial hearing officer, thus warranting vacatur of the award as irrational and reflective of the wrong amounts for the revenue losses. Consequently, TransCanada’s actual insurance claims or losses applied.

The Court’s Decision

The Court confirmed the award.

In confirming the award, the Court considered whether the award resulted from fraud, corruption, or other misconduct. Slip Op. at *6. In reviewing the record, the Court found that award was free of such wrongdoing. In fact, noted the Court, TransCanada neither “allege[d] nor establishe[d] that the award resulted” from such misconduct. “Thus,” concluded the Court, “even had the arbitrator erred in calculating the award and/or applied the amounts of TransCanada’s losses, the award must be confirmed.” Id., citing Henvill v. Metro. Transp. Auth., 148 A.D.3d 460 (1st Dept. 2017) (argument that award irrational and required vacatur rejected as court in considering award arising from voluntary arbitration may not review arbitrator’s findings of fact); Adolphe v. New York City Bd. of Educ., 89 A.D.3d 532 (1st Dept. 2011), lv. denied, 19 N.Y.3d 808 (2012) (mistakes of law or disregard of evidence do not constitute grounds for vacating award).

The Court also found that TransCanada failed “to show that the arbitrator’s calculations were irrational or erroneous, given the parties’ March 2018 stipulation, providing that the amounts set forth for ancillary and revenue losses were inclusive of ‘all’ such ‘claimed’ losses, and the undisputed representation made at the hearing that those were the correct amounts for those damages.” Id. “Thus,” concluded the Court, “even if the standard of review is whether the award is irrational, the arbitrator’s findings are supported by the record.” Slip Op. at *7, citing Matter of Hanover Ins. Co. v. Vasquez, 143 A.D.3d 612 (1st Dept. 2016) (whether arbitration voluntary or compulsory was irrelevant, as even under compulsory standard of review, award rationally supported by record).

Takeaway

As noted, New York has a strong public policy that favors arbitration. In fact, arbitration is not only favored, but encouraged “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.” Westinghouse v. New York City Tr. Auth., 82 N.Y.2d 47, 54 (1993). Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards. Tullett Prebon v. BGC Fin., 111 A.D.3d 480, 482 (1st Dept. 2013) (“awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation”). In fact, judicial review of arbitration awards is severely limited in New York. Id. As long as an arbitral award is rationally based and free of fraud, corruption or other misconduct, it will be confirmed. National Union is a good example of that principle.

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