Arbitration Award Confirmed in the Absence of Proof That Arbitrator Exceeded His Authority

• Posted on: Jul 22 2024

By: Jeffrey M. Haber

In Bron v. Fritch, 2024 N.Y. Slip Op. 32439(U) (Sup. Ct., N.Y. County July 12, 2024 (here), the court was asked to confirm an arbitration award, pursuant to CPLR 7510, stemming from various disputes between the owners of a company engaged in electrical contracting. As discussed below, the court confirmed the award. 

The parties in Bron jointly owned E. Electric Contracting Inc. (“EEC”). Their respective duties and ownership interests were governed by an operating agreement, the most recent of which was amended in 2016 (“AOA”). According to the AOA, the defendant owned 51% of the company and had the authority to hire and fire employees, while the plaintiff owned 49% of the company and lacked the power conferred on the defendant. Among other things, the AOA required the parties to arbitrate all disputes before the American Arbitration Association (“AAA”).

Eventually, the parties’ relationship deteriorated, leading the defendant to initiate arbitration against plaintiff “on a laundry list of claims”, including breach of contract; misappropriation of EEC’s supplies; fraud; kickbacks; breaches of fiduciary duty; diversion of corporate opportunity; fraudulent inducement; gross negligence; and destruction of evidence. Plaintiff filed several counterclaims against defendant, the most relevant to the action were: (1) breach of defendant’s fiduciary duty by causing EEC to overpay a construction company defendant owned (Fritch Construction Co., or “FCC”), effectively diverting funds from EEC to herself (the “Overpayment Claim”); and (2) breach of defendant’s fiduciary duty by using EEC’s funds to pay an employee to secretly investigate defendant’s personal grievances against plaintiff (the “Investigation Claim”).

The Arbitrator conducted a 25-day hearing complete with witnesses, exhibits, and testimony, and accepted both pre- and post-hearing written submissions.

On August 25, 2023, the Arbitrator issued a partial award (the “Partial Final Award”), which denied all of defendant’s claims, granted in part plaintiff’s two fiduciary duty claims, and denied the rest of the claims. The Arbitrator also awarded plaintiff money damages in the amount of $131,203.00 on the Overpayment Claim and $44,762.00 on the Investigation Claim, along with pre- and post-judgment interest at the statutory rate of 9% measured from August 1, 2021. In addition, the Arbitrator awarded plaintiff legal and arbitration fees and costs but deferred deciding the actual amount for later proceedings.

Several months later, on January 4, 2024, the Arbitrator issued a second, final award (the “Final Award”), incorporating the Partial Final Award and awarding plaintiff $1,312,439.30 in legal fees and costs, and $98,012.00 in arbitration fees and costs. The Final Award did not expressly mention interest.

Less than two weeks later, plaintiff commenced the proceeding pursuant to Article 75 of the CPLR to confirm the Awards and enter a final judgment in his favor. Defendant timely filed an opposition along with a cross petition to vacate the Awards. In both documents, defendant asked that the fiduciary duty awards be vacated for exceeding the Arbitrator’s authority; the legal/arbitration fee award be vacated as excessive; the attorney’s fees should not accrue pre- or post-judgment interest; and the Arbitrator and AAA were divested of jurisdiction.

Noting that the “the scope of judicial review of an arbitration proceeding is extremely limited” and that “an award will not be vacated ‘unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on the arbitrator’s power,” the Court granted the petition to confirm the Awards.

In opposing the petition, defendant argued that the Arbitrator’s ruling on the Investigation Claim effectively stripped her of the ability to hire and fire employees, effectively rewriting the contract in excess of the Arbitrator’s authority. But, noted the Court, “the ruling had nothing to do with hiring or firing: the Arbitrator found that [defendant] improperly used company funds to pay an employee to “pursu[e] grievances and investigations against [plaintiff] … not proper company business.” 

The Court explained that the “Arbitrator based this ruling on evidence that the employee’s salary ‘doubled in January 2020’ during the same period that the employee ‘was asked to supervise different investigations of [plaintiff] that failed to uncover any material wrongdoing.’” “Nothing about this ruling,” said the Court,” “constitutes ‘a completely irrational construction to the provisions of the parties’ agreement [that] effectively rewrite[es] it.’” 

“Nor can [defendant] show that that Arbitrator improperly ruled for [plaintiff] on the Overpayment Claim,” said the Court. The uncontroverted testimony of EEC’s project manager, noted the Court, supported plaintiff’s allegations. As a result, and as the Arbitrator found, defendant “breached her fiduciary duty by using one of her companies to overcharge the other without informing [plaintiff], thereby diverting to herself funds that otherwise would have been 49% [plaintiff’s].” 

The Court also rejected defendant’s argument that the fees and expenses were excessive. The Court found the argument to be “conclusory and unsupported”.

Takeaway

In New York, arbitration, like other alternative dispute resolution mechanisms, is valid and enforceable. Like many jurisdictions, 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.”

Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards. In fact, judicial review of arbitration awards is severely limited in New York. Id.  As this Blog previously noted (here), setting aside an arbitral award is difficult. The losing party bears a heavy burden of showing that an award should be vacated. In Bron, defendant could not meet this “heavy burden”.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.