Clarified Arbitration Awards, Arbitrator Bias and Vacatur
Print Article- Posted on: Mar 2 2022
By: Jeffrey M. Haber
Arbitration is an alternative dispute resolution mechanism that enables parties to resolve disputes without going to court. Arbitration is similar to a trial without the formalities. It is an adversarial proceeding where the parties can call witnesses and present evidence to a neutral arbitrator or panel of arbitrators. The rules of discovery and evidence are relaxed to make it a shorter and more cost-efficient process. Often, the parties select the arbitrator or panel of arbitrators. Arbitration can be binding, in which the arbitrator renders a decision that can be enforced by the courts, or non-binding, in which the arbitrator renders an advisory opinion that the parties can accept or reject.
In New York, arbitration, like other alternative dispute resolution mechanisms, is valid and enforceable.1 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.”2
Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards.3 In fact, judicial review of arbitration awards is severely limited in New York.4 As this Blog previously noted, setting aside arbitral awards is difficult.
Grounds For The Review Of Arbitral Awards
Upon receiving a motion to confirm an arbitration award, New York courts must confirm the award unless the movant satisfies one of the statutory reasons for modification or vacatur provided by New York Civil Practice Law and Rules Section 7511.5 The grounds for modification or vacatur under CPLR 7511 are limited. These include: (1) “corruption, fraud, or misconduct in procuring the award”; (2) partiality of the arbitrator; (3) the arbitrator exceeded his power or imperfectly executed it; (4) failure to follow the procedures of Article 75 of the CPLR.6 Only when the record demonstrates one of the foregoing will a New York court vacate or modify an award under the CPLR.
In today’s article, we examine, among other things, partiality of the arbitrator and the arbitrator exceeding his/her authority.
Partiality of the Arbitrator:
CPLR § 7511(b)(1)(ii) permits vacatur or modification when the arbitrator was biased or maintained an undisclosed personal relationship to one of the parties, resulting in a prejudiced decision.7 The mere inference of impartiality, however, is insufficient to warrant interference with the arbitrator’s award; the evidence must be stronger; it must be clear and convincing.8
The Arbitrator Exceeded His Power or Imperfectly Executed It:
Under CPLR § 7511(b)(1)(iii), a movant can vacate or modify an arbitral award when the arbitrator exceeded his or her authority under the arbitration agreement. To succeed under CPLR § 7511(b)(1)(iii), the movant must demonstrate that the arbitration agreement limited the arbitrator’s authority to act, and the arbitrator subsequently violated that limitation.9 The same is true with regard to arbitration mandated by statute. Vacatur will be warranted where the arbitrator fails to follow the standards and requirements of the subject statute.10 Absent an agreement or statute, however, as long as an arbitrator addresses the issue(s) submitted for resolution, vacatur will not be granted, unless the award is completely irrational – that is, the resulting award goes beyond the issues before the arbitrator.11
In addition to exceeding one’s authority, an award will be vacated when the decision is irrational or is violative of a public policy.12 In essence, the court must conclude, without any fact-finding or legal analysis, that arbitration of the matter is prohibited by law.13
The foregoing issues were considered by the Appellate Division, First Department in Matter of Finkelstein v. Finkelstein, 2022 N.Y. Slip Op. 01268 (1st Dept. Mar. 1, 2022) (here).
Matter of Finkelstein v. Finkelstein
Finkelstein involved a dispute between siblings concerning, among other things, the ownership of a portfolio of properties (the “Properties”) that was owned by the parties’ deceased father. The matter was adjudicated before the Beth Din (i.e., a Jewish tribunal composed of three Rabbis responsible for matters of religious law and the settlement of civil disputes).
The parties agreed that they would resolve any dispute concerning the father’s assets, in particular, the beneficial ownership and control of the Properties, by arbitration before the Beth Din. The parties further agreed that the Beth Din’s decision would be final and binding.
On May 6, 2020, the Beth Din issued an award in which it resolved the dispute over ownership of the Properties. On January 6, 2021, the Beth Din clarified its decision, awarding the Properties to the trusts for the pro rata benefit of the parties (e.g., the children).
Petitioners moved to confirm the award and respondents moved to vacate it.
In seeking vacatur, Respondents argued, among other things: the Beth Din’s determination was invalid because it concerned the distribution of assets under testamentary instruments which the Beth Din has no authority to determine; one of the three arbitrators had an undisclosed involvement in the underlying transactions and, therefore, tainted the proceedings; the clarified award made substantive modifications to the original award and, therefore, was invalid under CPLR § 7509; and to the extent that the clarified award was based on trusts it deprived respondents of their rights under CPLR § 7506 because the trust instruments were not presented to the Beth Din.
The motion court confirmed the award.
First, the motion court held that the Beth Din did not exceed its authority or violate public policy.
Respondents argued that under longstanding case law, the Beth Din’s award must be vacated. Respondents reasoned that the Beth Din did not have the authority to determine matters concerning the distribution of property under testamentary instruments, yet that is what it did by referring to the parents’ wills and the manner in which their property was to be distributed to the parties under those wills.
Petitioners responded that the Beth Din could not have determined the distribution of the Properties under a will because the Properties were transferred inter vivos into the trusts prior to the passing of the parents and that references to the wills were merely to determine the parents’ wishes under Rabbinical law. Petitioners also claimed that the clarification made it plain that the Beth Din awarded the Properties back to the trusts for the pro rata benefit of the father’s children.
The motion court noted that father’s wills were only an issue because the parties agreed to respect their parents’ wishes as reflected in their Halachic wills. This agreement, said the motion court, “present[ed] an interesting intersection of Rabbinical law and secular law”. Under Rabbinical law the distribution of assets that are not owned by an individual because they were transferred to trusts or other legal entities (pursuant to secular law) may be determined by evaluating the intent of the individual from his/her Halachic will.
Moreover, the motion court noted that the Beth Din’s clarification made clear that it was awarding the Properties back to the trusts for the pro rata benefit of the parties, as reflected by the parents’ wishes in their Halachic wills. The Beth Din was not resolving the distribution of estate assets.
Second, the motion court held that there was no arbitrator bias even though one of the Rabbis on the panel had previously assisted in the preparation of one of the father’s wills and that, even if there were bias, the claim was waived.
The motion court found that respondents failed to submit any evidence that the Rabbi’s participation in drafting the will had any effect upon his ability to be a neutral arbitrator. Instead, said the motion court, respondents simply concluded that the Rabbi had a vested interest in seeing that the will was the pivotal document relied upon by the Beth Din in reaching its determination.
Notably, the motion court held that “respondents waived any discernable objection they had in [the] Rabbi[] … sitting on the Beth Din since by their own admission they knew he was connected to the New York Will in some manner at the outset of the arbitration process but nevertheless failed to raise their objection during the arbitration and continued to participate.” (Citations omitted.)
The motion court rejected respondents’ assertion that they did not find out the extent of the Rabbi’s connection to the will until the second to last arbitration session. The motion court explained that “even if sufficient to meet their burden (and it is not since they were on notice at the outset of the process) [it was] not supported by the details of what they learned at this second to last session that has now caused them so much concern.” Thus, concluded the motion court, respondents failed to establish by clear and convincing proof bias on the part of the Rabbi “much less the entire Beth Din panel.”
Third, the motion court held that the clarification in the second award did not include any new findings or grant any relief different from the initial award. The motion court explained that respondents did not identify any relief in the clarification that was not in the initial award. In fact, noted the motion court, respondents agreed in the arbitration agreement that the Beth Din was authorized to resolve disputes as to beneficial ownership and control of the properties regardless of the record owner.
Moreover, “and most significantly”, said the motion court, respondents did not “deny that the properties that were in dispute and detailed in the clarification were held in the trusts created by [the parties’] father.” Indeed, observed the motion court, respondents signed an agreement which acknowledged that the properties were held in trusts and gave the Beth Din authority to determine the parents’ wishes based on their will made pursuant to Jewish law. In addition, noted the motion court, respondents did not object to the list of properties and trusts provided by petitioners to the Beth Din and respondents in furtherance of facilitating the clarification. “Therefore, because the clarification did not include any new findings nor did it grant any relief different from the initial award and because [respondents did] not dispute that the properties were held in the trusts identified in the clarification; the clarification was not a modification subject to CPLR §§ 7509 & 7511(c) and their rights under CPLR § 7506 were not violated.
On appeal, the Appellate Division, First Department affirmed.
On the issue of clarification versus modification, the Court agreed with the motion court that the award was clarified, not modified. Even if the first award was modified, the Court held that respondents failed to show any prejudice.14 The Court explained that “[b]oth the original award and the clarified award have the same bottom-line result: instead of belonging exclusively to [one of the respondents], certain properties are to be shared pro rata by all of the children of [the parents].”15
Regarding arbitrator bias, the Court found that respondents waived the argument.16 The Court explained that “‘[i]f a party goes forward with arbitration, having actual knowledge of the arbitrator’s bias, or of facts that reasonably should have prompted further … inquiry, [he] may not later claim bias based upon the failure to disclose such facts.’”17
The Court also rejected respondents’ argument that the Rabbi failed to disclose his involvement with the will. The Court noted that a witness who had no financial interest in the arbitration or the proceeding and who knew both petitioner and respondent submitted an affirmation saying that the arbitrator disclosed such involvement before the arbitration began. The Court also noted that respondents admitted that all of the parties had general knowledge that the arbitrator was involved with the parents’ estate, “which was sufficient to trigger further inquiry before the arbitration took place.”18
Footnotes
1. Westinghouse v. New York City Tr. Auth., 82 N.Y.2d 47, 54 (1993).
2. Id.
3. Tullett Prebon v. BGC Fin., 111 A.D.3d 480, 482 (1st Dept. 2013).
4. Id.
5. Bernstein Family Ltd. P’ship v. Sovereign Partners, 66 A.D.3d 1, 7-8 (1st Dept. 2009).
6. CPLR 7511(b)(1)(i)-(iv).
7. Matter of J. P. Stevens & Co. (Rytex Corp.), 34 N.Y.2d 123, 129-130 (1974).
8. Matter of Provenzano, 28 A.D.2d 528 (1st Dept. 1967), aff’d, J.D.H. Rest. Inc. v. New York State Liquor Auth., 21 N.Y.2d 846 (1968).
9. New York City Tr. Auth. v. Transport Workers’ Union of Am. Local 100, AFL-CIO, 6 N.Y.3d 332 (2005).
10. Forest River, Inc. v. Stewart, 34 A.D.3d 474, 474 (2d Dept. 2006).
11. Rochester City Sch. Dist. v. Rochester Teachers Ass’n, 41 N.Y.2d 578, 583 (1977).
12. See Board of Education of the Dover Union Free Sch. Dist. v. Dover-Wingdale Teachers Ass’n, 61 N.Y.2d 913 (1984); Matter of City of Johnstown, 99 N.Y.2d 273, 278 (2002).
13. Matter of New York City Tr. Auth., 6 N.Y.3d at 284.
14. Slip Op. at *1 (citing, Matter of Meisels v. Uhr, 79 N.Y.2d 526, 535 (1992)).
15. Id.
16. Id. at *1-*2 (citing, Matter of J. P. Stevens & Co. (Rytex Corp.), 34 N.Y.2d at 129; and Matter of Namdar (Mirzoeff), 161 A.D.2d 348, 349 (1st Dept. 1990), lv. denied, 77 N.Y.2d 802 (1991), cert. denied, 501 U.S. 1251 (1991)).
17. Id. at *2 (quoting, Matter of J. P. Stevens & Co. (Rytex Corp.), 34 N.Y.2d at 129).
18. Id.
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.
