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First Department Finds Arbitrator Exceeded Authority By Awarding Relief Not Demanded

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  • Posted on: Feb 14 2022

By: Jeffrey M. Haber

As readers know from past articles, CPLR § 7511 (b) sets forth the statutory grounds for vacating an arbitration award. Under that section, a court may vacate an award if the rights of the movant were prejudiced by: (1) corruption, fraud or misconduct in procuring the award; (2) partiality of the arbitrator; (3) the arbitrator exceeding or imperfectly executing his/her power; or (4) the arbitrator failing to follow the procedure of Article 75. 

With respect to whether an arbitrator exceeded or imperfectly executed his/her power, an award will not be overturned unless the award violates a strong public policy, is totally irrational or exceeds a specifically enumerated limitation on the arbitrator’s power.1 

In general, the grounds for vacating an arbitration award are narrowly construed.2 It will be upheld even when the arbitrator makes errors of law and/or fact.3 As noted by the Court of Appeals, the courts are not to assume the role of overseer of the arbitration and mold an award to its sense of justice.4 

An arbitration award violates strong public policy “only where [the] court can conclude, without engaging in any extended fact-finding or legal analysis, that a law prohibits the particular matters to be decided by arbitration, or where the award itself violates a well-defined constitutional, statutory, or common law of this state.”5 An award will be found to violate public policy only where such policy prohibits, in the absolute sense, particular matters being decided or certain relief being granted by the arbitrator.6 Vacatur on public policy grounds is exercised sparingly7 in order to preserve the parties’ choice of a nonjudicial forum to the greatest extent possible.8 

In Denson v. Trump, 180 A.D.3d 446, 450-451 (1st Dept. 2020), the Appellate Division, First Department identified a number of examples in which courts determined that public policy had been violated. These include: an award of punitive damages; violation of the State’s anti-trust laws; the liquidation of insolvent insurance companies; usury; an award that prevents an employer from fulfilling its legal obligation to protect against workplace sexual harassment; an award of child support that violates the Child Support Standards Act; and an award that violates the State’s policy of providing the public with high quality, efficient and effective hospital services.

Separately, an arbitration award is subject to vacatur when the arbitrator exceeds expressly enumerated limits on his/her authority. “Enumerated limits of an arbitrator’s authority may be found in the arbitration clause of an agreement, in a statute, or in a notice or demand for arbitration.”9 As noted by the First Department in Denson, “an arbitrator’s authority extends only to those issues that are actually presented by the parties.”10 “Even where a claim is otherwise arbitrable, the scope of the arbitration is still limited to the specific issues presented and may not extend to those that are materially different or legally distinct.”11 Simply stated, an arbitrator exceeds his/her authority by considering issues not raised by the parties.12 

Under CPLR § 7511(c)(2), when an arbitration award is issued in excess of the arbitrator’s authority, the court can modify the award so long as it does not affect the merits of the decision on the issues submitted. If modification is not possible, then vacatur of the entire award is required.13

“A public policy argument may be raised for the first time on a motion to vacate, and should be considered by the court.”14 “A claim that the arbitrator has decided issues that were not otherwise submitted can, for obvious reasons, only be raised once the award is made.”15

In Matter of 544 Bloomrest, LLC v. Harding, 2022 N.Y. Slip Op. 00936 (1st Dept. Feb. 10, 2022) (here), the First Department affirmed in part and reversed in part the decision and order of the motion court, which confirmed an arbitration award. In addition to addressing the claims brought by the petitioner, the arbitrator assessed sanctions against respondent and awarded petitioner its attorneys’ fees.   

Petitioner commenced the action to confirm its arbitration award against respondents. The arbitrator found that respondents had converted over $360,000.00 from petitioner through a variety of unlawful and illegal means, including, but not limited to, conversion and forgery. The arbitrator also denied respondents’ breach of contract counterclaim. In addition, the arbitrator awarded punitive damages in favor of petitioner, assessed sanctions against respondents and awarded petitioner its attorneys’ fees. 

The motion court granted petitioner’s motion to confirm the award and denied respondents’ cross motion to vacate the award. As noted, the First Department modified the motion court’s order, “to vacate that part of the award awarding petitioner punitive damages, sanctions and attorneys’ fees.” The Court “otherwise affirmed” the order.

As an initial matter, the Court held that the motion court properly confirmed the award as to petitioner’s conversion claim, and denied respondents’ counterclaim, notwithstanding the purported errors of law and fact made by the arbitrator. The Court explained that such errors were “not subject to judicial review.” 

Moreover, the Court rejected respondents’ contention that the individual respondent, a corporate officer or director, was immune from personal liability. The Court found that there was evidence that he personally participated in the fraud or had actual knowledge of it.

Significantly, the Court held that the arbitrator exceeded her power by awarding petitioner punitive damages, sanctions and attorneys’ fees, stating that such relief was not demanded. The Court noted that petitioner filed a demand for arbitration stating that its dispute with respondents concerned “[c]onversion by a variety of fraudulent means”. Petitioner did not advise the American Arbitration Association (“AAA”) that it was seeking other relief, including attorneys’ fees, interest, arbitration costs and punitive/exemplary damages.

Although the American Arbitration Association (AAA) preprinted form petitioner used allows a claimant to seek other relief, including attorneys’ fees, interest, arbitration costs and punitive/exemplary damages, the only boxes that petitioner checked off were for interest and arbitration costs. It did not check the punitive damages box or attorneys’ fees box, nor indicate anywhere on its demand that it was seeking such relief. Petitioner never amended its demand for arbitration. Nor did it include a prayer for such relief in its subsequently filed post-arbitration memorandum.

Citing Denson, the Court held that “[b]y granting unrequested relief, the arbitrator exceeded the expressly enumerated limits on her authority by deciding matters that were not before her.”

As to attorneys’ fees, the Court noted that “[a]lthough AAA commercial rule 47(d) empowers an arbitrator to award attorneys’ fees, this is only “if all parties have requested such an award or it is authorized by law or their arbitration agreement.” The Court found that “neither party requested such an award and it [was] not authorized by law.” The Court explained that the engagement letter that petitioner relied upon did not incorporate AAA Rule 47(d) into that agreement. “In any event,” said the Court, “even if the arbitrator has the authority to make an award [for attorneys’ fees], it must be demanded in the particular arbitration for the matter to be considered.” In other other words, an “arbitrator’s authority extends to only those issues that are actually presented by the parties.”16 

Consequently, held the Court, in the absence of a demand for such fees or the parties’ agreement that the prevailing party is entitled to legal fees, they could not be awarded. 

With regard to punitive damages, the Court found that petitioner did not request them, even though an arbitrator is authorized to award punitive damages pursuant to AAA rule 47(a). Petitioner only requested the arbitrator award such “other relief that the AAA deems just and proper”. Such general, broad language, held the Court, did not satisfy the requirements of a demand. 

However, the Court held that the award of the costs of arbitration was properly confirmed by the motion court. “Not only did petitioner request them in its demand for arbitration,” observed the Court, “AAA rule 47(c) provides that ‘the arbitrator shall assess the fees, expenses, and compensation,’ including administrative fees, expenses, and the arbitrator’s own compensation, “among the parties in such amounts as the arbitrator determines is appropriate.’”

Takeaway

In the big picture, 544 Bloomrest highlights circumstances in which an arbitrator can exceed his/her authority. The case also underscores the importance of following the terms of the arbitration agreement and making it clear at the outset the relief one is seeking. As the petitioner in 544 Bloomrest learned, the failure to do so, deprived it of the relief it thought it was seeking.


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.

References

  1. Matter of Silverman (Benmor Coats), 61 N.Y.2d 299 (1984); Matter of Kowaleski (New York State Dept. of Correctional Servs.), 16 N.Y.3d 85, 90 (2010); Frankel v. Sardis, 76 A.D.3d 136, 139 (1st Dept. 2010).
  2. Frankel, 76 A.D.3d at 139-140.
  3. Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 479-480 (2006) (citing, Matter of Sprinzen (Nomberg), 46 N.Y.2d 623, 629 (1979)).
  4. Wein & Malkin, 6 N.Y.3d at 480.
  5. Matter of Reddy v. Schaffer, 123 A.D.3d 935, 937 (2d Dept. 2014).
  6. Sprinzen, 46 N.Y.2d at 631.
  7. Matter of Neirs-Folkes, Inc. (Drake Ins. Co. of N.Y.), 75 A.D.2d 787 (1st Dept. 1980).
  8. Sprinzen, 46 N.Y.2d at 630.
  9. Denson, 180 A.D.3d at 151 (citations omitted).
  10. Id. (citing, Matter of Joan Hansen & Co., Inc. v. Everlast World’s Boxing Headquarters Corp., 13 N.Y.3d 168 (2009)).
  11. Id. (citing, Joan Hansen, 13 N.Y.3d at 173-174). 
  12. Id. (citations omitted).
  13. Matter of Slocum v. Madariaga, 123 A.D.3d 1046, 1047 (2d Dept. 2014).
  14. Denson, 180 A.D.3d at 451-452 (citations omitted).
  15. Id. at 452.
  16. Joan Hansen, 13 N.Y.3d at 173.
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