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Fourth Department Rejects Violation of Public Policy and Manifest Disregard of the Law as Bases To Vacate Arbitral Award

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  • Posted on: Nov 15 2021

By: Jeffrey M. Haber

Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law.1 It is encouraged and recognized as the public policy of the State of New York.2 Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration.3 

Generally, a court will vacate an arbitral award for the following reasons: the arbitrator violated the arbitration agreement; the arbitrator was not independent; the award was obtained by corruption, fraud, or undue means; and the arbitrator exceeded his/her powers – that is, the arbitrator ruled on matters that the parties did not consent to be heard in the arbitration agreement. Making a mistake in fact or law is not sufficient to vacate an award. An arbitrator’s decision will be upheld unless it is completely irrational or constitutes a manifest disregard of the law. As the U.S. Supreme Court noted, “as long as an honest arbitrator is even arguably construing or applying the contract and acting within the scope of his [or her] authority, the fact that a court is convinced [the arbitrator] committed serious error does not suffice to overturn [the arbitrator’s] decision.”4 

In New York, CPLR § 7511(b) sets forth the grounds upon which a court can vacate an arbitral award. 

Under CPLR § 7511, an arbitral award may be vacated: if the rights of a party were prejudiced by “(1) corruption, fraud, or misconduct in procuring the award, (2) partiality of a supposedly neutral arbitrator, (3) the arbitrator exceeding his powers [i.e., violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on his/her power] so that no final and definite award was made, or (4) failure to follow procedures provided by CPLR article 75.”5 New York courts apply these four grounds narrowly, declining more times than not to vacate arbitral awards.6  

In today’s article, we examine CPLR § 7511(b)(iii).

Under CPLR § 7511(b)(iii), a court may vacate an arbitrator’s award where it finds that the rights of a party were prejudiced when “an arbitrator … exceeded his [or her] power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.” An arbitrator exceeds his or her power only where his or her award violates a strong public policy, is irrational, or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.7 An award is “irrational” where “there is no proof whatever to justify the award”.8 Where, however, “an arbitrator offer[s] even a barely colorable justification for the outcome reached, the arbitration award must be upheld”. 9

While “courts are obligated to give deference to the decision of the arbitrator … even if the arbitrator misapplied the substantive law”,10 an arbitrator can exceed his or her power when he or she “manifestly disregard[s]” the substantive law applicable to the parties’ dispute.11 “To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrator[ ] knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrator[ ] was well defined, explicit, and clearly applicable to the case.”12 

The petitioner has the burden to establish that the arbitration award should be vacated.13 

In Matter of Gerber v. Goldberg Segalla LLP, 2021 N.Y. Slip Op. 06241 (4th Dept. Nov. 12, 2021) (here), the Appellate Division, Fourth Department considered the foregoing principles in affirming the confirmation of an arbitral award involving the departure of equity partners from their law firm.

Petitioners are former equity partners of respondent law firm. In 2015, they executed a Partnership Agreement (“PA”), which contained a withdrawal provision providing that the withdrawal of an equity partner extinguished that partner’s interest in the partnership and his or her rights to receive a return of capital. The withdrawal provision further provided that, if a client wished to remain with the withdrawing partner, the withdrawing partner was required to reimburse respondent for all unpaid costs advanced and all unpaid services expended with respect to the matter.

Upon their departure from respondent to begin a new practice, petitioners demanded arbitration, seeking rescission of the PA on the grounds that it was the product of the firm’s wrongful acts and that the withdrawal provision violated public policy. Following a hearing, the panel of arbitrators concluded that the PA was valid and enforceable and was consistent with controlling New York law and policy.

Petitioners thereafter commenced a CPLR article 75 proceeding, seeking, inter alia, to vacate the arbitration award on the grounds that it violated public policy and disregarded the law. Supreme Court vacated the petition, confirmed the award and entered judgment in favor of respondent. Petitioners appealed.

The Appellate Division, Fourth Department affirmed, holding that that arbitrator did not exceed his or her authority and did not manifestly disregard the law. 

Petitioners argued that, because the withdrawal provision of the PA violated “the twin public policies” of attorney mobility and client choice, the award upholding that provision violated public policy and should be vacated. The Fourth Department “reject[ed] that contention and conclude[d] that the arbitration award on its face [did] not violate public policy …  i.e., it [did] not ‘create[] an explicit conflict with other laws and their attendant policy concerns.’”15 

The Court also concluded that “the arbitration award [was] not subject to vacatur on the ground that it was based on a ‘manifest disregard of the law.’”16

Takeaway

A court may vacate an arbitral award where strong and well-defined policy considerations embodied in constitutional, statutory or common law prohibit a particular matter from being decided or certain relief from being granted by an arbitrator. The public policy exception has its roots in common law, where it is well settled that a court will not enforce a contract that violates public policy A court, however, may not vacate an award on public policy grounds when vague or attenuated considerations of a general public interest are at stake. “Courts shed their cloak of noninterference where specific terms of the arbitration agreement violate a defined and discernible public policy.”17

In Gerber, although not specifically stated, the provision in the PA at issue did not violate public policy because only vague considerations of a general public interest were at stake – e.g., attorney mobility and client choice.   

“To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.”18 Although discussed by the Fourth Department, neither of those requirements was apparently present in Gerber.


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.

Footnotes

  1. Rent-A-Ctr., W, Inc. v. Jackson, 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”).
  2. Matter of Smith Barney Shearson v. Sacharow, 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). 
  3. Id. at 49-50. (citations omitted).
  4. E. Associated Coal Corp. v. United Mine Workers of Am., Dist. 17, 531 U.S. 57, 62 (2000) (internal quotation marks and citation omitted).
  5. Matra Bldg. Corp. v. Kucker, 2 A.D.3d 732 (2d Dept. 2003).  
  6. E.g., Matter of Mercury Cas. Co. v. Healthmakers Med. Grp., P.C., 67 A.D.3d 1017, 1017 (2d Dept. 2009).
  7. Matter of Falzone [New York Cent. Mut. Fire Ins. Co.], 15 N.Y.3d 530, 534 (2010); Matter of New York City Tr. Auth. v. Transport Workers’ Union of Am., Local 100, AFL-CIO, 6 N.Y.3d 332, 336 (2005).
  8. Matter of Professional, Clerical, Tech., Empls. Assn. [Board of Educ. for Buffalo City Sch. Dist.], 103 A.D.3d 1120, 1122 (4th Dept. 2013), lv. denied, 21 N.Y.3d 863 (2013) (internal quotation marks omitted).
  9. Id. (internal quotation marks omitted).
  10. Schiferle v. Capital Fence Co., Inc., 155 A.D.3d 122, 125 (4th Dept. 2017).
  11. Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 479-80 (2006).
  12. Schiferle, 155 A.D.3d at 127 (internal quotation marks omitted).
  13. Caso v. Coffey, 41 N.Y.2d 153, 159 (1976).
  14. See Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375, 380-81 (1993); Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 98 (1989) and Rule 5.6 (a)(1) of the Rules of Professional Conduct (22 N.Y.C.R.R. 1200.00).
  15. Slip Op. at *2 (citations and internal quotation marks omitted).
  16. Id.
  17. In the Matter of New York State Correctional Officers and Police Benevolent Ass’n, Inc. v. State, 94 N.Y.2d 321, 327 (1999).
  18. Wien, 6 N.Y.3d at 481 (internal quotation marks omitted).
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