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Setting Aside Arbitral Awards Are Difficult

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  • Posted on: Jul 18 2016

This blog will address many aspects of arbitration, including the pros and cons of this alternative dispute resolution mechanism.  This installment will look at the difficulties the losing party has challenging the arbitral award.

Arbitration is a voluntary form of dispute resolution.  It is less formal than a court and conducted by an impartial person or persons selected by the parties. Unless the parties agree to the contrary, the arbitrator is not bound to follow the law. Instead, he/she may base the decision on business custom and practice, technical knowledge, or broad notions of equity and justice. Because arbitration is a contractually agreed upon method of dispute resolution, the parties can agree whether the award will be final and binding.

Parties can agree to arbitration in a number of ways.  Often, they include an arbitration clause in their agreements or transaction documents.  These clauses mandate the resolution of disputes in an arbitral forum, such as the American Arbitration Association or FINRA.  Other times, parties agree to arbitrate after a dispute has arisen.

Once an award is issued, the losing party can appeal it (i.e., move to vacate the award) in court. However, because arbitration is less formal than court and contractually based, the grounds upon which a court will vacate an award are limited.

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.’” E. Associated Coal Corp. v. United Mine Workers of Am., Dist. 17, 531 U.S. 57, 62 (2000) (citations omitted).

In New York, CPLR § 7511(b) sets forth the grounds upon which a court can vacate an arbitral award. Under federal law, Section 10 of the Federal Arbitration Act governs the grounds upon which a court can vacate an 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.” Matra Bldg. Corp. v Kucker, 2 A.D. 3d 732 (2d Dep’t 2003).  Case law makes it clear that New York courts apply these four grounds narrowly, declining more times than not to vacate arbitral awards.  E.g., Matter of Mercury Cas. Co. v Healthmakers Med. Group, P.C., 67 A.D. 3d 1017, 1017 (2d Dep’t 2009).

On June 29, 2016, the Appellate Division, Second Department added another decision to the long list of cases showing the difficulties faced when trying to vacate an arbitral award.  See Structure Tek Construction, Inc. v. Waterville Holdings, LLC, 2016 NY Slip Op. 05140.

Structure Tek was an action, inter alia, to foreclose a mechanic’s lien in which the plaintiff sought to confirm an arbitral award in its favor.  The plaintiff was hired by the defendant Waterville Holdings, LLC, d/b/a Smuggler Jacks Restaurant, as a contractor in connection with the construction of a restaurant located on property owned by another defendant, Noel Cannon.  Sometime thereafter, the plaintiff and the defendants became involved in a dispute about the construction of the restaurant. The plaintiff filed a mechanic’s lien against the property.  After the plaintiff commenced the action, the plaintiff and the defendants agreed to resolve the dispute through arbitration.

After a hearing, the arbitrator issued an award in favor of the plaintiff for $254,735.29. The plaintiff sought to confirm the award pursuant to CPLR 7510, and the defendants moved to vacate the award pursuant to CPLR 7511.

The Supreme Court, Nassau County granted the petition and denied the motion to vacate the award. The defendants appealed.  The Second Department affirmed.

In affirming the ruling, the Second Department underscored the difficulty parties to arbitration have in vacating an arbitral award:

Judicial review of arbitration awards is extremely limited. A party seeking to overturn an arbitration award on one or more grounds set forth in CPLR 7511(b)(1) bears a heavy burden to demonstrate that vacatur is appropriate by clear and convincing evidence. An arbitrator may do justice as he or she sees it, applying his or her own sense of law and equity to the facts as he or she finds them to be and making an award reflecting the spirit rather than the letter of the agreement. An arbitrator’s award should not be vacated for errors of law and fact committed by the arbitrator and the courts should not assume the role of overseers to mold the award to conform to their sense of justice.

(Internal quotations and citations omitted.)

Against the foregoing, the Second Department found that the “record [did] not reflect” any evidence “that the arbitrator made an award that was irrational, or that the award violated a strong public policy or clearly exceeded a specifically enumerated limitation on the arbitrator’s power.”  (Internal quotations and citations omitted.)

Takeaway:

Arbitration can be a very effective forum for the resolution of disputes. It is a less formal and less costly alternative to resolve disputes.  However, as Structure Tek shows, it is very difficult to vacate an arbitral award.  For this reason, parties that agree to arbitrate their disputes should do so with their eyes wide open.  They should understand that there are disadvantages to arbitration, including the difficulties overturning an award. In short, the parties should expect to live with the outcome of the arbitration, even if it is unjust or erroneous, or both.

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