Alternative Dispute Resolution

Your client who was just subpoenaed to provide documents in an arbitration, advises you, but with confidence says “But we did not agree to arbitrate, so I can ignore this, right?” After some discussion, your client agrees it’s in her best interest to comply with the subpoena, but only after you promise she will not be forced to arbitrate. How can you be sure your client will not be brought into the arbitration?  A recent decision by the Honorable Barry Ostrager highlights some ways in which a non-signatory can be dragged into an arbitration they never even envisioned

In IQVIA RDS Inc. v. Eisai Co. Ltd, IQVIA, a subcontractor, was forced to seek a stay of arbitration after Eisai, the client, sought to join IQVIA as a party to its ongoing arbitration against PharmaBio, the contractor.  The only problem was that the subcontractor never agreed to an arbitration provision.

If the subcontractor did not agree to arbitrate this dispute, how could it be forced into an ongoing arbitration?

The Direct Benefits Theory

The client argued that the subcontractor was prohibited from avoiding arbitration under a theory known as direct benefits estoppel.  This is an exception to the general rule against binding non-signatories to arbitration.  Under this theory, a non-signatory may be compelled to arbitrate where it “knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement” (Notably Federal Courts have applied a similar theory, see Ouadani v. TF Final Mile LLC, 876 F.3d 31, 33 (1st Cir. 2017).  The court found that the subcontractor did not receive direct benefits from agreement between the contractor and the client because their agreement conferred no direct benefits on the subcontractor.  Rather, the agreement allowed the contractor the option to select a subcontractor of its choosing.  Simply because the contractor hired and paid the subcontractor did not make the subcontractor a direct beneficiary of the contract compelling it to arbitrate. Thus, the court allowed the subcontractor to seek a stay of arbitration.

Prior participation in the Arbitration

Another way a non-signatory could be forced to arbitrate its dispute is if it already “participated” in the ongoing arbitration.  Section 7503 (b) of the CPLR states that a party may not seek a stay if it already participated in the arbitration.   A party participates in arbitration by, among other things, appearing in the dispute, selecting the arbitrators, or scheduling the hearing.  The subcontractor’s participation in the ongoing arbitration was limited to complying with subpoena demands.  This, as the court found, is not participating in the arbitration for purposes of Section 7503 (b).  Thus, subcontractor was permitted to seek, and was granted, a stay of arbitration.

The lesson here is that even if your client did not agree to an arbitration provision, it still could be forced into arbitration.  You and your client should be wary of these pitfalls, and seek to avoid these mistakes, if you do not wish to arbitrate your disputes.

 

You’ve just represented a client in an arbitration proceeding…and lost. The client wants to “appeal” the decision. Now what? The only remedy your client has is to request that the court vacate or modify the arbitration award. However, this is no small task.

A recent decision by New York County Commercial Division Justice Charles E. Ramos (NSB Advisors, LLC v C.L. King & Assoc., Inc., 2018 NY Slip Op 32533 [Sup. Ct., NY County 2018]) serves as a reminder that a party seeking to vacate an arbitration award faces a heavy burden. Arbitration awards are almost always upheld by New York State courts because the standard of review is so high. An arbitration award must be upheld when the arbitrator offers “even a barely colorable justification for the outcome reached.”

The burden of proof lies with the party that is challenging the arbitration award to show the court why the award should be vacated. Pursuant to CPLR §7511, an application to vacate or modify an arbitration award may be made by a party within 90 days after the decision is rendered.

The only two instances when an arbitration award may be vacated include (1) instances involving fraud, corruption or misconduct of the arbitrators or (2) where an arbitration award exhibits “manifest disregard of the law”. To vacate an arbitration award on the latter ground, a court must find that the arbitration panel knew of a governing law yet refused to apply it or ignored it, and that the governing law was well defined, explicit and clearly applicable.

Examples of what could constitute a “manifest disregard of the law” include “an explicit rejection of controlling precedent” and “a decision that is logically impossible”. However, it is important to remember that the arbitration panel is entitled to make its own factual and legal findings, just like a judge or a jury. Alleging mere factual error by the arbitrator or misapplication of complex legal principals will not suffice.

A party seeking to vacate an arbitration award is best served by making every effort to obtain the reasoning behind the arbitration award. However, this must be requested prior the rendering of the award by the arbitrator. Moreover, arbitrators are not automatically required to explain their decision and Article 75 of the CPLR does not impose this requirement. Unfortunately, a failure to provide an explanation for the award is not grounds for vacating it.

However, in some instances, the parties can request that the arbitration panel issue an “explained decision.” Pursuant to FINRA Rule 13904(f), an arbitration panel may contain a rationale for the underlying award if the parties jointly request what is known as “an explained decision”. However, if only one party seeks this relief, the arbitrator is not required to honor the request. In this case, the arbitration was governed by FINRA, but the parties failed to request an explained decision. Justice Ramos reasoned that without an explanation behind the award, it would be next to impossible to determine whether the award was, in fact, a “manifest disregard of the law”.

Finally, a party seeking to vacate an arbitration award must provide the entire arbitration record to the court. Justice Ramos criticized Respondent in this case for not providing the court with a complete record of the arbitration materials despite acknowledging that the complete record included over 16,000 pages of transcripts and 800 exhibits. He reasoned that the court could not possibly have the opportunity to conclude that the arbitration panel “manifestly disregarded the law” with just “a mere snapshot of what occurred.”

Takeaway: Vacating an arbitration award is an uphill battle and attorneys seeking this relief from the court should avail their client to every procedural advantage, including seeking an explained decision from the arbitration panel and submitting the entire record for the court’s review.

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