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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A recent decision out of the Suffolk County Commercial Division underscores the importance of staying on top of your mail if you plan on leaving New York for an extended period of time.  Last week, in Matter of New Brunswick Theological Seminary v Van Dyke, 2018 NY Slip Op 51204(U), Justice Emerson confirmed a $3,229,097 arbitration award against a respondent who failed to appear at an arbitration, claiming she did not receive notice of the proceedings against her.

The respondent was a retired investment banker who, in 2000, entered into an agreement with petitioner to act as its investment advisor and broker. The respondent managed petitioner’s account until May 2016, when the petitioner terminated her services. Thereafter, the Financial Industry Regulatory Authority (“FINRA”) commenced an investigation against respondent in connection with her alleged mishandling of certain customer accounts, including petitioner’s account. The investigation ultimately concluded with respondent being permanently barred from the securities industry.

Petitioner proceeded to arbitrate its claims against the respondent.  Between July and October of 2017, FINRA sent to the respondent several notices regarding the arbitration at the addresses the respondent provided FINRA for service of process. One notice, sent by certified mail to the respondent’s home addresses in New York City and Sag Harbor, was returned as “unclaimed, unable to forward.” But the other notices, sent to the same two addresses, were not returned.

The respondent did not appear at the arbitration. Nevertheless, the arbitrator determined that, since the respondent had been served with several notices by regular mail and by certified mail, she would be bound by the arbitrator’s ruling and determination, which ultimately awarded petitioner $3,229,097.00, with interest. Thereafter, the petitioner commenced a proceeding to confirm the arbitrator’s award, and the respondent cross-moved to vacate the award, arguing that: (1) the arbitrator erred in finding that service had been effected, (2) respondent had been deprived of due process, and (3) it would be fundamentally unfair to confirm the arbitration award under the circumstances.

According to the respondent, she had been in California for five months and did not receive notice of the arbitration until January 19, 2018, when she was served with the petition and arbitration award at her home in Sag Harbor. She claimed that, while in California, the mail sent to her Sag Harbor address was held at the Post Office, and the mail sent to her New York City address was de minimus enough to fit into the mailbox, and remained there until she returned to New York. Respondent further claimed that, upon returning to New York, she did not “prioritize going through the months of held mail and that she was still going through it when she was served with the petition and arbitration award on January 19, 2018” and that petitioner should have attempted to advise her of the arbitration through email.

Justice Emerson declined to vacate the arbitration award, holding that the respondent was not deprived of due process. First, Justice Emerson found that the respondent knew, or should have known, that the petitioner might proceed to arbitration while she was in California. Indeed, the respondent was a seasoned investment banker and broker who knew that FINRA had opened an investigation concerning her mishandling of petitioner’s account, and that that investigation concluded with respondent being permanently barred from the securities industry. According to Justice Emerson, respondent should have expected that petitioner would pursue its arbitral remedies against her and yet, “the respondent left for California for five months without advising FINRA of her address in California and without forwarding her mail.”

Next, Justice Emerson noted the respondent’s continued obligation to maintain and update her address with FINRA for service of process, even though she was permanently barred from the securities industry. Because the respondent failed to do so, FINRA was left with no choice but to serve respondent at the addresses it had on file for service of process. Accordingly, the Court found that, under the Court of Appeals’ holding in Beckman v Greentree Securities, Inc., 87 NY2d 568, 570 (1996), the notices were “reasonably calculated to apprise the respondent of the pendency of the arbitration and to afford her an opportunity to present her objections.” And so, even though one of the notices was returned as “unclaimed,” additional mailings were sent to the same two addresses, none of which were returned.

Last, the Court found that the respondent “made no effort to ensure that she received mail from FINRA while in California, although she knew or should have known that petitioner might proceed to arbitration.” Specifically, the respondent “failed to provide FINRA with her address in California, as required, and failed to have her mail forwarded.” Indeed, there was correspondence from FINRA waiting for respondent when she eventually came back to New York, which respondent also ignored. Under these circumstances, the Court found that “a strong inference may be drawn that the respondent was attempting to avoid receiving any mail from FINRA and that she ignored the mail that was received.”

ay a stranger to an arbitration agreement compel arbitration against its signatories? According to the Second Department in Degraw Construction Group v McGowan Builders, Inc., 2017 NY Slip Op 05580 (2nd Dept July 12, 2017), the answer is “sometimes”: a plaintiff cannot avoid arbitration with a company by substituting the company’s employees as defendants.

Our dispute began in the fair County of Queens, renowned for its spicy food and injury-prone athletes, when Degraw Construction Group, Inc. (“Degraw”) agreed to perform construction work for McGowan Builders, Inc. (“McGowan”). McGowan apparently did not pay what Degraw felt was owed, because Degraw brought suit in Supreme Court, Queens County, notwithstanding that the contract, signed by Degraw and McGowan, contained an arbitration clause covering “all disputes arising thereunder.” Degraw also brought causes of action for conversion, unfair competition, and tortious interference against McGowan and several of McGowan’s employees and officers (the “Individual Defendants”). The Supreme Court (Dufficy, J.) granted McGowan’s motion to compel arbitration. However, the Individual Defendants’ corresponding motion was denied because they were not parties to the Contract and therefore had no right to enforce its arbitration provisions.

The Second Department reversed, holding that the individual defendants, although not signatories to the agreement, had the right to enforce it. The Second Department noted first that because “a corporation can only act through its officers and employees […], any breach of the agreement would necessarily have to occur as a result of some action or inaction attributable to an officer or employee of [McGowan].”

This principle girded the Court of Appeals’ 1996 decision in Hirschfeld Prods. v. Mirvish, (cited in the Second Department’s Degraw decision), in which the president and chairman of a theatrical production company were sued in their individual capacities for their unprofitable 1993 production of Hair at the Old Vic Theatre in London (the Spectator’s review: “this was once a great and classic theatre, and what it is doing housing a shoddy, roadshow-like revival of breathtaking inadequacy remains something of a mystery”). As in Degraw, the officers were not signatories to the company’s arbitration agreement. Nevertheless, the Court of Appeal granted their motion to compel arbitration, noting that “a rule allowing corporate officers and employees to enforce arbitration agreements entered into by their corporation is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.”

The Second Department also cited Highland HC, LLC v. Scott, in which the plaintiff sued an architectural and construction company, as well as individual officers of the defendant company, due to alleged “design flaws” and “substandard work.” The contract contained an arbitration provision, but was unsigned by the company’s officers or employees in their individual capacities. Despite this, the Second Department (citing Hirschfeld) compelled arbitration, affirming the rule that non-signatories to arbitration agreements “are entitled to enforce the arbitration clause to the extent that their alleged misconduct relates to their behavior as agents of the [signatory company].”

An important takeaway from these decisions is the close relation between the individual defendants’ alleged conduct and their employers’ performance under the contracts. In Hirschfeld, the individual defendants, as president and chairman, controlled and supervised the company’s role in the production. And in Highland, the individual defendants were charged with completing the architectural and construction work on the company’s behalf.   Thus, a key element of the rule affording non-signatory agents the benefit of arbitration agreements signed by their principals is that the non-signatory’s conduct must relate to the performance of its principal’s contractual obligations.

In light of the general policy favoring arbitration, the holding in Degraw should come as no surprise. Nonetheless, potential litigants should be aware that a clause providing that “all disputes” arising out of an agreement shall be resolved by arbitration cannot be circumvented simply by naming a counter-party’s employees as individual defendants.

* A special thanks to Farrell Fritz Summer Law Clerk Kyle Gruder for his research and drafting assistance with this post. Kyle is a student at Hofstra University School of Law and anticipates receiving his J.D. in 2018.

 

 

As any seasoned commercial litigator knows, courts are generally loathe to overturn the independent decisions of arbitrators.

New York County Commercial Division Justice Charles E. Ramos recently examined the standard for doing so in Daesang Corp. v NutraSweet Co., a dispute arising from Daesang Corporation’s attempted $79,250,000 sale of its aspartame business to iconic sweetener brand NutraSweet.

Daesang commenced the breach of contract action when NutraSweet attempted to exercise its right to rescind the purchase transaction based upon the filing of a suit against the parties by a class of aspartame purchasers for alleged violations of federal antitrust laws. The parties stipulated to the jurisdiction of the International Chamber of Commerce (“ICC”), which ultimately issued a written award dismissing all of NutraSweet’s counterclaims and defenses and awarded Daesang damages of over $100 million. Daesang then commenced the instant proceeding to confirm the ICC’s award, which NutraSweet moved to vacate.

Acknowledging the “presumption in favor of upholding arbitration awards,” Justice Ramos further observed that such deference is not limitless.   The Court explained that an arbitration award may be vacated only if it a) violates a ground set forth in Section 10 of the Federal Arbitration Act; or b) was rendered in “manifest disregard” of the law.

Justice Ramos determined this to be the rare case, finding two exceptional aspects of the ICC’s award to Daesang warranting vacatur. First, the Court held that with respect to NutraSweet’s defense and counterclaim for equitable rescission based on fraud in the inducement, the ICC disregarded, and in fact ignored the “well-established principle that a fraud claim can be based on a breach of contractual warranties where the misrepresentations are of present facts.”

Second, the Court found that the ICC’s outright refusal to consider NutraSweet’s breach of contract counterclaim, which the ICC concluded NutraSweet waived during its closing argument, went “beyond a mere error in law or facts, and amount[ed] to an egregious dereliction of duty.” The Court explained that, beyond the fact that NutraSweet submitted witness statements, live and expert testimony, and took cross-examination on the counterclaim, the portion of the transcript that the ICC based its decision on failed entirely to address the breach of contract counterclaim.

While the Commercial Division’s decision was a sweet success for NutraSweet, this case should serve as a stark reminder to commercial litigators that a successful motion to vacate an arbitration award requires a finding of truly egregious errors and/or “manifest disregard” for well-established law.