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Selecting Arbitrators Is Critical Given Courts’ Deference to Awards
New York Law Journal
With ever-increasing frequency, corporate counsel have included arbitration clauses in an array of contracts and agreements, helping avoid the costs of litigation and class actions. However, despite the many benefits of arbitration, corporate counsel must exercise caution when selecting their arbitrators. Arbitration awards, once final, are rarely overturned. This article highlights the pitfalls of arbitration by discussing the deferential treatment of arbitration awards in New York courts.
It is well established that alternative dispute resolution mechanisms, like arbitration, are valid and enforceable in New York. Like many jurisdictions, New York’s public policy strongly favors arbitration and courts give considerable deference to arbitrators and their awards. In fact, arbitration is not only favored in New York, but encouraged “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.” Thus, New York courts drastically limit their review of arbitration awards, serving the goals of efficiency and judicial economy. Ultimately, this results in arbitration decisions that are seemingly impervious to judicial scrutiny.
Limited Review of Awards
Upon receiving a motion to vacate or modify an arbitration award, New York courts must confirm the award unless the movant meets one of the statutory justifications provided by New York Civil Practice Law and Rules Section 7511. The limited grounds for vacatur or modification under CPLR 7511 include: “(1) corruption, fraud, or misconduct in procuring the award; (2) partiality of the arbitrator; (3) the arbitrator exceeded his power or imperfectly executed it; (4) failure to follow the procedures of Article 75 of the CPLR.” These instances provide the exclusive grounds for vacatur or modification under the CPLR. Only when the record amply demonstrates these defects will a New York court vacate or modify an award based upon the CPLR. Otherwise, courts are reluctant to meddle with the decisions of arbitrators.
Under CPLR 7511(1), an award may be vacated based upon a showing of corruption, fraud, or misconduct. This involves, for example, instances where the arbitrator refused to hear material evidence or failed to accept a criminal conviction as proof that an individual committed an alleged offense. Likewise, CPLR 7511(2) permits vacatur or modification where the arbitrator held bias or maintained an undisclosed personal connection to one of the parties, resulting in a prejudiced decision.
Vacatur is also available, under CPLR 7511(3), where the arbitrator exceeded his or her authority under the arbitration agreement. In order to succeed on this basis, the movant must be able to demonstrate that the arbitration agreement limited the arbitrator’s authority to act, and the arbitrator subsequently violated that limitation.
Finally, vacatur is permitted by CPLR 7511(4) where the arbitrator fails to follow the procedures of CPLR Article 75. Article 75 affords parties due process rights, such as, inter alia: the right to be heard, the right to cross-examine witnesses, and the right to present evidence. Again, as with each ground, vacatur under CPLR 7511(4) is extremely limited. Article 75 of the CPLR does not bind an arbitrator to the rules of evidence because arbitrators are not bound by substantive rules of law. Thus, there must be some clear, egregious, and evident prejudice to the arbitration participant in vacating under CPLR 7511(4).
The narrow grounds in which vacatur or modification is permitted under CPLR 7511 exemplifies the deferential treatment of arbitrators in New York. Ultimately, if an award is merely in enforceable form, and disposes of the question left to the arbitrators, courts in New York have no power to vacate or modify, resulting in the confirmation of the arbitration award.
Public Policy Exception
In extremely narrow circumstances New York courts allow a limited exception to the stringent requirements of CPLR 7511. This exception allows for vacatur where “there is any statutory, constitutional or public policy prohibition against arbitration of the grievance.” Here, a dispute might be considered inarbitrable if, without any fact-finding or legal analysis, a court can conclude that arbitration of the matter is prohibited by law. Stated another way, “a court must stay arbitration where it can conclude…that the granting of any relief would violate public policy.” This is the lone instance where a court may intervene in the arbitration process outside of CPLR 7511. Accordingly, even in the most egregious circumstances, New York courts likely will not disturb a valid arbitration award.
In New York, the deference afforded to arbitrators is evidenced by their wide discretion in making evidentiary determinations. Consequently, determinations by the arbitrator need not be consistent with substantive law. Rather, evidentiary determinations, including credibility findings, are the exclusive province of the arbitrator. For example, in Matter of Moran, petitioner appealed on the basis that the arbitrator was partial and fell asleep during critical portions of the proceeding. Despite these contentions, the arbitrator’s determination of petitioner’s credibility, and his ultimate award, was beyond judicial review.
Similarly, in Matter of Haynes, notwithstanding the arbitrator’s (alleged) misguided shifting of the burden of proof, the First Department refused to vacate the arbitration award. The court reasoned that “an arbitrator does not act irrationally when, in finding the testimony of one party credible, he or she points out that the other party failed to rebut such evidence.” So long as only scant evidence suggests the arbitrator acted contrary to CPLR 7511, where public policy is not implicated, arbitration awards will be valid and enforceable in New York.
Notably, challenges to the sufficiency of evidence cannot provide grounds for vacating an arbitration award. For example, in Kalyanaram v. New York Inst. of Tech., petitioner contended that he did not send certain inflammatory emails that resulted in the termination of his employment. Although he presented evidence showing he was not present at the IP address from where some emails were sent, the Appellate Division, Second Department, upheld the arbitrator’s ruling. The court found it was not its duty to assess the adequacy of evidence, but, rather, the only duty was to ensure that there was only some plausible basis for the outcome of the arbitration.
Barely Colorable Claims
Numerous cases have confirmed arbitration awards that were clearly illogical, contrary to the evidence, or clearly opposite to the outcome a court applying legal standards would have concluded. New York so strongly favors arbitration that the New York Court of Appeals has held an “arbitration award must be upheld when the arbitrator offer[s] even a barely colorable justification for the outcome reached.” For example, in Silverman v. Benmor Coats, the New York Court of Appeals determined that an arbitration award cannot be vacated or modified even if the arbitrator “misconstrues or disregards its plain meaning” or misapplies substantive rules of law.
In Matter of Gansburg v. Blachman, the Appellate Division considered an arbitration award arising after the nonpayment of a real estate broker’s commission. Despite an apparently illegal agreement between a licensed real estate broker and a non-licensed ‘broker,’ the court neglected to engage in further fact-finding. Deferring to the arbitrator, the court disregarded appellant’s contention that the fee agreement between the brokers was contrary to public policy.
Where an arbitration award is based upon faulty interpretations of the law, New York courts are equally hesitant to interfere with the arbitration process. In Zakarian Mgt. Group v. Lax Petitioners argued that “the arbitrator ignored the fact that federal law provides for criminal liability for labor law violations with a mens rea of knowledge or recklessness.” Accordingly, petitioners claimed Zakarian engaged in criminal activities that exempted his actions from the protections afforded by a release clause of an agreement entered between the parties., petitioners challenged an arbitration award based upon the arbitrators’ conflation of the requisite scienter.
Although the court—Supreme Court, New York County—noted this apparent error, the court limited itself to the arbitrator’s interpretation, requiring a showing of “willful misconduct,” rather than permitting Zakarian’s likely criminal liability as way out of the release clause. Thus, the court determined that New York law provided no basis to overrule the arbitrator’s decision.
As is evident under New York law, arbitration awards are nearly impervious to judicial review. This should raise concern among corporate counsels to be wary of arbitration agreements. At the least, this should prompt counsel to exercise caution when selecting arbitration panels. In all too many cases, even where arbitration awards are founded upon questionable grounds, New York courts are reluctant to encroach upon the sacred domain of the arbitrator.
Mitchell C. Shapiro is a partner with Carter Ledyard & Milburn. Dylan L. Ruffi, a law clerk at the firm, assisted with the preparation of this article.
Reprinted with permission from the August 20, 2015 edition of the New York Law Journal. © 2015 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, email@example.com or visit www.almreprints.com.
Westinghouse v. New York City Tr. Auth., 82 N.Y.2d 47, 54 (1993) (“Considerable authority thus supports the validity and enforceability of alternative dispute resolution mechanisms.”).
Tullett Prebon v. BGC Fin., 975 N.Y.S.2d 18, 21 (1st Dept. 2013) (“awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation”).
See N.Y. C.P.L.R. 7511; see also Bernstein Family Ltd. P’ship v. Sovereign Partners, 66 A.D.3d 1, 7-8 (1st Dept. 2009) (confirmation is mandatory in the absence of grounds for vacatur).
Goldfinger v. Lisker, 68 N.Y.2d 225, 231 (1986) (“Arbitrators must afford the parties the opportunity to present evidence”).
N.Y. Office of Mental Health v. N.Y. State Corr. Officers & Police Benevolent Ass’n, 46 A.D.3d 1269 (3d Dept. 1954) (“The preclusive effect of criminal convictions may mandate a finding of employee misconduct.”).
J.P. Stevens & Co. v. Rytex, 34 N.Y.2d 123, 129-130 (1974) (“all arbitrators before entering upon their duties should make known any relationship direct or indirect that they have with any party to the arbitration, and disclose all facts known to them which might indicate any interest or create a presumption of bias”).
New York City Tr. Auth. v. Transport Workers’ Union of Am. Local 100, AFL-CIO, 6 N.Y.3d 332 (2005) (interpreting CPLR 7511 narrowly).
See “The Truth Behind ‘Final and Binding’ Arbitration: A Study of Vacated Arbitration Awards in The New York Appellate Division,” 74 Alb. L. Rev. 983, 993 (2010-2011).
Matter of City of Johnstown, 99 N.Y.2d 273, 278 (2002).
Matter of New York City Tr. Auth., 6 N.Y.3d at 284 (“where a court examines an arbitration agreement or an award on its face and concludes that the granting of any relief would violate public policy without extensive fact-finding or legal analysis, courts may then intervene and stay arbitration”).
Maross Constr. v. Central New York Regional Transp. Authority, 66 N.Y.2d 341, 345 (1985) (“a particular type of dispute is statutorily bestowed exclusively upon the courts or where judicial, as opposed to arbitral, enforcement of particular rights and prohibitions is mandated by public policy, an agreement to arbitrate will not be given effect by the courts”).
See, e.g., Nationwide v. Investors Ins. Co. of America, 37 N.Y.2d 91, 95 (1975) (“this state favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties”); American Independent Ins. v. Art of Healing Medicine, 104 A.D.3d 761, 762 (2d Dept. 2013) (“There is a strong public policy favoring arbitration, and courts interfere as little as possible with the freedom of parties to submit their disputes to arbitration.”).
Moran v. New York City Tr. Auth., 45 A.D.3d 484, 485 (1st Dept. 2007) (“the arbitrator’s determination of petitioner’s credibility based on his demeanor is beyond judicial review”); Haynes v. New York City Dept. of Homeless Servs., 27 A.D.3d 330, 332 (1st Dept. 2006) (“It is for the arbitrator, not the courts, to make findings of fact and credibility determinations.”); Kalyanaram v. New York Inst. of Tech., 79 A.D.3d 418, 419-420 (1st Dept. 2010) (“Challenges to the sufficiency or adequacy of the evidence to support an award are not grounds for vacating the award.”).
Matter of Moran, 45 A.D.3d at 485 (“the arbitrator’s determination of petitioner’s credibility based on his demeanor is beyond judicial review”).
Haynes v. New York City Dept. of Homeless Servs., 27 A.D.3d 330, 332 (1st Dept. 2006) (“It is for the arbitrator, not the courts, to make findings of fact and credibility determinations.”).
Kalyanaram v. New York Inst. of Tech., 79 A.D.3d 418, 419-420.
Wien & Malkin v. Helmsley-Spear, 6 N.Y.3d 471, 479 (2006) (internal quotations and citations omitted).
Silverman v. Benmor Coats, 61 N.Y.2d 299, 308 (1984).
Gansburg v. Blachman, 111 A.D.3d 935, 936 (2d Dept. 2013). The author represented defendant Blachman in this case.
Zakarian Mgt. Group v. Lax, 975 N.Y.S.2d 713, 713 (Sup. Ct. N.Y. Co. 2013).
Id. Zakarian Mgt. Group v. Lax, 975 N.Y.S.2d 713, 713 (Sup. Ct. N.Y. Co. 2013).