Opinion
02-CV-0059E(F)
May 14, 2003.
MEMORANDUM and ORDER
This decision may be cited in whole or in any part.
Presently before the Court are defendants' October 7, 2002 Motion for an Order Appointing a Panel of Three Arbitrators and plaintiff `s October 22, 2002 Cross-Motion in opposition seeking to compel arbitration. For the reasons stated hereinbelow, defendants' motion will be denied and plaintiff's motion will be granted.
The pertinent facts are relatively straightforward. Plaintiff ("Fleming") commenced this action January 22, 2002 seeking, inter alia, the enforcement of a purchase and sale agreement against defendants. Defendants subsequently moved the Court, on February 11, 2002, to stay this action and compel arbitration. On March 1, 2002 this Court granted defendants' motion and ordered the action stayed pending completion of the arbitration proceedings. Consequently, the parties attempted to proceed with arbitration in accordance with the governing arbitration clause, which reads:
The two named defendants will hereinafter be collectively referred to as "Budwey" or "defendants."
"Disputes: Arbitration. All disputes between Fleming and the Retailer, including any matter relating to this Agreement, shall be resolved by final binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). To the extent they are available, arbitrators shall be selected from the AAA Food Industry panel. In any dispute involving a claim in excess of $100,000, three arbitrators shall be employed. Absent a showing of good cause, the hearing shall be conducted within 90 days from the service of the statement of claim. All proceedings shall be governed by the Federal Arbitration Act." Compl., Ex. B, Facility Standby Agreement ¶ 6.
On or about March 1, 2002 Fleming commenced arbitration proceedings, pursuant to the AAA's applicable Commercial Arbitration Rules ("the Rules"), by serving defendants with a Demand for Arbitration. Jennifer C. St. Laurent, appointed by the AAA as the case manager, conducted a March 26, 2002 administrative conference call between the parties in order to discuss the impending arbitration proceedings. Among the issues that were discussed at the conference call was the provision within the arbitration clause that called for the selection of arbitrators from the AAA's Food Industry panel ("Food Panel"). St. Laurent indicated that she was not familiar with the Food Panel and expressed uncertainty as to its existence, but she stated that she would inquire into the matter. St. Laurent also informed the parties that, pursuant to the applicable Rules, the AAA would provide a list of fifteen arbitrators from which the parties were to choose a panel of three. Accordingly, the parties were asked for any requirements that they may have had with regard to the qualifications and experience of prospective arbitrators. In a follow-up March 26, 2002 letter memorializing a summary of the administrative conference call, St. Laurent made no reference to the Food Panel but indicated that "[t]he parties [had agreed] to arbitrator qualifications as follows: commercial transaction experience, retail food industry experience, wholesale food experience." Notice Cross-Mot., Ex. B. On April 23, 2002 the AAA forwarded a list of fifteen prospective arbitrators to the parties. Budwey's attorney responded with an April 29, 2002 letter by which he objected to the list of arbitrators because not one of them was from the AAA Food Industry panel. See Affidavit of Jonathan A. Mugel, Esq. ¶ 15.
Plaintiff contends that defendants' counsel merely inquired as to which arbitrators on the list were from the Food Industry panel. See Notice Cross-Mot. ¶ 22.
On May 7, 2002 defendants first advised plaintiff that, if there were no Food Panel members to choose from, then defendants would seek judicial intervention in order to appoint a new panel of arbitrators. At defendants' request, the AAA and plaintiff subsequently investigated the origins of the Food Industry panel and also whether the Panel still existed. Although it was subsequently determined that the Panel no longer existed, plaintiff was able to compile a list of former Food Industry panel members. The parties then jointly requested, via a May 31, 2002 letter, that the AAA
search its databank and records "in an attempt to determine and advise whether [the individuals on the compiled list of former Food Panel members] continue to serve as arbitrators on behalf of the AAA, or whether their relevant backgrounds, experience and/or whereabouts can be ascertained." Notice Cross-Mot., Ex. C. The AAA subsequently informed the parties that three of the people on such list were still associated with the AAA. In response, the parties requested that the three individuals be added to the list of fifteen potential arbitrators. On or about June 17, 2002, the parties agreed and stipulated to the appointment of three arbitrators from the eligible list. The AAA subsequently informed the parties that one the three chosen arbitrators had declined appointment and that, pursuant to its pertinent rules, the parties could agree to an alternative arbitrator or file their preferences and allow the AAA to appoint a third arbitrator. Thereafter, the parties engaged in unsuccessful discussions regarding the selection of a third arbitrator. On or about July 12, 2002 defendants submitted its First Amended Answer, Defenses and Counterclaims to the Demand for Arbitration. By letter dated August 9, 2002, defendants' counsel requested that plaintiff participate in the selection of an entirely new arbitration panel in order to replace the existing panel to which defendants had previously consented and stipulated. Defendants further noted that, if the parties could not reach an agreement regarding the appointment of a new panel of arbitrators, they would seek judicial intervention. Plaintiff did not comply with defendants' requests and subsequently notified defendants that it would proceed with the appointment of a third arbitrator pursuant to the AAA's applicable Rules. Accordingly, on August 19, 2002, plaintiff submitted its rankings of the eligible arbitrators to the AAA in accordance with Rule R-13. Defendants subsequently sent an August 20, 2002 letter to the AAA by which it objected to "the appointment of any arbitrator without significant food industry experience or who is not a member or former member of the AAA Food Industry Panel." Defs.' October 29, 2002 Response, Ex. M. By letter dated September 26, 2002 St. Laurent notified the parties that the arbitration panel had been appointed. However, that same letter also advised the parties that one member of the arbitration panel — Paul Peter Nicolai, Esq. — had disclosed that an attorney in his law firm had once worked with an attorney from plaintiff's law firm in Albany, N.Y. See Pl.'s Notice Cross-Mot., Ex. D. Budwey responded with a September 27, 2002 letter objecting to the arbitration panel and advising plaintiff and the AAA that it would be moving "in either State or Federal Court, or both, for the appointment of an appropriate panel of arbitrators." Id., Ex. E. Budwey filed its present motion October 7, 2002 and plaintiff's cross-motion was filed October 22, 2002.
Apparently, it was subsequently determined that only one of the three was still associated with the AAA. Accordingly, that individual was added to the list of fifteen potential arbitrators from which the parties had to choose the panel.
The agreed upon panel comprised John D. Determan, Esq., Paul J. Josenhans, Esq. and Edward V. Lahey, Esq.
Rule 13 of the Commercial Arbitration Rules pertinently provides:
"If the parties have not appointed an arbitrator and have not provided any other method of appointment, the arbitrator shall be appointed in the following manner:
(a) Immediately after the filing of the submission ***, the AAA shall send simultaneously to each party to the dispute an identical list of names of persons chosen from the panel. The parties are encouraged to agree to an arbitrator from the submitted list and to advise the AAA of their agreement.
(b) If the parties are unable to agree upon an arbitrator, each party to the dispute shall have 15 days from the transmittal date in which to strike names objected to, number the remaining names in order of preference, and return the list to the AAA. *** If the parties fail to agree on any of the persons named, or if acceptable arbitrators are unable to act, or if for any other reason the appointment cannot be made from the submitted lists, the AAA shall have the power to make the appointment from among other members of the panel without the submission of additional lists." Notice Cross-Motion, p. 24, Commercial Arbitration Rule R-13.
The panel consisted of Josenhans, Leahy — the two arbitrators who had been previously agreed upon — and Paul Peter Nicolai, Esq., who was appointed by the AAA.
Plaintiff is represented by Hodgson Russ, LLP, which has offices in several New York cities, including Buffalo and Albany.
Defendants have apparently chosen both fora as they have contemporaneously filed a motion in Lockport City Court seeking the appointment of a new panel of arbitrators.
Defendants advance two arguments in support of their motion. Their first contention is that the qualifications of the individuals on the current arbitration panel are inadequate. Defendants contend that the "pool of potential arbitrators provided by the AAA has woefully inadequate food industry experience" and that not one of the individuals on the current arbitration panel has "ever served on the Food Industry panel [or] appear[s] to have significant food industry experience." Mugel Aff. ¶¶ 25, 31. Accordingly, defendants request that the Court select and appoint an arbitration panel from its suggested list of individuals who have food industry experience or were members of the former AAA Food Industry panel.
Defendants also seek such appointment pursuant to sections four and five of the Federal Arbitration Act ("FAA"). Section four of the FAA pertinently provides that "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court *** for an order directing that such arbitration proceed in the manner provided for in such agreement." 9 U.S.C. § 4. Budwey asserts that Fleming has failed to proceed with arbitration according to, or in the manner provided by, the terms of the written arbitration agreement by refusing to consider arbitrators from the compiled list of former AAA Food Industry panel members. Accordingly, Budwey seeks an Order from this Court appointing a new panel of arbitrators pursuant to section 5 of the FAA, which pertinently reads:
"If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, *** then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire ***." Id. § 5.
In opposition and in support of its cross-motion, plaintiff contends that defendants' motion is premature and that it must wait until after the conclusion of the arbitration proceeding to challenge the arbitration proceedings, at which time it may seek to vacate any arbitration award. Nevertheless, plaintiff argues that it did avail itself of the method for choosing a panel of arbitrators in this case by proceeding according to the AAA's Commercial Arbitration Rules once it was learned that the AAA Food Industry panel had ceased to exist.
Plaintiff's other arguments — viz., that the doctrines of laches and estoppel warrant denial of Budwey's motion — will be deemed moot inasmuch as the Court will grant plaintiff's motion on other grounds.
This arbitration dispute is governed by the FAA. Section two of the FAA provides that
"[a] written provision in any *** contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction *** shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or equity for the revocation of any contract." 9 U.S.C. § 2 (emphasis added).
Although the FAA provides for vacatur of an arbitration award under certain circumstances, it "does not provide for pre-award removal of an arbitrator." Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892, 895 (2d Cir. 1997). Thus, "it is well established that a district court cannot entertain an attack upon the qualifications or partiality of arbitrators until after the conclusion of the arbitration and the rendition of an award." Ibid. (quotations and citations omitted). Accordingly, defendants' first argument in support of its motion, based on the current arbitration panel's purported inadequate qualifications, is unavailing and premature at this stage of the proceedings. See Marc Rich CO., A.G. v. Transmarine Seaways Corp. of Monrovia, 443 F. Supp. 386, 388 n. 3 (S.D.N.Y. 1978) ("No section of the [FAA] *** provides for judicial scrutiny of an arbitrator's qualifications in any proceeding other than an action to confirm or vacate an award. If Congress had wished to authorize such review before arbitration proceedings commenced, it could have easily so provided.").
Such circumstances include, inter alia, where "the award was procured by corruption, fraud, or undue means [or] where there was evident partiality or corruption in the arbitrators ***." 9 U.S.C. § 10.
Nonetheless, although the FAA does not explicitly provide for the pre-award removal of an arbitrator, the Second Circuit Court of Appeals has recognized that in certain limited circumstances a court has the power to remove an arbitrator pursuant to section 2 of the FAA if the arbitration agreement itself "is subject to attack under general contract principles ***." Aviall, at 895. For example, pre-award removal of an arbitrator is justified "when the court concludes that one party has deceived the other, that unforeseen intervening events have frustrated the intent of the parties, or that the unmistakable partiality of the arbitrator will render the arbitration a mere prelude to subsequent litigation." Ibid.; see Erving v. Virginia Squires Basketball Club, 349 F. Supp. 716 (E.D.N.Y.) (removing a facially biased arbitrator and reforming the contract by appointing a neutral arbitrator), aff'd, 468 F.2d 1064 (2d Cir. 1972); Masthead Mac Drilling Corp. v. Fleck, 549 F. Supp. 854 (S.D.N.Y. 1982) (removing arbitrator because one party had concealed the fact that the contractually-designated arbitrator was its business associate); Cristina Blouse Corp. v. Int'l Ladies Garment Workers' Union, Local 162, 492 F. Supp. 508 (S.D.N.Y. 1980) (reforming contract and removing arbitrator because it had been undisclosed to plaintiff that the arbitrator was a former lawyer for defendant). However, in such cases the arbitration agreement itself was found to be invalid because the arbitrator — who had been specifically designated and mutually designated by the agreement — had a relationship to one party that was undisclosed, or unanticipated and unintended. Availl, at 895. Accordingly, the resulting removal and appointment of a new arbitrator was warranted in each case because the parties' intent to have their dispute resolved by a neutral party had been frustrated.
Such cases "manifest the FAA's directive that an agreement to arbitrate shall not be enforced when it would be invalid under general contract principles." Availl, at 896.
Here, in contrast to the cases cited above, the unanticipated abolition of the AAA Food Industry panel has not operated to invalidate the arbitration agreement because such has not defeated the parties' intent to have their disputes resolved by a neutral third-party — viz., the AAA. This is so because the terms of the arbitration agreement are not so restrictive as to limit resolution of any dispute to only members of the AAA Food Panel. Rather, the terms of the arbitration agreement unambiguously show that the dominant intent of the parties was to have any potential disputes resolved by arbitration "in accordance with the Commercial Arbitration Rules of the AAA." Within that framework and in accordance with such rules, the parties intended that arbitrators be selected from the AAA Food Industry Panel but only "[t]o the extent they are available." Thus, while the dominant intention of the parties was to have any arbitration proceeding resolved by the AAA and its governing rules, the stated mechanism for the selection of arbitrators — to wit, that arbitrators be selected from the AAA Food Panel — was merely incidental or secondary. The abolition of the Food Panel may have interfered with the parties' intent regarding their preferred arbitrators; however such unexpected circumstances are insufficient to hold that the arbitration agreement itself — by which the parties agreed to arbitrate in accordance with the AAA's Commercial Arbitration Rules — has been invalidated.
The terms of the arbitration agreement control inasmuch as arbitration is a "creature of contract." See In re Salomon Inc. Shareholders' Derivative Litigation, 68 F.3d 554, 558 (2d Cir. 1995) (looking to the terms of the parties' arbitration agreement in deciding which organization the parties agreed to resolve their disputes) (citing Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989)).
The arbitration agreement does not show an unequivocal intention by the parties that the AAA Food Industry Panel was to be the exclusive and only possible arbiter of any disputes. If the parties had wished otherwise there would be no conditional language preceding the parties' choice of arbitrators. Thus, the clause "to the extent they are available, arbitrators shall be selected from the AAA Food Industry panel" is unambiguous and the fact that the AAA Food Industry panel no longer existed meant that it was appropriate for the parties to proceed with the selection of arbitrators according to AAA's applicable rules.
The fact that Budwey has since managed to locate some former AAA Food Industry panel members is irrelevant. Once the parties learned that the Food Panel no longer existed, the Commercial Arbitration Rules governing the selection of arbitrators became operative. The parties proceeded according to those rules and eventually consented to a duly constituted panel on June 17, 2002. Budwey cannot now seek relief after such participation merely because it is dissatisfied with the result. Otherwise, the purpose of arbitration, which is to forgo the time and expense of litigation in favor of expedited dispute resolution would be flouted by judicial intervention and endless litigation over the merits of potential arbitrators.
Additionally, the Court notes that the lone case relied upon by Budwey in support of its motion is inapposite to the present set of facts. In Astra Footwear Industry v. Harwyn Int'l, Inc., 442 F. Supp. 907 (S.D.N.Y. 1978), the petitioner requested that the court appoint an arbitrator because the organization designated in the relevant arbitration agreement to arbitrate any disputes between the parties — to wit, the New York Chamber of Commerce — could not perform. The court agreed to appoint an arbitrator pursuant to 9 U.S.C. § 5, holding that such section "was drafted to provide a solution to the problem caused when the arbitrator selected by the parties cannot or will not perform." Astra, at 910. Budwey argues that such an appointment is warranted here in this case because, like the Chamber, the AAA Food Industry panel is unable to perform. However, Budweys' reliance on Astra is misplaced. The court in Astra did not invoke section five of the FAA to order the removal an existing arbitration panel in favor of another. Rather, an arbitrator was appointed because, unlike the situation here, such was needed because the only possible arbitrator — as designated in the arbitration agreement — was no longer available. Thus, while the parties' arbitration agreement in Astra provided for only one specifically designated arbitrator, the agreement here does not unequivocally restrict itself to one, and only one, specifically named arbitrator. Furthermore, in appointing an arbitrator the Astra Court relied upon equitable considerations in that such appointment was needed to allow the parties to proceed with arbitration. Here, in contrast, equitable considerations do not require the appointment of any arbitrators because a panel has already been assembled and is ready to proceed.
Lastly, defendants' argument that Fleming "failed to avail" itself of the method for choosing arbitrators as provided for in the arbitration agreement is without merit. Fleming initially tried to facilitate the arbitration process by assisting defendants in investigating the origins and existence of the AAA Food Industry panel. However, once the parties were informed that the Food Panel ceased to exist, Fleming appropriately proceeded with the selection of an arbitration panel according to the AAA's applicable Rules. Thus, there is no evidence that plaintiff failed to avail itself of the designated method for choosing arbitrators and therefore the appointment of arbitrators pursuant to 9 U.S.C. § 4 and 5 is not warranted.
There are a few narrowly limited set of circumstances that would justify judicial intervention and the removal of an arbitrator in an ongoing arbitration proceeding. As explained, such exceptional circumstances exist if a party can demonstrate, for example, some kind of infirmity with the contracting process or the arbitration agreement itself. However, because the defendants have made no such showing the Court is unable to intervene and the parties are therefore bound by their agreement to proceed with arbitration in accordance with the AAA's governing rules. Any further application to this Court by defendants which attacks the qualifications of the arbitration panel, or the arbitration proceeding itself, will have to wait until after an arbitration award has been rendered at which time it may proceed to seek vacatur.
Accordingly, it is hereby ORDERED that defendants' motion for an Order appointing a panel of three arbitrators is denied, that plaintiff's Cross-Motion to compel arbitration is granted and that the parties are directed to proceed with arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association.
The Court declines to grant plaintiff's request that it "issue an order precluding the Lockport City Court from ruling on [this] same issue" — see Notice Cross-Mot. ¶ 13 — inasmuch as plaintiff has cited no legal authority for this Court to do so.