Opinion
May 9, 2000.
In this application under CPLR Article 75, petitioner seeks an order recusing the panel of three arbitrators presiding over an ongoing proceeding among the parties in Florida.
The original loan agreement between the parties specified that any disputes arising thereunder were to be resolved by a panel of three American Arbitration Association arbitrators. The "Governing Law" clause of the agreement stated that it was to be construed and enforced in accordance with New York law.
In the arbitration proceeding, petitioner experienced difficulty in procuring an expert, and as a result was unable to comply with certain deadlines ordered by the panel for producing a report quantifying petitioner's claimed damages. On July 2, 1999, respondent Riverside moved to strike petitioner's statement of claim and for sanctions, arguing that petitioner's delay left insufficient time to prepare for the hearings, which were scheduled to begin the last week of that month. On July 8, petitioner sent a letter requesting an adjournment of the hearings and opposing dismissal and sanctions.
On July 22, the panel issued an "Order Continuing Hearing And Imposing Sanctions". The order set out a new schedule for discovery and hearings. It also stated "The panel imposes a sanction upon Peoples Lottery in the amount of $500.00 per hearing day per Arbitrator for six hearing days being cancelled in July and August 1999 for its failure to comply with the Panel's previous orders and for causing the continuance of the hearings. The $9,000.00 shall be paid by Peoples Lottery and deposited with The American Arbitration Association on or before July 30, 1999. This sum shall be divided among the Panelists. The Panel reserves ruling as to further injunctions against Peoples Lottery."
The AAA compensation stipulation entered into by the parties specified that each arbitrator was to be compensated at the rate indicated on the arbitrator's resume. It also stated that "it is understood that compensation will be paid for actual hearing days, not for time spent on case study or preparation." The resume of one panel member did specify that he was to be paid a cancellation fee of $500 for each day of hearings canceled on less than 30 days notice. The resumes of the other two panel members did not contain such a provision.
Petitioner appealed the order to the AAA. In October, in a summary decision, the AAA informed petitioner that it would not reverse the panel's order.
As discussed below, prior to bringing the instant proceeding, petitioner commenced and then withdrew a similar action in Federal court.
New York courts have consistently held that a demand for additional compensation by an arbitrator presents such an appearance of impropriety that it constitutes a basis for vacating an arbitration award, even without further showing of actual bias. Grendi v. LNL Construction Management, 175 A.D.2d 775 (1st Dept. 1991); Catalyst-Waste-to-Energy v. City of Long Beach, 164 A.D.2d 817 (1st Dept. 1990). Here, it may be that some sanctions against petitioner were justified and that some or all of the panel members were entitled to compensation as a cancellation fee. However, the unfortunate form of the July 22 order, which demanded that petitioner provide payment to the arbitrators as a sanction as part of the decision on respondent's motion to strike, clearly does give an appearance of impropriety. (Certainly the panel members, who are all attorneys, should have been cognizant of the need to avoid such appearances.)
Respondents contend that even if the panel's order was sufficient misconduct to vacate an eventual award, petitioner's only remedy is to move to vacate after a final award. In Grendi, supra, the First Department held that the petitioner should not have to proceed once such misconduct had been established, and granted a pre-award motion to disqualify the arbitrator. Respondents' position is that the ruling in Grendi does not apply here, since this case involves interstate commerce and thus is governed by the Federal Arbitration Act.
In Aviall, Inc. v. Ryder Systems, Inc., 110 F.3d 892 (2nd Circ. 1997), the petitioner sought to disqualify an arbitrator for alleged bias. As here, the parties had a New York choice of law clause in their agreement. The court held that since the case involved interstate commerce the FAA governed, and that under the FAA pre-award appeals could only be entertained in narrow circumstances not present in that case (or in this one). However, there is no indication in Aviall, or in the other cases cited by respondents, that the issue of whether New York law with regard to pre-award applications, rather than the FAA, should apply was even raised. Nor does it appear there was any reason to consider the question. Aviall involved the allegation of a different type of bias from that alleged here, for which pre-award relief would not have been available under New York law. Thus the outcome would have been the same whether FAA or New York law governed. None of the Federal cases cited by respondents involve the type of misconduct alleged here.
The United States Supreme Court has held that contracting parties should be free to choose the particular procedural rules to govern an arbitration between them, and thus a choice of laws clause will be given effect to the extent that it does not conflict with the specific terms of the FAA or the general policies underlying it. Volt Information Sciences v. Leland Stanford Jr. University, 489 U.S. 468; Smith Barney v. Luckie, 85 N.Y.2d 193.
It is difficult to see how the ruling in Grendi would conflict with any specific terms of the FAA. The FAA's language regarding vacating awards, which has been interpreted to limit pre-award applications, is virtually identical to the CPLR Article 75 language which governed Grendi. It is also difficult to see how applying Grendi would frustrate the underlying policies of the FAA. The exception involved is extremely narrow, involving what amounts to per se misconduct and an immediate order to pay. The First Department's logic — that the policies of promoting speedy resolutions between the parties and the enforceability of awards would not be promoted by requiring the petitioner to proceed to an eventual award that would not be enforceable — is clearly reasonable.
Respondents also contend that petitioner should be precluded from pursuing this action based on the Federal action it instituted in February. Judge Chin denied petitioner's application for preliminary relief. As the transcript indicates, he also indicated that he believed that petitioner would ultimately be unable to establish subject matter jurisdiction (due to lack of diversity) and would have difficulty getting around the Aviall ruling. However, he specifically refrained from making any rulings on these issues and allowed petitioner to withdraw the federal action without prejudice. Thus res judicata does not apply.
Accordingly, the motion to disqualify the present panel of arbitrators is granted.
This constitutes the decision and order of this court.