Utica First Ins. Co. v. Republican Franklin Ins. Co., 2 Misc.3d 1008(A), 2004 N.Y. Slip Op. 50200(U) (
N.Y. Dist. Ct. April 2, 2004)A New York trial court, finding that the arbitrator’s conduct and decision were “irrational,” “arbitrary” and “capricious,” recently vacated an Arbitration Forums Intercompany Arbitration award arising from a property subrogation claim. The court’s criticism of the award generally involved perceived procedural improprieties by the arbitrator, and established a framework for seeking similar relief in future cases.
Both parties to the action in question were insurance companies and signatories to the "Nationwide ICA" agreements administered by Arbitration Forums. After a property loss, the subrogating carrier filed a lawsuit in the New York court system. In due course, the parties concluded their pleadings and initiated discovery. Over two years later, while the lawsuit was still underway, the subrogating carrier commenced an ICA proceeding.
Arbitration Forums sent a notice scheduling a hearing. The notice stated that all documents must be received four days prior to the hearing. The defending carrier’s attorneys sent correspondence and documents dated eight days before the hearing, wherein they asserted jurisdictional, statute of limitation, and merit defenses. They also indicated that they would appear at the ICA hearing.
At the hearing, the arbitrator refused to allow the defending carrier to dispute or even defer the matter. The arbitrator also refused the defending carrier an opportunity to present evidence, or to consider its documents and defenses. Important to understanding the arbitrator’s position is the fact that the Arbitration Forums date stamp indicated that the defending carrier’s opposition papers were clocked in three days before the hearing.
After the hearing, an award of $3,500 was rendered, allegedly in the absence of opposition. Later, the subrogating carrier’s attorneys sent the award to the defending carrier’s attorneys with a request for them to sign "a stipulation of discontinuance" for the action pending in the court system. In response, the defending carrier’s attorneys refused payment and discontinuance, and instead moved the court to vacate the award pursuant to a New York statute addressing arbitration s.
Although the court first considered whether the subrogating carrier had the right to unilaterally abandon the court case and commence an ICA proceeding, the court instead chose to address on its merits the arbitration’s improprieties. The court framed the issue as follows: “Did the arbitrator properly deny the defense carrier a hearing, and the right to raise jurisdictional, statue of limitation, and merit defenses?”
New York’s statute addressing the applicability and enforcement of arbitration decisions, CPLR § 7511 - one very similar to other states’ arbitration statutes - will only allow a court to vacate or modify an arbitration award if the court finds a party’s rights were prejudiced by:
(a) Corruption, fraud or misconduct in procuring the award;
(b) partiality of an arbitrator appointed as a neutral; except where the award was by confession; or
(c) an arbitrator, or agency or person making the award exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.
CPLR § 7511 (emphases added).
After reviewing these standards, the court noted that arbitrator's awards may generally not be set aside unless the award is completely irrational; and that even obvious errors or failures to justify awards with reasons will not permit the vacation of an arbitration award. The logic behind allowing such relaxed standards is that the parties implicitly consented to them as a mechanism to simply expedite resolutions. At the same time, the one principle that the court found that arbitrators must adhere to is that if the arbitration agreement contains rules, they must follow them. The court reviewed some of the ICA Rules and found that the arbitrator had violated them.
Thus, given the courts stated analytical framework, the following discussion of the published ICA rules is notable:
ICA Rule # 2 states in part that “participation in this program does not extend the rights or liabilities of participating parties beyond what exists at law; … [the] obligations and rights are no greater in arbitration than at law.” The court viewed this rule as establishing the applicability of substantive New York and Federal law, which includes the right to assert the affirmative defense that the Statute of Limitations had expired.
Rule # 7 states in part that “if the jurisdiction
[1]issue is raised…, the panel will forthwith pass upon the merits of the jurisdictional question even though the hearing on the issues of liability and damages will be deferred because of pending companion claims or suits not subject to arbitration,” and “a respondent company is not precluded from effectively raising an affirmative defense running to jurisdiction if the applicable Statute of Limitations has run prior to the existence of the coverage question." The court viewed this rule as expressly preserving the right to interpose a jurisdictional defense in all situations, and especially if the arbitration is commenced after the statute of limitations has run. In this case, the defending carrier asserted that the statute had expired two and a half years before the arbitration was commenced. Thus, the court expressed that the arbitrator was required to entertain arguments on this issue.Equally egregious in the court’s opinion was the arbitrator's violation of ICA Rule # 6, which requires deferment of arbitration for pending court actions if it is demanded at least two days prior to hearing. In this case, the demand was admittedly received three days prior to the hearing, yet the arbitrator's unilaterally imposed a requirement of a written filing four days before the hearing, a requirement that had no contractual basis.
Overall, the court found that the arbitrator's failure to entertain the defending carrier’s request to be heard on the deferment and statute of limitations issues was "irrational", "arbitrary" and "capricious." As a result, it further held that such conduct negates the underlying consent to agree to arbitrate by the established rules, and as such the arbitrator exceeded his power and imperfectly awarded judgment in this matter. Based upon these conclusions, the court vacated the arbitration award.
Practice Tips:
1. This decision demonstrates that in addition to limited appeal mechanisms in place within Arbitration Forums, there does exist an opportunity to seek review and relief in the court system for improper arbitration awards.
2. The relief offered by courts to vacate arbitration awards is, however, extremely limited. As noted in the decision, in the absence of corruption, fraud, or partiality, one must be able to demonstrate that the award was a result of misapplication of the established arbitration rules themselves. When rule violations occur, a court may determine that such an arbitration was not the arrangement to which both parties had consented to participate, and therefore the arbitration award is not valid.
3. Arbitration Forums does have an appeal mechanism to a limited extent. For example, under the Property Subrogation Arbitration program, Rule 5.2, Arbitration Forums may correct a clerical or jurisdictional error of an arbitrator. The arbitrating companies must provide written notice of the error within 60 days after the decision’s publication. Jurisdictional errors are defined by the rules as occurring “when an arbitrator improperly assumes jurisdiction, proceeds with a hearing, and makes a decision without resolving a potential jurisdictional impediment.” This appeal mechanism should be attempted first, so that the argument cannot be asserted against a party that they failed to take all reasonable methods of review before coming into the court system. It is obviously less expensive to seek review through Arbitration Forums, as compared to the court system.
4. Despite the internal Arbitration Forums review process, many states may require that any action to vacate an arbitration award be filed within a limited time after the award. Insurance carriers should immediately contact counsel to understand the time-restrictions of making such a claim for relief in the court system following an arbitration award that appears to be improper and actionable.
[1]Here, the term “jurisdiction” simply means the power of the arbitrator to rule on the issues. Arbitrators generally only have “jurisdiction” to resolve disputes if all the parties have agreed to give them such judicial power, and the dispute being decided falls within the types of disputes agreed to be arbitrated. Jurisdiction may not exist in this context, for example, if the arbitration involved a non-signatory company that had not consented, or if another related matter was pending and a party had properly requested a deferment.
