We have discussed cases where the costs of arbitrating a dispute were so prohibitive that the First Department voided the arbitration agreement.

In a recent Federal decision out of Texas, a court modified an arbitration agreement’s cost and venue provisions, relieving a party from some of the costs she would otherwise have been obligated to pay.

As part of her employment, plaintiff agreed to arbitrate any claims arising from her employ. She commenced suit against her employer alleging wage and labor claims. The employer sought to compel arbitration. There was no dispute that the employee signed an arbitration agreement that covered her asserted claims. Instead, the employee argued that the agreement was unenforceable because it’s cost-splitting and venue provisions rendered it “substantively unconscionable.” The employer countered that the provisions were reasonable but if they were not, the court could sever those provisions while still compelling arbitration.

After an extensive selection process to select arbitrators, and 10 hearings over 19 months, defendant sought an injunction to stay the continuation of an AAA arbitration and to disqualify the remaining two arbitrators. At a point prior to that, the panel chair disclosed that his daughter-in-law was an attorney working for the same firm that was representing plaintiff. Not seeing a conflict, the other panel members supported the chair’s efforts to stay on the panel. After defendant objected, the AAA removed the chair from the panel, but not the “wing” arbitrators.

Defendant sought to disqualify those two remaining panel members because they did not agree to disqualify the chair and were thus “compromised by their improper participation” in the chair’s disclosure process and efforts to stay on the panel, which purportedly demonstrated their impartiality against defendant. It appears from the decision that defendant was not just complaining about the chair’s discussion with the other two arbitrators about the conflict and his resignation, but their knowledge that defendant challenged their partiality, all of which rendered them unfit to continue as arbitrators.

After noting that the AAA had the final say about disqualification of arbitrators, and did not bar the type of discussion of which defendant complained, the court held that defendant was not entitled to the injunction finding “neither the appearance [of] nor ‘probable partiality.’” Reiterating the reluctance of courts to interfere in a pending arbitration, especially as AAA rules and procedure were on point to the issues of which defendant complained, the court rejected defendant’s argument that the disqualified arbitrator somehow poisoned the remaining two. The court underscored its opinion of defendant’s application by pointing out that defendant’s concern about the remaining arbitrators’ opinion of defendant was entirely of its own making in that until the lawsuit was filed those two arbitrators were not aware that defendant was challenging their role as the remaining arbitrators. The court closed its opinion by rejecting the remaining claims of bias asserted by defendant and reminding defendant that it could object to the panel’s decision in court.

Two years after commencing a personal injury accident, plaintiff settled. After counter executing the settlement documents, plaintiff’s counsel returned them to defendant’s counsel with a blank form W-9 for the payee’s information. The W-9 was never returned.

When the settlement payment was not paid in 21 days, under CPLR 5003-a, plaintiff’s counsel filed a judgment. Defendant moved to vacate the default, claiming that the IRS required the W-9 and the judgment was therefore improper. After the W-9 and settlement proceeds were exchanged, plaintiff still opposed vacatur. The lower court vacated.

Disagreeing with the First Department based on the underlying claims in this action, the Second Department held that because the W-9 was neither a release nor a stipulation of discontinuance discussed in CPLR 5003-a as the trigger for the deadline for a settling party to pay, the judgment was proper. Once plaintiff satisfied CPLR 5003-a, the clock began to tick, even without the W-9. “Granting settling defendants the unilateral right to withhold payment in these circumstances would significantly undercut the statutory goal of CPLR 5003-a to ensure the prompt payment of settlement proceeds upon tender of the statutorily prescribed documents. Accordingly, the defendants’ failure to timely pay the sum due under the settlement agreement entitled the plaintiff to enter judgment including interest, costs, and disbursements pursuant to CPLR 5003-a (e).”

A client sued its law firm for malpractice. The law firm commenced an arbitration addressed to its unpaid fees, as required by the parties’ retainer agreement. The client sought to stay the arbitration pending the outcome of the lawsuit while the law firm attempted to stay the lawsuit pending the outcome of the arbitration.

Finding that no question existed as to the arbitrable nature of the legal fees, the lawsuit would be stayed while the arbitration progressed because “where ‘arbitrable and nonarbitrable claims are inextricably interwoven, the proper course is to stay judicial proceedings pending completion of the arbitration, particularly where . . . the determination of issues in arbitration may well dispose of nonarbitrable matters.’” The court then addressed the fact that no arbitration agreement was ever signed addressed to the client’s malpractice claims, stating “[t]o the extent plaintiff argues that it cannot be forced to arbitrate its malpractice claim because it did not explicitly agree to do so, both the First and Second Departments have clearly found that a nonarbitrable issue can be decided in an arbitration when it is inextricably intertwined with an arbitrable issue, particularly where, as here, the determination of the arbitrable unpaid fees claim may dispose of the nonarbitrable malpractice claim.”

Protostorm, Inc. v. Foley & Lardner LLP

Plaintiff borrowed more than a million dollars from defendant, in addition to using his funds, to form an LLC with which to buy a property. The LLC was in defendant’s name, however, pending plaintiff’s ability to obtain credit to hold the property on his own. When the time came for defendant to transfer the LLC and property to plaintiff, he refused, denying that there was any agreement between them. Defendant tried to explain away the loan proceeds and other indicia of plaintiff’s ownership and control. The lower court found that defendant’s notes that the funds he provided to plaintiff were loans led to the imposition of a constructive trust.

The Second Department affirmed. After finding that the arrangement was not defeated by the statute of frauds, because the parties’ conduct would be “extraordinary” absent their unwritten agreement, it refused to find that plaintiff’s conduct in seeking to avoid his creditors—which led to the arrangement in the first place—could be seen as unclean hands to defeat his claims. Because defendant assisted plaintiff and was not harmed by whatever conduct was alleged to be plaintiff’s unclean hands, the relief to defendant would be denied because: “‘relief is denied under the ‘clean hands’ doctrine, ‘not as a protection to defendant, but as a disability to the plaintiff’ and as a matter of public policy in order to protect the integrity of the court.’” In other words, generally speaking, the clean hands doctrine is a defect in a plaintiff’s claim; it is not a defense for the defendant.

Last, the court found the existence of a fiduciary relationship between the parties. While ordinary business relationships, including that of lender-borrower, do not usually rise to a fiduciary relationship, the details of the general relationship in this case satisfied the court that the parties had a “confidential or fiduciary” relationship.

Plaintiff and a China-based manufacturer and its Georgia-based subsidiary executed an NDA to develop a specialty LED light bulb. The parties ended up going their own way with each developing their own LED bulb.

Plaintiff thereafter alleged that the Chinese company and its subsidiary had breached the NDA and, pursuant to the terms of the parties’ NDA, commenced an arbitration before the AAA in North Carolina. In 2019, the AAA panel awarded plaintiff some $3 million. Plaintiff filed a petition to confirm the award, serving the Petition by email and Federal Express, upon counsel and the subsidiary’s registered agent.

Defendants moved to dismiss the Petition, arguing they were not properly served under the Federal Rules of Procedure, the Federal Arbitration Act (the “FAA”), or the Hague Convention. Plaintiff responded by noting that in the NDA the parties had agreed to comply with the rules of the AAA, and that those rules permitted service as made by plaintiff—by email and upon a representative. Plaintiff also argued that defendants had actual notice of the Petition which, under the FAA, was a critical issue in determining whether service would be upheld.

In a recent case, the United States Court of Appeals for the Fourth Circuit dismissed an appeal based on the parties’ waiver of any right to an appeal.

A doctor that at one point was associated with Beckley Oncology Associates (“BOA”) filed an arbitration against BOA claiming that he was owed money. The arbitration was to proceed in accordance with the parties’ agreement, which included the provision that the arbitrator’s decision would be final and enforceable in court “without any right of judicial review or appeal.”

The doctor was awarded $167,030. BOA filed a lawsuit seeking to vacate that award. The lower court refused, dismissing the complaint and confirming the award, finding that the Federal Arbitration Act precluded a party’s ability to waive judicial review of an arbitration award.

An LLC member promised to accept “any terms” for the sale of the parties’ entity if another member would pay certain of his personal debts. That member would later renege and agree to a different deal from a second buyer. When that member also refused the terms of the LLC sale to the second party, the other members removed the refusing member and moved toward consummating the sale. When litigation was commenced among the members, that second buyer backed out. The LLC and the remaining members sued the excluded member for, among other things, breach of contract.

Addressing the breach claim in connection with the first potential buyer, while agreeing with the principle that to enforce a contract the terms of the agreement must have been sufficiently clear and capable of being agreed to, the Second Department held that an enforceable agreement can be found even if not all of the terms are “‘absolutely certain [ ]’” so long that the parties intended to agree to an agreement that left a term undefined. The court stated “[c]ontrary to the defendant’s assertion, an agreement to accept a reasonable offer is not necessarily unenforceable; instead, ‘a party may agree to be bound to a contract even where a material term is left open’ provided there is ‘sufficient evidence that both parties intended that arrangement.’”

Additionally, the term “reasonable offer” can be sufficiently definite and not unreasonably vague. “Here, since the agreement involved offers by third parties, leaving open what constituted a ‘reasonable offer’ was not inappropriate. There were objective criteria, such as whether an offer comported with the company’s value as established by an analysis of its financial records, which could be used to determine whether a given offer was ‘reasonable.’”

Defendant owned a property that was long alleged to house individuals selling counterfeit goods. Watchmaker Omega bought two counterfeit watches from a retailer at the same location and commenced a lawsuit against the property owner for contributory trademark infringement. Surviving a motion to dismiss by the property owner, the case went to trial. The judge instructed the jury that the property owner’s contributory infringement could be found if the jury found that the property owner allowed those selling the counterfeit goods to continue doing so once it knew what was being sold. Knowing, included “willful blindness,”meaning ignoring the obvious. The jury awarded Omega $1.1 million.

On appeal, the property owner argued that Omega never proved that it leased space to a specific infringer, which it claimed was required. The Second Circuit disagreed. It held that willful blindness, ignoring what it knew or should have known, suffices for “contribution,” because when it had reason to suspect what was being sold looking away would not shield the contributor from liability even if the specific infringer was not specifically identified. While the owner had no obligation to look for the wrongful conduct, but once it was made aware of it, it could not ignore that conduct.

Omega SA, Swatch, SA v. 375 Canal, LLC

Plaintiff entered into a contract to buy a mixed-use building for slightly more than $2 million. Plaintiff’s downpayment was $200,000. The transaction was to be all cash, as-is, and to close six months after the date of the contract. Before that closing date, plaintiff asked permission to show the property to a bank to obtain financing, which was granted. The closing was not held on the scheduled date and defendant-seller gave time of the essence notice for a date about three weeks later. Plaintiff did not appear on that date. Defendant held plaintiff in contempt and declared that it was retaining the downpayment. Plaintiff sued for specific performance. Defendant answered and cross-claimed for a declaration that it was entitled to keep the downpayment. Defendant thereafter moved for summary judgment. The lower court granted summary judgment dismissing the complaint but also denied the counterclaim. Both parties appealed.

Finding that plaintiff could not demonstrate its financial ability to close “on the closing date,” and did not appear to close, hence its breach. As a result, the Second Department affirmed the dismissal but reversed as to the defendant, granting its counterclaim on the downpayment.

Ashkenazi v. Miller

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