Articles Posted in Arbitration

Typically, properly executed arbitration agreements, even as boilerplate in a form agreement, are strictly enforced. That said, there is an interesting 2017 First Department case that allows a party to avoid arbitration due to the cost of doing so.

In this case, as part of his employment, an employee agreed to arbitrate any disputes with his employer before the AAA in Florida. Doing so would require the employee to pay half of the arbitration costs, including the fees charged by the arbitrators, and administrative costs. The claims of the employee were as part of a class, where claims of late payment of wages were made, and recovery would include an award of statutory attorneys’ fees. In response to the employer’s motion to compel arbitration, the employee argued that “he had not agreed to arbitrate Labor Law claims, that any such agreement would be against public policy, and that, based on his limited financial means, as detailed in a supporting affidavit, the fee splitting and venue provisions of the agreement render arbitration financially prohibitive.”

The First Department reaffirmed New York’s strong public policy of favoring arbitrations (where agreed to) and that courts interfere as little as possible in that process and resulting award. “As a general matter, therefore, a clear and unmistakable agreement to arbitrate statutory wage claims is not unenforceable as against public policy.” That said, the court recognized the competing public policy argument that the employee could not afford to travel to Florida and participate in the AAA proceeding and that forcing him to do so would “preclude him from pursuing his claims.” The court referred the matter back to the trial court for an accounting of the employee’s income “and assets,” and the cost to participate in the arbitration. The court did not acquit the employee from the arbitration, only directed the trial court to determine if arbitrating in New York at the employer’s expense would obviate the employee’s concerns. The court also allowed the trial court to consider how the attorneys’ fees provision would impact the employee’s ability to participate in the arbitration. The court did not directly address the issue of whether the employee’s inability to pay the AAA expenses would free him from arbitration completely.

Plaintiff and defendant entered into a contract for architectural services. Their contract had a rider that provided for additional fees and contained an arbitration provision. In response to plaintiff’s lawsuit seeking fees, defendant moved to dismiss based on the arbitration provision in the rider. Plaintiff claimed that the rider was unenforceable as the parties never signed.

The trial court disagreed. The court held that because plaintiff’s lawsuit itself relied on the rider, it could not claim that the rider, and the obligation to arbitrate, could not be enforced. The court stated that “through her pleadings plaintiff has conceded that the rider is part of the [contract] and is enforceable.” This outcome was all the more true when defendant demonstrated that the parties had relied on that rider during their relationship.

While the court did not address waiver or estoppel theories, it clearly held that by relying on the rider and incorporating it into her complaint, plaintiff could not disavow its enforceability.

Suffolk County Commercial Division Justice Elizabeth Emerson refused to vacate a FINRA arbitration decision which awarded the petitioner $3,229,097, plus interest, after respondent defaulted in the underlying arbitration.

The facts, briefly, are as follows. Respondent was petitioner’s investment advisor and broker. After withdrawing her participation in a FINRA investigation, respondent was permanently barred from the securities industry. Nonetheless, pursuant to her prior agreement with FINRA, respondent was obligated to arbitrate any customer complaints. In connection with that obligation, all FINRA members must provide FINRA with current addresses for service of process.

Petitioner commenced an arbitration proceeding against respondent. Commencement papers were sent to petitioner at her New York City and Sag Harbor addresses. A subsequent mailing to her New York City address informed respondent that she was the sole remaining respondent in the arbitration. A third mailing warned respondent that her time to participate was expiring. None of the mail was returned to FINRA. A final mailing, sent certified, to respondent’s New York City address was returned as unclaimed. After the arbitrator conducted a hearing without the respondent’s participation, a default award was entered.

A broker was hired to find a tenant for a residential apartment in Manhattan. The parties agreed that the broker would receive a six percent commission if the tenant purchased the apartment within six of months after the lease expired, or any extension thereof. The broker found a tenant, and a lease was executed on July 15, 2012, with an expiration of July 14, 2013. With a verbal agreement, the tenants remained until July 10, 2014, when they purchased the apartment for $3.05 million. The owner refused to pay the six percent commission. The parties went to arbitration, where the arbitrator found against the broker.

The broker filed a petition to vacate the award, arguing that the arbitrator’s decision in denying the commission was based on the immaterial allegation that the broker lacked an active role in the sale, and violated public policy. The owner argued that (i) the agreement was signed with the owner’s wife, (ii) the broker did not procure the buyer as the tenants reached out to the owner directly, and (iii) the sale took place a year after the lease expired.

After outlining the limited grounds for overturning an arbitration award, and discussing the basis for this arbitrator’s award—that the owner’s wife signed the brokerage agreement without focusing on the sales commission and without the consent of the husband—the court vacated the award as being irrational and violative of a strong public policy. The court refused to find that the wife’s failure to focus on the commission as a valid reason to ignore the parties’ executed agreement. The court noted that the arbitrator did not base his decision on the wife’s alleged inability to bind her husband or any defect in the agreement. (The court did not address the outcome of this case had the wife’s authority been challenged.) The arbitrator’s emphasis on what the owner’s wife understood could not be a basis for a decision.

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