In re Arbitration between Siegel and Lewis, 40 N.Y.2d 687 (1976)

Parties to an arbitration agreement can select arbitrators even if the arbitrator has a known relationship with one of the parties, provided there is no evidence of fraud, duress, or unequal bargaining power, and the relationship is disclosed.

Summary

Siegel sought to vacate the designation of arbitrators Kooper and Birnbaum in a stock purchase agreement with Lewis, arguing their prior relationships as attorney and accountant for Lewis created bias. The agreement named Kooper, Lewis’s attorney, and Birnbaum, his accountant, as arbitrators, a fact known to Siegel. The Court of Appeals reversed the lower court’s decision, holding that parties can choose their arbitrators, and a known relationship, absent fraud or unequal bargaining power, does not disqualify them. The court emphasized the importance of upholding arbitration agreements and respecting the parties’ choice of forum.

Facts

Lewis sold half of his stock in Henry Lewis Lamp Shade Corporation to Siegel for $55,000. The agreement included an option for Lewis to rescind the sale. Kooper, Lewis’s attorney of 15 years, represented Lewis in the agreement, and Birnbaum, his accountant of equal duration, was named escrowee. Both were familiar with pre-sale negotiations. Siegel was represented by his own counsel. The agreement designated Kooper and Birnbaum as sole arbitrators for disputes arising from the agreement. A dispute arose when Lewis accused Siegel of converting funds, leading Lewis to attempt to exercise his option and Siegel to demand arbitration.

Procedural History

Siegel initiated a proceeding to disqualify Kooper and Birnbaum as arbitrators before arbitration began. Special Term granted Siegel’s request, disqualifying the arbitrators. The Appellate Division affirmed this decision. The New York Court of Appeals granted review and reversed the lower courts’ rulings.

Issue(s)

Whether an arbitrator’s prior relationship as attorney or accountant for one party to an arbitration agreement, fully known to the other party at the time of the agreement, is sufficient grounds to disqualify the arbitrator in advance of arbitration proceedings.

Holding

No, because parties are free to choose their arbitrators, and a known relationship, absent fraud, duress, or grossly unequal bargaining power, does not disqualify them; the parties’ consent to the arbitrator’s selection constitutes a waiver of the right to object based on that relationship.

Court’s Reasoning

The court emphasized that commercial arbitration is a contractual creation, allowing parties to select their own forum for dispute resolution. Parties have the right to name or select arbitrators, and courts should interfere as little as possible with this freedom. The court noted the absence of statutory authority to disqualify arbitrators in advance of proceedings, except in cases of unavailability or vacancy. Arbitrators are not held to the same qualification standards as judges, and parties may choose arbitrators for their specific expertise or knowledge, even if such factors would disqualify a judge. A known relationship between an arbitrator and a party, such as attorney-client, does not automatically disqualify the arbitrator unless there is a failure to disclose a relationship likely to affect impartiality. Assent to the choice of an arbitrator with knowledge of the relationship constitutes a waiver of the right to object. The court found that Siegel knew of Kooper’s and Birnbaum’s relationships with Lewis when the agreement was made. Therefore, there was no basis for advance disqualification. The court stated, “In the absence of a real possibility that injustice will result, the courts of this State will not rewrite the contract for the parties.” Chief Judge Breitel’s concurrence emphasized that parties are free to choose their arbitrators absent fraud or unequal bargaining power, and the relationship of the arbitrators, if disclosed, is not a disqualification. He cautioned against “hectoring” arbitrators with ethical considerations, stating that an award can be set aside for demonstrated partiality or improper conduct after the arbitration has concluded. The court also said, “[t]he spirit of the arbitration law being the fuller effectuation of contractual rights, the method for selecting arbitrators and the composition of the arbitral tribunal have been left to the contract of the parties.’”