New York Law Review

Tag: Arbitrator Misconduct

  • Henneberry v. ING Capital Advisors, LLC, 11 N.Y.3d 285 (2008): Vacating Arbitration Awards Based on Procedural Errors

    11 N.Y.3d 285 (2008)

    A court will not vacate an arbitration award for arbitrator misconduct where the arbitrator’s procedural error did not deprive a party of a fundamentally fair arbitration.

    Summary

    Virginia Henneberry sought to vacate an arbitration award upholding her termination from ING Capital Advisors. She argued the arbitrator’s reversal on the burden of proof and decision regarding operating committee approval constituted misconduct and exceeded his authority. The New York Court of Appeals affirmed the lower courts’ confirmation of the award, holding that Henneberry was not deprived of a fair hearing because she was aware of the ongoing dispute regarding the burden of proof, and the arbitrator concluded the outcome would have been the same regardless. The court further found the arbitrator’s interpretation of the agreement regarding operating committee approval was rational.

    Facts

    Virginia Henneberry’s employment agreement with ING Capital Advisors stipulated termination conditions. Paragraph 11(b) allowed termination for “unsatisfactory performance” or “professional misconduct” with a specified payout, while paragraph 11(d) permitted termination without cause but with a more substantial severance. In July 2002, other managing principals agreed to terminate Henneberry for performance deficiencies. Paul Gyra, assuming the dissolved operating committee’s role, approved the termination under paragraph 11(b). Henneberry initiated arbitration, disputing the grounds for her termination.

    Procedural History

    The arbitrator initially placed the burden of proof on ING to justify the termination. ING objected, arguing Henneberry should bear the burden. After extensive hearings, the arbitrator reversed his initial ruling, placing the burden on Henneberry, but also stated ING would have prevailed under either standard. The Supreme Court denied Henneberry’s petition to vacate the award, and the Appellate Division affirmed, stating Henneberry was on notice regarding the burden of proof dispute. The Court of Appeals then affirmed the Appellate Division decision.

    Issue(s)

    1. Whether the arbitrator’s reversal of the burden of proof after evidence was presented constituted misconduct that deprived Henneberry of a fair hearing, warranting vacatur of the arbitration award under CPLR 7511(b)(1)(i)?

    2. Whether the arbitrator exceeded his authority under CPLR 7511(b)(1)(iii) by concluding that operating committee approval of Henneberry’s termination was unnecessary, effectively redrafting the parties’ agreement?

    Holding

    1. No, because Henneberry was aware of ING’s objection to the initial burden of proof allocation and the arbitrator ultimately determined that ING would have prevailed regardless of who bore the burden.

    2. No, because the arbitrator’s decision was rational, interpreting the agreement reasonably given the dissolution of the operating committee, and did not exceed a specifically enumerated limitation on his power.

    Court’s Reasoning

    The Court of Appeals stated that judicial review of arbitration awards is limited to the grounds specified in CPLR 7511. Regarding the burden of proof, the court emphasized Henneberry was aware ING disputed the initial allocation and the arbitrator had stated the decision was subject to change. The court quoted from the lower court record referencing Henneberry’s strategic choice to forego additional witnesses. The court distinguished the case from those where arbitrator misconduct, like ex parte communications, tainted the proceeding. “Here, at worst, the arbitrator engaged in a procedural error, which he ultimately corrected. He did not infect the underlying proceeding with the taint of fraud.”

    Regarding the operating committee, the court cited Matter of New York City Tr. Auth. v Transport Workers’ Union of Am., Local 100, AFL-CIO, 6 NY3d 332, 336 (2005), stating, “an excess of power occurs only where the arbitrator’s award violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” The court found the arbitrator’s interpretation reasonable because requiring operating committee approval after its dissolution would render the termination clause superfluous. The court emphasized deference to the arbitrator’s decision, concluding it was neither irrational nor exceeded his authority.

  • Goldfinger v. Lisker, 68 N.Y.2d 225 (1986): Vacating Arbitration Awards for Ex Parte Communication

    Goldfinger v. Lisker, 68 N.Y.2d 225 (1986)

    Private communication between an arbitrator and one party-litigant, concerning the credibility of the party and the validity of the disputed amount, without the other party’s knowledge or consent, constitutes misconduct sufficient to vacate the arbitration award.

    Summary

    This case concerns a dispute between two diamond dealers, Goldfinger and Lisker, arbitrated within the Diamond Dealers Club (DDC). After the arbitrators awarded Goldfinger $162,976, Lisker sought to vacate the award, alleging arbitrator misconduct due to private communications between the chairman of the arbitration panel and Goldfinger regarding settlement offers and credibility. The New York Court of Appeals reversed the lower courts, holding that such ex parte communication constituted misconduct warranting vacatur of the award, emphasizing the need to safeguard the integrity of the arbitration process.

    Facts

    Goldfinger and Lisker, both members of the DDC, had a dispute over diamond transactions. Goldfinger claimed Lisker owed him $500,000 from a joint venture. Lisker denied any obligation. During arbitration, Goldfinger told Horowitz, one of Lisker’s business associates, that Lisker could have settled for $70,000 but would now pay more. Horowitz told Weinman, the arbitration panel chairman, about this conversation. Weinman then initiated a private conversation with Goldfinger to assess Goldfinger’s credibility and the validity of his claim, without Lisker’s knowledge or consent.

    Procedural History

    Goldfinger initiated a proceeding in Supreme Court to confirm the arbitration award. Lisker cross-moved to vacate, alleging arbitrator misconduct. Special Term referred the matter to a Referee, who recommended confirming the award and denying the cross-motion. Special Term adopted the Referee’s findings. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether private communications between an arbitrator and one party-litigant, regarding the credibility of the party and the validity of the amount in dispute, without the knowledge or consent of the other party-litigant, constitutes misconduct sufficient to warrant vacating the arbitration award?

    Holding

    Yes, because such private communication creates an appearance of impropriety and denies the other party the opportunity to respond, thus prejudicing their rights and undermining the integrity of the arbitration process.

    Court’s Reasoning

    The Court of Appeals emphasized that while arbitration provides a less formal alternative to litigation, the integrity of the process must be zealously safeguarded. Arbitrators must act fairly and impartially, affording parties the opportunity to present evidence and cross-examine witnesses. The court distinguished this case from permissible independent investigations, noting that Weinman’s private communication with Goldfinger was not about “facts of trifling importance.” The court stated: “Weinman’s communication with Goldfinger following the conversation with Horowitz was deliberate in nature and designed clearly to enable Weinman to resolve in his own mind any doubt he may have had as to Goldfinger’s credibility or the validity of the claim itself. In so contacting Goldfinger, Weinman denied Lisker the opportunity to respond and created the appearance of impropriety if not actual partiality. Such actions amounted to misconduct which prejudiced Lisker’s rights under CPLR 7506 (a), (b) and (c).” The court rejected the argument that the DDC bylaws authorized such communications, finding that the bylaws did not sanction private, credibility-testing conversations. The Court emphasized the importance of safeguarding the arbitration process, reversing the lower court decisions and vacating the award.