Proceeding to Compel Arbitration Cannot be Initiated Until Opponent Begins Litigation

On October 16, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in KPMG LLP v. Kirschner, 2018 NY Slip Op. 32661(U), holding that a plaintiff cannot bring a proceeding to compel arbitration until the defendant begins litigation, explaining:

CPLR § 7503(a) provides:

A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration .... If an issue claimed to be arbitrable is involved in an action pending in a court having jurisdiction to hear a motion to compel arbitration, the application shall be made by motion in that action. If the application is granted, the order shall operate to stay a pending or subsequent action, or so much of it as is referable to arbitration.

Likewise, the FAA dictates: a party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition for an order compelling arbitration. The Appellate Division has stated that under CPLR § 7503(a) a party to an arbitration agreement is not aggrieved until litigation of an issue within the operation of the arbitration provision is attempted. Federal courts interpreting the FAA have come to the similar conclusion that unless the respondent has resisted arbitration, the petitioner has not been aggrieved by anything, and there is nothing for the court to compel. The Second Circuit has stated that a party has refused to arbitrate if it commences litigation or is ordered to arbitrate the dispute by the relevant arbitral authority and fails to do so. Thus, a party is considered aggrieved if the non-aggrieved party (1) commences litigation in lieu of arbitration, or (2) refuses to comply with an order of a relevant arbitral authority to arbitrate the dispute.

Here, it is undisputed that (1) the Trustee had not commenced litigation at the time KPMG's petition was filed, and (2) no order had been issued by an arbitral authority. KPMG was thus not an aggrieved party at the time it commenced this special proceeding.

KPMG filed this petition before the Trustee commenced the California Action, and thus, the Court does not have jurisdiction to adjudicate such a petition from a non-aggrieved party even though the California Action has since been commenced. Further, courts have adhered to the time-of-filing rule regardless of the costs it imposes. Thus, the petition in this special proceeding must be dismissed for lack of subject matter jurisdiction and lack of standing.

(Internal quotations and citations omitted) (emphasis added).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.