Arbitrator Did Not Manifestly Disregard the Law in Awarding Prevailing Party Attorney's Fees

On July 2, 2019, the First Department issued a decision in Matter of Steyn v. CRTV, LLC, 2019 NY Slip Op. 05341, holding that an arbitrator did not manifestly disreagard the law in awarding a prevailing party attorneys' fees, explaining:

We are mindful that courts possess very limited authority to review an arbitration award. Indeed, the parties agree that manifest disregard of the law is the only appropriate ground to vacate the arbitrator's award of attorneys' fees.

For an award to be set aside for manifest disregard, the arbitrator must understand and correctly state the law, but proceed to disregard the same. Application of the manifest disregard of law standard requires the court to make, in essence, three inquiries: (1) whether the legal principle allegedly ignored by the arbitrator was well defined, explicit, and clearly applicable; (2) whether the arbitrators knew of the governing legal principle; and, (3) whether knowing that principle, the arbitrators refused to apply it or ignored it. A court may not vacate an arbitration award because it thinks the arbitrators made the wrong decision. Indeed, even if the court thinks that the arbitrator reached the wrong result or applied the law incorrectly, the court should nevertheless confirm the award, despite the court's disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.

Whether manifest disregard of the law occurred here depends on whether New York law on attorneys' fees controlled the arbitration. It is well established under New York procedural rules and substantive law that arbitrators are not permitted to award attorneys' fees in arbitration. New York courts only recognize three limited exceptions to New York's special arbitration provision barring the award of attorneys' fees: (1) where a statute provides for such an award, (2) where it was authorized by an express provision in the agreement; or (3) where it is unmistakably clear that both parties intended such an award.

In this case, Supreme Court found that the arbitrator was neither authorized to award attorneys' fees by statute (first exception), nor by the parties' agreement (second exception), but concluded that the third exception might apply. Supreme Court found, however, that it was not unmistakably clear that the parties intended that attorneys' fees be awarded. Specifically, relying on this Court's precedent, Supreme Court found that the parties' requests for attorneys' fees, in their respective pleadings, constituted mere boilerplate requests that did not satisfy an unmistakably clear intent to agree that attorneys' fees be awarded.

We find, however, that the arbitrator did not manifestly disregard the law because it was not unreasonable for the arbitrator to conclude that the unmistakably clear intent requirement did not apply. It appears that the arbitrator believed the requirement did not apply because here the parties' arbitration clause incorporated the rules of the AAA as controlling, and Rule 47(d) of the AAA explicitly provides that an award of attorneys' fees may be made if all parties have requested such an award or it is authorized by law or the arbitration agreement. Rule 47(d) of the AAA does not require any specific language to be used in making a request for attorneys' fees. Thus, under Rule 47(d) of the AAA, an arbitrator would be empowered to award attorneys' fees provided, as here, all parties have requested it even if the unmistakably clear standard for requesting attorneys' fees under New York law was not met.

The arbitrator's conclusion under the AAA rules that a party may receive attorneys' fees, although not otherwise entitled to attorneys' fees under New York's unmistakably clear standard, was not unreasonable. Therefore, it cannot be overturned by this Court under the manifest disregard of the law standard. In fact, there is support for the arbitrator's conclusion in this Court's prior holdings. We have held that the power to award attorneys' fees can arise from the submission of the dispute under the rules of a given organization, like the AAA, if the rules themselves authorize the fees. For example, in Matter of Warner Bros. Records, this Court upheld the arbitrators' award of attorneys' fees because the arbitration in question was governed by the AAA, which permits an award of attorney fees and where, like here, both parties so requested it in their respective pleadings.

Even if this Court were of the view that the AAA rules did not grant the arbitrator broader authority to award attorneys' fees than New York's unmistakably clear standard, that the arbitrator gave the AAA Rule 47(a) a broader interpretation does not evidence a manifest disregard of the law. Indeed, this Court previously held in McLaughlin, Piven, Vogel Sec., Inc. v Ferrucci (67 AD3d at 405) that an arbitrator's award of attorneys' fees was not a manifest disregard of the law, even though the parties' agreement was governed by New York law, because it did not appear that the arbitrators knew that New York law was controlling on the question of their authority to award attorneys' fees. Similarly, here, just as Supreme Court initially held before changing its decision upon reargument, the arbitrator was under the impression that it is possible under the AAA rules for a party not otherwise entitled to attorneys' fees under New York's unmistakably clear intent standard, to be entitled to such fees under the AAA rules. This was a reasonable interpretation not based on manifest disregard of the law, and thus should not be vacated.

Finally, contrary to CRTV's argument, a New York choice of law provision in the agreement to arbitrate, without greater specificity, does not bar damages permitted under the FAA and AAA rules, but barred by New York law. For example, an arbitrator is empowered to award punitive damages, in accordance with FAA rules, despite the fact that a contract contains a New York choice of law provision and punitive damages would be precluded under New York law. This Court has recognized that the FAA has a preemptive effect on New York's restrictions on arbitral awards of punitive damages and attorneys' fees. Thus, although attorneys' fees are generally barred under New York law, pursuant to the "American Rule," they are not barred in arbitration when the agreement contains a New York choice of law provision.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are--usually by agreement but sometimes by statute--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 or law.