Party Cannot Participate in Arbitration Without Challenging Jurisdiction in Court and Then Seek to Vacate Based on Lack of Jurisdiction

On October 9, 2020, Justice Ostrager of the New York County Commercial Division issued a decision in Fava v. Morgan Stanley Smith Barney, Inc., 2020 NY Slip Op. 33358(U), holding that a party cannot participate in an arbitration without challenging its jurisdiction in court and later seek to vacate an award based on lack of jurisdiction, explaining:

Fava now seeks to vacate the Award, claiming FINRA exceeded its authority when it proceeded with the arbitration over Fava’s objection based on the provision in the parties’ Settlement Agreement wherein the parties explicitly agreed to raise any disputes in court, knowing full well that FINRA rules provided for arbitration. However, Fava’s claim fails.

Although CPLR § 7511(b)(1) allows a party who participated in the arbitration to move to vacate the award on the ground that the arbitrators exceeded their authority, Fava’s claim here really is that no valid agreement to arbitrate exists. In Barclays Capital Inc. v. Leventhal, 2017 WL 7732816, 2017 N.Y. Slip Op. 51982(U) (N.Y. Co July 25, 2017), Justice Lucy Billings rejected a similar claim by a party who had participated in the arbitration, stating as follows:

While respondent characterizes the arbitrator's actions as exceeding his power, respondent's actual contention is only that the arbitrator lacked the authority to arbitrate the dispute absent an agreement. An arbitrator acts in excess of his power in enforcing or interpreting an agreement only when he violates strong public policy, acts irrationally, or exceeds a contractually specified power. In fact, an excess of power necessarily presupposes power in the first instance. Respondent's claim, which is simply that the dispute under the promissory note must be litigated in another forum, is not a basis to challenge confirmation of the award.

This analysis is further bolstered by the unambiguous language in CPLR § 7511(b)(2)(ii), which provides for vacatur of an arbitration award where a valid agreement to arbitrate was not made but only in the case of a party who neither participated in the arbitration nor was served with a notice of intention to arbitrate. The record here establishes that Fava participated in the arbitration to the fullest extent, despite his objection to FINRA’s jurisdiction. Fava had the option under CPLR § 7503 to apply to stay arbitration on the ground that a valid agreement was not made, but he chose not to pursue that option. Having charted his course, Fava cannot now argue that FINRA exceeded its authority by proceeding with the hearing when no valid arbitration agreement existed.

(Internal quotations omitted).

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.