Massachusetts Dispute Resolution Services

Recent Arbitration Developments April 2016

Arbitration – Judicial review

In an important decision, the SJC has ruled that where a defendant has requested that an arbitration award be vacated, the request must be denied despite that the parties’ arbitration agreement contained language authorizing a different standard of judicial review than that mandated by the Massachusetts arbitration statute.

“The central question presented in this appeal is whether parties to a commercial arbitration agreement may alter by contract the scope or grounds of judicial review of an arbitration award that are set out in the Massachusetts Uniform Arbitration Act for Commercial Disputes (MAA), G.L.c. 251. The SJC decided that the grounds of judicial review are limited to those delineated in G.L.c. 251, §§12 and 13. …

The case involved a dispute between shareholders of an accounting firm and an accountant who was terminated from the company. The plaintiff shareholders sued in Superior Court to confirm an arbitration award they won against the former partner.

In upholding the trial court judge’s ruling confirming the award, the SJC made clear that lawyers cannot rely on contract language to alter the scope of judicial review under the Massachusetts Uniform Arbitration Act for Commercial Disputes, G.L.c. 251.

The language at issue (in §§11, 12 and 13) states that a court “shall confirm” an arbitration award absent a narrow menu of grounds that allows a judge to vacate, modify, or correct an award. Under the statute, an award can be vacated only if it was “procured by corruption, fraud or other undue means.”

The losing partner argued that to the extent his objection to the award is a claim that the arbitrator committed an error of law, he is entitled to have a court consider the merits of his claim because in the arbitration clause of the agreement, the parties specifically provided for judicial review of an award to determine whether there was a ‘material, gross and flagrant error’ by the arbitrator. The partner reasoned that arbitration is strictly a creature of contract, that the aim of the MAA is to enforce the parties’ contractual agreement to arbitrate, and that, therefore, the parties’ agreed-upon standard of judicial review should be enforced.

The SJC stated that …..“Although arbitration is a matter of contract, Commonwealth v. Philip Morris Inc., 448 Mass. 836, 843 (2007), we disagree that parties, through contract, may modify the scope of judicial review that is set out in §§12 and 13 of the MAA. As previously stated, the directive of G.L.c. 251, §11, is that a court ‘shall confirm’ an award unless grounds for vacating it pursuant to §§12 and 13 are shown; this statutory language ‘carries no hint of flexibility.’ See Hall St. Assocs., L.L.C. v. Matell, Inc., 552 U.S. 576, 587 (2008) (Hall St.). …

“In addition to the language of the MAA, there are strong policy considerations that support limiting the scope of judicial review to the statutorily defined ‘egregious departures from the parties’ agreed-upon arbitration,’ Hall St., 552 U.S. at 586, that are listed in G.L.c. 251, §§12 and 13. Allowing parties to expand the grounds for judicial review would ‘undermine the predictability, certainty, and effectiveness of the arbitral forum that has been voluntarily chosen by the parties’ (citation omitted). … If parties were able to redefine by contract language the scope of what a court was to review with respect to every arbitration award, it would spawn potentially complex and lengthy case-within-a-case litigation devoted to determining what the parties intended by the contractual language they chose. This is fundamentally contrary to the intent and purpose of our arbitration statute. The policy of limited judicial review preserves arbitration as an expeditious and reliable alternative to litigation for commercial disputes. …”

Given that arbitration is designed to be prompt, more streamlined, and less expensive than a full-fledged lawsuit, the SJC’s decision is well founded, because to have ruled otherwise would frustrate the fundamental purpose and advantages of arbitration.
The 23-page decision is Katz, Nannis & Solomon, P.C., et al. v. Levine, et al., SJC-11902 March 9, 2016

Arbitration – Annuity Award Upheld

The SJC has ruled that where an arbitration panel awarded a petitioner $1.24 million, the award should be confirmed despite the respondents’ contention that the panel awarded damages that were neither claimed by the petitioner nor supported by the evidence, awarded damages in a manner and amount that was contrary to clear law, and denied the respondents a fair opportunity to obtain material evidence through discovery.

“… Put simply, a party seeking to overturn an arbitration award faces a very steep uphill climb; that is true even if the award is against the great weight of the evidence or otherwise unreasonable or wrongly decided. Respondents here have not satisfied that demanding legal standard. …

“In early 2010, petitioner accepted an early retirement buyout package from her employer Verizon, purchased a Prudential variable annuity through Rogers and Ausdal, and retired but later became dissatisfied with the annuity’s performance. …

“Respondents’ argument has two parts: first, they contend that the arbitrators awarded damages on a claim or issue not before the panel; and second, they contend that the panel’s damages calculation was contrary to controlling law. … The SJC stated ….“Here, the panel’s brief award, made without explanation or elaboration at the request of the parties, makes it difficult (if not impossible) to determine the reasons for the specific amount the panel awarded to Rogers. However, as respondents themselves note, the panel ‘could have reached the damage award of $1,240,000 [by assuming] Ms. Rogers would not have retired at age 49 ½ and would have worked to age 65 (15 ½ more years) and would earn $80,000 per year in each of those years.’ … The question, then, is whether Rogers presented such a claim to the arbitration panel. The record demonstrates that she did so, or at least in a manner sufficient to satisfy the applicable standard. …

“Respondents’ second contention under §10(a)(4) is that the panel exceeded its powers by awarding a damages amount that was contrary to controlling law. Specifically, respondents contend that the panel failed to reduce the damages award to present value, and failed to adjust the damages to take into account Rogers’s duty to mitigate damages by working elsewhere.

“It is well-established that arbitrators are not generally required to give the reasoning behind an award. … Although the panel may have arrived at the number awarded simply by estimating Rogers’s lost future earnings, without more, it is also possible that the panel employed a different methodology. …

“Ultimately, the question before the Court is not whether the arbitrators made the correct decision, or even whether the arbitrators were rational or fair. Instead, it is whether the arbitrators had the authority to decide as they did. … Respondents’ own customer agreement specifically empowered the panel to hear ‘any controversy’ between Rogers and respondents. … Respondents have raised serious questions about the reasonableness and fairness of the award, but they have not demonstrated that the panel exceeded its legal powers. …

“Respondents’ primary contention that §10(a)(3) was violated centers on the panel’s denial of respondents’ request to issue subpoenas to non-parties, including Verizon. …

“Here, the panel may well have acted unfairly. It appears that the chair denied respondents the right to obtain the Verizon information, then concluded that the same information ‘seems to be important.’ Presumably, the panel could not and did not take that information into account, as it was not part of the record. However, the panel was acting within its legal authority when it reviewed and denied respondents’ requests for subpoenas and this Court is without the power to vacate the award on that basis. …

“Respondents further challenge the award under §10(a)(2) on the ground that the panel displayed evident partiality towards Rogers and against respondents. …

“In effect, respondents ask the Court to infer partiality not from the existence of undisclosed bias or facts indicating an improper motive on the part of the panel, but from the panel’s award of damages. Respondents have not submitted any facts demonstrating that the alleged ‘partiality’ was based on anything other than the facts and argument presented by the parties. Thus, a reasonable person certainly would not have to conclude that the panel was partial to Rogers.”

Rogers v. Ausdal Financial Partners, Inc., et al. (16 pages) (Saylor, J.) (USDC) (Civil Action No. 15-12899-FDS) (March 9, 2016).

Arbitration – Counsel fees/Contingent fee agreement

Where a plaintiff corporation contends that its application to vacate an arbitration award on the ground that the arbitrator erred in awarding counsel fees was improperly dismissed by a Superior Court judge, that contention must fail in light of the reimbursement provision in the parties’ cooperation agreement to “co-develop” solar energy projects.

“… [Plaintiff] ACE challenges the award of attorney’s fees to [defendant] The Real Thing, LLC, (TRT) for two reasons. First, ACE contends the arbitrator exceeded his authority in awarding attorney’s fees to TRT based on the lodestar methodology rather than on a contingent fee basis. Second, ACE contends that the arbitrator erred in failing to grant it a continuance to file its response to TRT’s attorney’s fee filing. …

“… ACE’s argument that the arbitrator exceeded his authority is based on the arbitrator’s interpretation of the underlying contract provision, specifically the use of the word ‘reimbursement’ in the phrase ‘shall award reimbursement of attorneys’ fees.’ Ace contends that the use of ‘reimbursement’ restricted the arbitrator to use of the contingent fee agreement as a ceiling to the amount of attorney’s fees that could be awarded, and that by using the lodestar method, the arbitrator exceeded his authority.

“However, even if we agreed with ACE’s interpretation of ‘reimbursement,’ we cannot overrule an arbitrator solely because ‘we give a contract a different interpretation.’ … It is clear that the arbitrator acted within the authority conferred on him, as ‘reimbursement’ is not a clear and plain limiting word with no room for interpretation.

“An arbitrator deciding an attorney’s fee award should be made aware of a contingent fee agreement. See Winthrop Corp. v. Lowenthal, 29 Mass. App. Ct. 180, 186 (1990). TRT provided its contingent fee agreement to the arbitrator when it submitted its affidavit for attorney’s fees. However, even if the arbitrator erred in not considering the contingent fee agreement, it is not an error that we can correct. See Softkey, Inc. v. Useful Software, Inc., 52 Mass. App. Ct. 837, 840-841 (2001). ‘Assuming, without deciding, that Winthrop Corp. v. Lowenthal, supra, is not distinguishable, the arbitrator’s deviation from the holding in that case was at most an error of law, and therefore not subject to review.’ …

“TRT seeks an award of attorney’s fees associated with defending ACE’s appeal to this court. We note that ACE substantially raises the same issues that were raised before and answered by the Superior Court judge, essentially enumerating the arbitrator’s alleged errors. The arguments raised on appeal ‘were wholly insubstantial, frivolous and not advanced in good faith,’ G.L.c. 231, §6F, inserted by St. 1976, c. 233, §1, and TRT is entitled to an award of attorney’s fees and cost associated with defending ACE’s appeal. …”

American Capital Energy, Inc. v. The Real Thing, LLC (7 pages) (Appeals Court – Unpublished) (No. 15-P-327) (Feb. 19, 2016).