In State Court It’s Just as Tough to Vacate an Arbitration Award

Tug of War

Most commercial arbitrations fall under the Federal Arbitration Act.  But some arbitrations are intra-state so they come within the various state arbitration laws.  In New York, for example, Article 75 of the Civil Practice Law and Rules governs arbitration.  When it comes to vacating an arbitration award, however, choosing state law over the FAA is no walk in the park.  In fact, in a recent ruling, a New York appellate court shows how equally difficult it is to overturn an arbitration award under state law.

In In re McKenna, Long & Aldridge, LLP v. Ironshore Specialty Insurance Co., No. 65140717 (N.Y. App. Div., 1st Dep’t Oct.17, 2019), petitions to vacate a final arbitration award in favor of an insurer were denied by the motion court and affirmed on appeal.  The parties seeking to vacate the award argued that the arbitration panel exceeded its authority in making the award or issued the award in manifest disregard of the law.  In affirming the denial of the petitions to vacate, the court stated that the language of the arbitration clause referring to “any controversy, claim or dispute arising in connection with [the insurance] policy” reflects “such a broad grant of power to the arbitrators as to evidence the parties’ clear intent to arbitrate issues of arbitrability.”

While hard to tell from this opinion, it appears that one of the parties, who was held by a federal court to be an intended third-party beneficiary of the insurance policy, argued that it could not be compelled to arbitrate.  The panel’s final award clearly affected that party, which is why the petition to vacate was filed.  In affirming, the appellate court upheld the arbitrators’ decision to rule on whether that party was subject to the arbitration clause in the policy based on the broad arbitration provision.

As to manifest disregard of the law, this ground has been severely limited by the U.S. Supreme Court under the FAA.  In this case, the court held that the petitioners failed to show that the arbitration panel knew of a governing legal principle that was well-defined, explicit and clearly applicable, yet refused to apply it or ignored it altogether.  The court found that the arbitration panel carefully considered the operative language in the relevant agreements and the law before reaching its conclusions.  For example, the court found that contrary to the arguments, the panel considered the applicability of Delaware law and a specific case and distinguished the case, concluding that it was not applicable.  Notably, and consistent with cases under the FAA, the court concluded that the panel’s determination, at worst, was a mistake of law, which does not constitute manifest disregard and is not a ground for vacating an arbitration award.

As an aside, this arbitration is the type of dispute that is perfect for the new ARIAS·U.S. PANEL RULES FOR THE RESOLUTION OF INSURANCE AND CONTRACT DISPUTES.  Check them out.

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