In two decisions this week, courts consider whether arbitration awards can be violated based on arbitrators’ decisions to exclude evidence. In both cases, the courts affirm an arbitrator’s authority to make reasonable evidentiary decisions — excluding hearsay and denying tardy subpoena requests — as long as those decisions do not deny a party a fair hearing.
In LJL 33rd Street Assocs. LLC v Pitcairn Props. Inc., __ F.3d __, 2013 WL 3927615 (2d Cir. July 31, 2013), a dispute over the valuation of a luxury high-rise in NYC, the arbitrator excluded four exhibits. All four contained valuations by entities or individuals who were not called as witnesses in the hearing. The federal district court then vacated the arbitrator’s determination of value under Section 10(a)(3) of the FAA. It reasoned that, while the exhibits were hearsay, they should have been admitted and the objections should have gone to their evidentiary weight.
The Second Circuit reversed the vacatur with instructions to confirm the award. It noted that Section 10(a)(3) of the Federal Arbitration Act only allows vacatur of an award if arbitrators are “guilty of misconduct” in “refusing to hear evidence pertinent and material to the controversy.” To violate that standard, excluded evidence must impair the “fundamental fairness” of the proceeding. The court found this arbitration proceeding was fundamentally fair for two reasons. First, there was nothing preventing the complaining party from bringing live witnesses to authenticate the documents. And second, if the exhibits had been allowed, the other side would have been prejudiced by its inability to cross-examine the authors of those valuations.
In Doral Financial Corp. v. Garcia-Velez, __ F.3d __, 2013 WL 3927685 (1st Cir. July 31, 2013), the issue was the arbitrators’ decision not to issue subpoenas to a third party. In that employment dispute, the employer did not seek any subpoenas (or document requests) before the deadline in the scheduling order. Then, after the arbitration hearing had begun (but was on a recess), the employer requested the arbitrators issue subpoenas for documents and hearing testimony from a third party. The arbitrators denied the request as untimely, and later awarded the employee almost $2.5 million.
The employer moved to vacate the award under Section 10(a)(3), arguing that the denial of its subpoena request deprived it of a fair hearing. Both the district court and appellate court refused to vacate the award. With colorful language reminiscent of earlier arbitration decisions, the First Circuit described the employer as “cling[ing] like a limpet in the heaviest sea to the ‘fair hearing’ requirement subsumed in [Section] 10(a)(3).” The limpet’s ride was cut short by the fact that the employer had received both adequate notice of the schedule for requesting discovery and the opportunity to present relevant evidence and arguments (as well as continuances when requested). The court also noted that the employer had nothing but a hunch that the documents and testimony it sought woudl have yielded relevant information, declaring “[w]e cannot vacate an arbitral award based on sheer speculation alone.” [In confirming the arbitrator's grant of pre-award interest, the court closed its discussion with "To say more on this front would be to carry coals to Newcastle." What does that even mean??!]