On July 2, 2019, the First Department, in a unanimous decision written by Justice Dianne T. Renwick, reversed a decision of former Commercial Division Justice Eileen Bransten confirming an arbitration award.[i]  The First Department concluded that the arbitrator’s award of attorney’s fees was not in manifest disregard of New York law, but that the arbitrator did not have jurisdiction over counterclaims brought by a related-third-party pursuant to an agreement that did not contain an arbitration clause.[ii]   The opinion provides a helpful review of New York law regarding both the award of attorney’s fees in arbitration and on jurisdictional objections to arbitration.

Background

Mark Steyn and CRVT (also known as BlazeTV) entered into a binding term sheet to produce a television show.  Stern was obligated to deliver 200 shows a year, with his responsibilities to begin once a studio in Burlington, Vermont was completed.  The term sheet provided that the agreement was to be governed by New York law, and that any unresolved disputes were to be settled by “confidential binding agreement in accordance with the Federal arbitration act” and “rules of the American Arbitration Association (AAA) applicable to general commercial disputes.”[iii]

A separate letter-memorandum agreement between OHM and CRTV provided that OHM, an entity related to Steyn, was to be retained to provide services to Steyn.  In that agreement, OHM agreed to procure guests for the show and hire certain third-party service providers like makeup artists and public relations firms.  The letter-memorandum agreement did not include an arbitration clause.[iv]

In February 2017, CRTV decided to cancel the show allegedly because of poor performance by Steyn.  Steyn countered that he performed his obligations under the term sheet and that “extraordinary personnel problems, construction delays, and technical shortcomings in the Steyn studio largely prevented content production.”  CRTV served Steyn with a demand to arbitrate.  Steyn and OHM served an answering statement and counterclaims, including counterclaims by OHM for breach of contract and requests for punitive damages and attorney’s fees.  CRTV answered the counterclaim, denying the allegations and seeking dismissal and an award of attorney’s fees and costs.  Thereafter, Steyn filed a second amended answer and counterclaim, which also sought attorney’s fees.  CRTV answered by again requesting attorney’s fees.[v]

Prior to the arbitration hearing, CRTV objected to the arbitrator’s jurisdiction over the OHM counterclaims.  Despite making this objection, CRTV proceeded to arbitration and defended against the objected-to OHM claims, as well as Steyn’s claims.  Ultimately, the arbitrator found in OHM’s and Steyn’s favor and awarded each of them damages and attorney’s fees.[vi]

Steyn and OHM initiated an Article 75 proceeding to confirm the awards in their favor against CRTV.  Initially, the Commercial Division Court determined that the award of attorney’s fees was appropriate because both parties had requested fees in their pleadings.  On a motion for re-argument, however, the court determined that a boilerplate demand for attorney’s fees in an arbitration demand and other arbitration pleadings was not sufficient evidence of the party’s intent to waive the traditional American rule on attorney’s fees.  The court also confirmed the arbitrator’s determination that it had jurisdiction to hear OHM’s counterclaims, as well as the damages awards to OHM and Steyn.[vii]

Attorney’s Fees

On appeal, Justice Renwick of the First Department explained that the only basis on which a New York court may review the merits of an arbitration award is if the decision is in manifest disregard of the law.  Under the “manifest disregard of law” standard, the court must make 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.”[viii]  In fact, “[a] court may not vacate an arbitration award because it thinks the arbitrators made the wrong decision . . .  Indeed, even if the court thinks the arbitrator reached the wrong result or applied the law incorrectly, the court should nevertheless confirm the award.”[ix]

The First Department explained that the question of whether the arbitrator manifestly disregarded the law in this case centered on whether New York law on attorney’s fees controlled over the AAA’s Commercial Arbitration Rules.  Under New York law, arbitrators are only permitted to award attorney’s 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 for such an award.”[x] 

In this case, it was clear that no statute provided for an award of attorney’s fees, nor were legal fees authorized by an express provision in the governing agreement.  Moreover, prior New York case law held that “boilerplate requests” in arbitration demands did not satisfy the “unmistakably clear” standard.[xi]  However, the First Department held that it was not unreasonable for the arbitrator to conclude that the “unmistakably clear intent” requirement did not apply here.  Indeed, Justice Renwick noted that it appeared that the arbitrator believed that standard did not apply because the parties had incorporated the AAA rules into their agreement, and Rule 47(d) of the AAA’s Commercial Arbitration Rules provides that an award of attorney’s fees may be made “if all parties have requested such an award.”[xii] 

The First Department rejected CRTV’s argument that the agreement’s New York choice of law clause barred attorney’s fees that were permitted under AAA rules.  In reaching this conclusion, the First Department considered prior precedent dictating that an arbitrator may award punitive damages in accordance with AAA rules even though a New York choice of law provision would preclude punitive damages for a contract claim.  Applying that precedent to the issue of attorney’s fees, the First Department specifically ruled that “although attorney’s fees are generally barred under New York law . . . they are not barred in an arbitration when the agreement contains a New York choice of law provision,” assuming that the applicable arbitration rules provide for attorney’s fees.[xiii]

Lack of Jurisdiction to Arbitrate OHM’s Counterclaims

As Justice Renwick observed, the question of whether the parties have submitted a particular dispute to arbitration is for judicial determination, unless the parties clearly and unmistakably provide otherwise in a contract or other agreement.  The First Department further noted that a party cannot be forced to arbitrate a dispute that it did not specifically agree to submit to arbitration.[xiv]

The First Department rejected OHM’s argument that CRTV’s appearance at the arbitration after making its arbitrability objection operated as a waiver of the objection.  In doing so, the First Department held that asserting an objection to jurisdiction is sufficient to preserve that objection for judicial review.[xv]  Put differently, “a party does not have to try to enjoin or stay an arbitration proceeding in order to preserve its objection to jurisdiction.”[xvi]

Justice Renwick also rejected OHM’s argument that the term sheet incorporating the AAA rules left the question of arbitrability to the arbitrator.  This position was rejected as there was no dispute that OHM was not a party to the term sheet and therefore was not entitled to invoke it.[xvii]

Finally, the First Department determined that the issues between OHM and CRTV were not “so intertwined with those between CRTV and Steyn, such that CRTV would be estopped from avoiding arbitration.”   The First Department reached this conclusion because although the “letter agreement arose” in connection the “work created by the Term Sheet[,]  [t]he Term Sheet did not depend upon the viability of the OHM letter agreement in anyway.”[xviii]  Accordingly, the First Department concluded that the arbitrator did not have jurisdiction to adjudicate the claims that OHM asserted against CRTV.

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The First Department’s decision on legal fees confirms the broad latitude enjoyed by arbitrators in fashioning awards, particularly in awarding legal fees.  In contrast, the decision also makes clear that where a party has not agreed to arbitrate, the New York courts will exercise their power to vacate an award rendered against a party who has not agreed to arbitrate.