The Importance of Early Planning in Arbitration

June 10, 2019

One of the early strategic decisions that arbitrating parties must address is the form of award. That is, will the arbitrator or panel provide an explanation for the award, and if so, in what detail? The rules for AAA, JAMS, and FINRA arbitration all provide this flexibility. Some parties may, in the name of cost savings, feel inclined toward the option that requires the least amount of time spent on the actual construction of the award, i.e., a straight award with little or no explanation.

Quote from article: In NSB Advisors v. C.L. King, the Commercial Division reminds us to take care not to be frugal in deciding on the form of an award, for doing so may make an award effectively unreviewable.

NSB Advisors began as a dispute over NSB’s management of funds invested by C.L. King. After a series of losses in 2011 and 2012, C.L. King terminated its affiliation with NSB. Two FINRA arbitrations—one led by C.L.King, and a second led by NSB—were commenced. In the first arbitration, C.L.King obtained and confirmed a $13 million award, representing the margin balance owed to it by NSB’s managing member. Thereafter, in the second arbitration—and in seeming contradiction to the award in the first arbitration—NSB obtained a $1.75 million award against C.L. King. The parties did not request a reasoned award.

When NSB petitioned to confirm its arbitration award in the Commercial Division, C.L. King opposed, arguing that NSB failed to provide evidence to support its claims, and that the arbitration panel disregarded governing law. Under New York law, however, an arbitration award must be upheld when an arbitrator offers even a “barely colorable” justification for their decision. Because of this high standard, the Court could not find fault with NSB’s award as there was no decision that articulated the basis for the panel’s determination; therefore, any argument by C.L. King on the panel’s disregard of the law was mere unsupported conjecture. (NSB also failed to provide the Court with a complete record of the arbitration, further inhibiting the Court’s review.) Under these circumstances, C.L. King was incapable of demonstrating that the panel lacked a colorable justification for its decision, and the Court confirmed NSB’s award.

Quote from article over stock photo of courthouse: NSB Advisors is a good reminder of the deference paid to arbitrators when confirming awards

NSB Advisors is a good reminder of the deference paid to arbitrators when confirming awards, the burdens of proof at the confirmation stage, and the part a reasoned or explained award plays in the confirmation process. Opposing confirmation of an arbitration award is challenging in New York; without the explanatory rationale, a party opposing the confirmation of an arbitration award will, many times, find that burden insurmountable.

Therefore, when negotiating the contours of an arbitration, take care to consider whether your client may benefit from judicial review of the resulting award (or effectively insulating that award from judicial review) when deciding on its form. The cost of the panel’s time in preparing a reasoned or explained award should rarely be the primary consideration.

[1] NSB Advisors, LLC v. C.L. King & Assoc., Inc., 2018 NY Slip OP 51473 (U) (Sup. Ct. New York County Oct. 2, 2018).

If you have questions concerning this topic or would like to discuss in further detail, please contact the authors, Jeffrey Harradine or Katerina Kramarchyk.

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