Northstar Mech., Inc. v JCH Delta Contr., Inc.

[*1] Northstar Mech., Inc. v JCH Delta Contr., Inc. 2009 NY Slip Op 51470(U) [24 Misc 3d 1216(A)] Decided on June 4, 2009 Supreme Court, New York County Sherwood, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on June 4, 2009
Supreme Court, New York County

Northstar Mechanical, Inc., Petitioner,

against

JCH Delta Contracting, Inc., Respondent.



100893/2009



Robert M. Milner, Esq. of Robinson Brog

Leinwand Greene Genovese & Gluck, PC for petitioner

Mark A. Rosen, Esq. of McElroy, Deutsch, Mulvaney & Carpenter, LLP forrespondent

O. Peter Sherwood, J.

Petitioner, Northstar Mechanical, Inc., ("Northstar") commenced this proceeding pursuant to CPLR Article 75, to confirm an arbitration award rendered pursuant to the procedures set forth in the Construction Industry Arbitration Rules ("CIA Rules") of the American Arbitration Association ("AAA"). Northstar and respondent, JCH Delta Contracting, Inc. ("Delta"), are parties to a construction subcontract (the "Subcontract") to replace the heating, ventilation and air conditioning system at the United States Post Office-Morgan Station on the Westside of Manhattan.The Subcontract contains a broad arbitration clause which states in relevant part that:

[A]ny controversy or claim arising out of or relating to this contract, or any breach thereof, shall be settled in accordance with the Construction Industry Arbitration rules of the American Arbitration Association and judgment upon the award may be entered in any court having jurisdiction thereof.

During the course of the work, Northstar commenced an arbitration proceeding pursuant to the terms of the Subcontract. Thereafter, Northstar was terminated from the job by Delta. In the arbitration hearing, Delta filed a counterclaim against Northstar for damages and the costs of completing the work.

The arbitration proceeding which was held before a single arbitrator, Richard Callahan, continued for approximately thirteen months, consumed 25 hearing days and produced a 5,000 page transcript of the live testimony and hundreds of exhibits. After all the testimony was received but before post-hearing briefs were due to be submitted, arbitrator Callahan died. Subsequently, the AAA appointed a new arbitrator, Charles N. Guiliana, in accordance with the CIA Rules.

The parties disputed before the AAA how the matter should proceed before the new arbitrator. Northstar urged that the case be decided on the existing record. Delta demanded a de novo hearing. AAA referred the issue to arbitrator Guiliana. He held a hearing, considered briefs and arguments submitted by the parties and rendered a an "Interim Ruling" which is fifteen pages [*2]in length. He determined that the evidentiary record would be reopened and that the record before arbitrator Callahan would constitute the "Official Record" before him. He also reserved up to ten (10) days for "Supplemental Evidentiary Hearings" to address discrete issues he would identify. Thereafter, he reviewed the Official Record and identified a list of fact and legal issues regarding which the parties were asked to submit supplemental briefs. Although the parties were accorded the opportunity to present evidence at the Supplemental Evidentiary Hearings, it was agreed that such Hearings were not necessary. None were conducted.

On or about December 1, 2008, the arbitrator issued an Interim Memorandum and Award

("Interim Award"). He held that Delta was justified in terminating Northstar and that under the provisions of the Subcontract, Northstar was entitled to be paid for the work that it had performed. He also held that Delta was entitled to an offset for those completion costs the arbitrator determined were appropriate. The result was a net amount owed to Northstar. Because both parties requested an award of attorney fees, the arbitrator made a determination of a "prevailing party" and declared that Northstar was the prevailing party. He awarded it the sum of $477,944 plus interest at the rate of 9% from December 31, 2005 together with all administrative fees of the AAA and compensation of the arbitrator. He declined to award attorney fees. Thereafter, on December 17, 2008, the arbitrator rendered his Final Award which included all of the foregoing.

Subsequently, Delta's counsel wrote to the arbitrator to request modification of the Final Award based on four grounds, all of which it has re-asserted in this proceeding. The arbitrator denied the request in a written decision dated January 14, 2009, entitled "Disposition of Application for Modification of Award" ("Modification Decision").

Northstar filed this petition seeking to confirm the award. Delta then filed a cross-petition and now moves for an order pursuant to CPLR 7510 vacating or modifying the award. Delta asserts (1) that the arbitrator improperly ruled that a de novo hearing was not required, (2) that the arbitrator failed to provide a reasoned award as to damages, (3) that the award contains a calculation error in the amount of $83,750, (4) that the arbitrator failed to award it an allowance for overhead and profit as required by Article 9 of the Subcontract and (5) that the application of the incorrect measure of damages amounted to a manifest disregard of the law.

DISCUSSION

Whether reviewed pursuant to New York (CPLR Article 75) or Federal (Federal Arbitration Act ["FAA"], 9 USC §1, et sec) law, it is well settled that judicial review of arbitration awards is extremely limited (see e.g. Wien & Malkin, LLP v. Helmsley - Spear, Inc., 6 NY3d 471, 479 [2006]). The burden of vacating an arbitration award is on the party seeking to vacate it (see, e.g. Hoeft v. MVL Group, Inc, 343 F.3d 57 [2d Cir 2003]).

Consistent with New York's strong public policy favoring arbitration and discouraging judicial interference with arbitration awards (see Smith Barney Shearson Inc. v. Sacharow, 91 NY2d 39, 666 N.Y.S.2d 990 [1997], and Merrill Lynch Pierce Fenner & Smith Inc. v. Benjamin, 1 AD3d 39, 766N.Y.S.3d 1 [1st Dept. 2003]), the grounds specified in CPLR 7511 for vacating or modifying an arbitration award are few in number and are narrowly applied (see Alexander, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C7511:2, at 771-2; Goldfinger v. Lisker, 68 NY2d 225, 230 [1986] and Azrielant v. Azrielant, 301 A.D2d 269, 275 [1st Dept 2002]).

Under the CPLR, an arbitration award may be vacated "only if a party's rights were prejudiced by corruption, fraud or misconduct (CPLR §7511 [b][I] bias [b][ii], excess of power [*3][b][iii], or procedural defects [b][iv])" (Azrielant v. Azrielant, supra at 275). Similarly, the FAA permits vacatur of an arbitration award on four grounds which all involve fraud, corruption or misconduct (see Wallace v. Buttar, 378 F.3d 182, 188 [2d Cir 2004]).[FN1] In addition, an award may be vacated if the court finds that it exhibits a "manifest disregard of the law". This standard "gives extreme deference to arbitrators" and the occasions for vacating awards on this ground are appropriately "rare" (see Duferco Intl Steel Trading v. T. Klaveness Shipping S/A, 333 F.3d 383, 389 [2d Cir 2003]). To vacate an award on this ground, a court must find "both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrator was well defined, explicit and clearly applicable to the case" (Wallace, 378 F.3d at 189).

The arbitrator's findings in this case are well reasoned and rational. He did not exceed the limits of his powers. Respondent has not met the stringent test required to permit vacating the award based on a manifest disregard of the law standard.

1. De Novo Hearing

On its cross-petition, Delta renews its contention that pursuant to CPLR 7506(c), it is entitled to a full de novo hearing before the new arbitrator. Northstar opposes this claim, citing both New York and Federal caselaw. The Subcontract itself does not provide for the law governing the rules for arbitration. Absent such a choice-of-law clause in the arbitration provision of the Subcontract, the default presumption is that the FAA, not New York law, supplies the procedural rules for arbitration (see Martin Domke, Domke on Commercial Arbitration §30:1[3d ed 2008]). Nevertheless, the court will review the decision of the arbitrator denying Delta's request for a de novo hearing in light of both the FAA and New York law.

Delta argues that when a member of a three-person panel dies before rendering an award and the arbitration agreement does not anticipate that circumstance, the arbitration must commence anew with a full panel (see, e.g. Marine Products Export Corp. v M.T. Global Galaxy, 977 F 2d 66 [2d Cir 1992] and Fromer Foods, Inc. v Edelstein Foods, Inc, 14 Misc 2d 1048 [Sup Ct Bronx County 1958]). It maintains that the same rule should apply here even though the arbitration is conducted before a single arbitrator.[FN2]

CPLR §7506(c) itself guarantees only certain minimums of procedural due process: the right to be heard, to present evidence and to cross-examine witnesses. The statute is not intended to vitiate the well established principle that arbitrators are not bound by the rules of evidence and procedure that apply in judicial proceedings (see Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, C7506:2, p. 699).

In an arbitration before a three-person panel, the general rule is that "where one member of a three-person arbitration panel dies before the rendering of an award and the arbitration agreement [*4]does not anticipate that circumstance, the arbitration must commence anew with a full panel," (Marine Products Export Corp., 977 F.2d at 66). The parties have not identified any case - and the court has found none - that address how an arbitration is to be administered following the death of a neutral, one-person arbitration panel after completion of evidentiary hearings and before issuance of an award. The unfortunate facts that gave rise to the issue in this case occur rarely and may explain why the arbitrator observed that the question is one of first impression.

There are "special circumstances" that may be cause for applying exceptions to the general rule quoted above (see Marine Products Export Corp., 977 F.2d at 68). Any inquiry into whether or not there are special circumstances requires a review of the facts of the arbitration. The conduct of the prior hearings, the status of the arbitrators on the panel and the applicable rules of the tribunal administrating the administration, are all important factors to be considered as the cases discussed below illustrate.

In Trade & Transport, Inc. v. Natural Petroleum Charterers Inc., 931 F2d 191 (2d Cir 1991), the Second Circuit departed from the general rule where upon a request of the parties for a bifurcated decision, the original three-person arbitration panel had rendered a final decision as to liability, but had not rendered an award as to damage when a member of the panel died. The court held that there was no need to re-visit the issue of liability because the arbitration panel had conclusively decided every point required on the issue. Also, in Czarnikow-Rionda Co, Inc v. Buenamara Compania NA, 1986 US Dist LEXIS 20284*19 (SDNY Sept 17, 1986), the court refused to set aside an arbitration award signed by two arbitrators where the final award "recite[d] that the unanimous...decisions were reached in joint deliberations between all three members' of the panel before [the third arbitrator] died." The court rejected as speculative the argument that the arbitration should start anew before a three-person panel because the deceased arbitrator might have changed his mind and convinced the balance of the panel before the final award was issued. In Kern v. Excelsior 57th Corp., 270 AD2d 25 (1st Dept 2000), the court held that where a party designated arbitrator died after conclusion of the hearing but prior to rendering of the final award, the arbitration need not be commenced de novo before an entirely new panel. Applying CPLR §7504, the court ruled that the circumstances constitutes an "inability to act and permits appointment of a successor" by the court. Further, in Matter of Bernstein v. On-Line Software Int'l, 232 AD2d 336 (1st Dept 1996), the Appellate Division, First Department, held based on the CIA Rules, R-20, that the remaining members of a three-member panel of neutral arbitrators properly continued with the damages phase of an arbitration after resignation of one of the arbitrators.

Arbitrator Guiliana described his understanding of the rationale for the "general rule". He noted that in each case where the "general rule" was applied and a de novo hearing before a new panel was required, the court's rationale for ordering a de novo hearing hinged on the importance of the absent party arbitrator's role on the panel as an "advocate". Interim Ruling at 10. After reviewing the cases, he concluded that the circumstances present in those cases are absent in this case. He found that there were no facts to suggest that there would be any undue influence on him, as the deceased arbitrator was a single, neutral arbitrator. As an extra precaution however, and to avoid any hint of undue influence, the arbitrator directed that the notes of the deceased arbitrator be excluded from the official record and did not consider them.

CIA de Navegacion Onasil S.A. v. Hugo New Corp., 359 F. Supp 898 (S.D.N.Y 1973) and Fromer Foods, Inc., 14 Misc 2d at 1048 which the arbitrator analyzed and on which Delta relies [*5]here, both involved the death of a party appointed arbitrator where the resulting vacancy deprived the complaining party of the arbitrator who could have been seen as its "advocate." In CIA de Navegacion Onasil S.A., a case brought pursuant to the FAA, the court explained that the death of "respondent's arbitrator (who the court described as "an amalgam of judge and advocate") after the hearing was finally concluded and before a decision was rendered, required that the arbitration start anew before an entirely new panel because there were "weighty objections to having the charter's [replacement] arbitrator join the deliberations after a series of hearings and meetings have transpired without him, [the other two arbitrator's having] worked together and been exposed to each other's influence" id at 899. Thus the status of a party appointed arbitrator on the panel and his role as an advocate required that following the departure of that arbitrator, the process begin anew before a new panel in order to give both parties equal opportunity to influence the process. In Fromer Foods, Inc., the court refused to confirm an award by two arbitrators following the death of the third arbitrator who had been selected by respondent. The arbitrator died before post hearing briefs were filed. Citing Matter of American Eagle Fire Ins. Co. v. New Jersey Ins. Co., 240 NY 398 (1925), the court held that although an award by two arbitrators is binding even though a third withdraws before the award is rendered, this is not so when one of the arbitrators dies after the hearing but before the decision has been rendered. This court disagrees. The decision of the Court of Appeals does not mandate that result. In American Eagle Fire Ins. Co., the Court of Appeals observed that the Civil Practice Act (now CPLR) altered the common law concerning arbitration to provide that all arbitrators are required to hear all the proofs. The Civil Practice Act did not require that all the arbitrators participate in making the award. All arbitrators must be given the opportunity to participate in the deliberations but the failure of an arbitrator who heard the proofs to participate will not render an otherwise valid decision a nullity. The Court of Appeals did not address the narrow question of whether and under what circumstances two arbitrators may render a decision where the third arbitrator dies after all the evidence has been received and prior to rendering a decision.The arbitrator's reasoning provides a sufficient basis for confirmation of his decision to deny Delta's application for a de novo hearing. The decision is not irrational. Moreover, there are other, independent grounds for confirming the interim ruling.

CIA Rules, R- 20(c) grants the new arbitrator complete discretion to determine whether it is necessary to repeat all or part of any prior hearing. It states that:

"[i]n the event of the appointment of a substitute arbitrator, the panel of arbitrators shall determine in its sole discretion whether it is necessary to repeat all or part of any prior hearings."

Exercising these powers, the new arbitrator determined not to start anew but instead to review the extensive record consisting of a 5,000 page transcript of the hearing and hundreds of exhibits, to order submission of supplemental briefs and to give the parties the opportunity to supplement the record through additional hearings. The parties elected not to present additional evidence.

The CIA Rules are incorporated in the contract and are properly the subject of interpretation by the arbitrator (see, e.g. Bernstein, 237 AD2d at 337). The arbitrator's interpretation of the contract is entitled to substantial deference and his decision must be upheld if there is only a barely colorable justification for the outcome reached (see Yusuf Ahmed Alghanim & Sons v. Toys-R-Us, Inc, 126 F3d 15, 23 [2d Cir 1997]). As long as the arbitrator is even arguably construing the contract and acting within his authority, a court may not overturn his decision even if it is convinced that he [*6]committed serious error (see Lead Architectural Products v. United States Steelworkers of America, 916 F2d 63, 65 [2d Cir 1990] and Elul Dimonds Co. Ltd. v. Z Kor Diamonds, Inc., 50 AD3d 293 [1st Dept 2008]). Delta has failed to show that the arbitrator's award should not be accorded the substantial deference due it.

2. Damages Award

Arbitrators are not required to state the reasons for their award (see Wall Street Assocs., L.P. v. Becker Paribas, Inc., 27 F.3d 845, 849 [2d Cir 1994]). Generally, arbitrators have no obligation to disclose the facts or reasons behind their awards (see Bernhardt v. Polygraphic Co. of Amer., 350 U.S. 198, 203 [1956]). The CIA Rules do not require that the arbitrator provide findings and conclusions when rendering an award (see CIA Rules, R-43). They require only that he or she provide "a concise, written breakdown of the award" and that the award be signed, unless the parties request a written award prior to appointment of the arbitrator (see id). Delta has not established compliance with this predicate. The parties are entitled to no more than "a concise written breakdown of the award."

Even if one were to assume that the arbitrator in this case was required to render his decision in the form of a "reasoned award," the Interim Award he issued is sufficient. The arbitrator's reasons for the award are set forth in a twenty-nine page "Interim Award Memorandum". Although it lacks the level of detail one might expect in a "findings and conclusions" form of award, the Interim Award provides well reasoned grounds for the determination made.

This is a breach of contract case. The arbitrator found that Northstar breached the Subcontract. Applying Article 9 of the Subcontract as he interpreted it, the arbitrator reimbursed Delta "for those damages that are the difference between what they would have paid absent the breach, and what they paid to find replacement performance as a result of the breach" (Final Award at p. 25). The arbitrator took Delta's "Cost-to-Complete" tabulation, adjusted it based on his determination as to whether or not the work proven was under the Subcontract and credited Northstar for certain extra work performed prior to termination (see id). He then gave Northstar credit for payments owed it under the Subcontract. He did not specifically identify which of the "23 separate, distinct elements" (Delta's Memorandum of Law at p.8) of Delta's Cost-to-Complete claim were allowed or disallowed. In a reasoned decision form of award, the arbitrator is not required to do so.

The arbitrator awarded Delta a Cost-to-Complete credit of $1,090,578.12, less than the $1,685,510.67 demanded. The arbitrator stated the basis for the lower amount awarded. It reflected the failure of Delta's witnesses to adequately support the claim and the fact that several of the categories of damages claimed were inappropriately assessed against Northstar. The arbitrator specifically found that the claimed allocation for "Home Office and Field Office Overhead" was unsupported. His decision is consistent with established legal precedent , (see Berley Industries, Inc. v. City of New York, 45 NY2d 603, 686-7 [1978]; Marishul Construction Corp. v. Dormitory Authority, 79 AD2d 383, 389 [1st Dept 1980][Plaintiff has the burden of proving there was in fact an increase in home office overhead]) and Article 9 of the Subcontract. The court cannot say that the arbitrator's interpretation of Article 9 of the Subcontract was either irrational or exhibited a manifest disregard of the law. Under the standards governing review of arbitral awards, the arbitrator's award must be confirmed. (see, e.g. Stolt-Nielsen, SA v. Animalfeeds Int'l Corp., 548 F.3d 85, 95 [2d Cir 2008]).

Regarding the "calculation error" involving an alleged failure to give Delta credit for a [*7]payment made to Northstar in the amount of $83,750.00, the arbitrator reviewed the issue anew following Delta's application for modification of the Final Award. In his Modification Decision the arbitrator stated that "there are no...computational errors in the Final Award." The court also notes that Northstar has shown that the credit was given (see Exhibit 4 at p.2 to Reply Affirmation of Robert M. Milner). The arbitrator's rulings will not be disturbed.

The arbitrator refused to award either party attorney fees but charged the fees and expenses of the AAA and the compensation of the arbitrator against Delta. Under CIA Rules, R-44, apportionment of these costs among the parties are "are in such amounts as the arbitrator determines is appropriate". The arbitrator awarded over 50% of the amounts claimed by Northstar and denied a substantial part of Delta's counterclaim. His award must be granted great deference (see Duferco, 333 F.3d at 388). This court will not disturb it.

Accordingly, the arbitration award will be confirmed. The cross-petition will be dismissed.It is hereby

ORDERED and ADJUDGED that the petition to confirm the arbitration award dated December 17, 2008 is granted, and it is further

ORDERED and ADJUDGED that the cross-petition is dismissed, and it is further

ORDERED and ADJUDGED that judgment shall enter in favor of petitioner, Northstar Mechanical, Inc., against respondent, JCH Delta Contracting, Inc., in the amount of (1) $477,944.01 plus pre-judgment interest at the rate of 9% from December 31, 2005; until the date of entry of judgment in the amount of $_______________; and (2) $100,442.00 plus interest at the rate of 9% from December 17, 2008 until the date of entry of judgment in the amount of $____________; and (3) costs of this proceeding as calculated by the clerk of the court.

This constitutes the decision, order and judgment of the court.

DATED: June 4, 2009

ENTER,

______________________________

O. PETER SHERWOOD

J.S.C. Footnotes

Footnote 1: These grounds are inapplicable here.

Footnote 2: Delta's demand for a de novo hearing was submitted to arbitrator Guiliana without objection. Accordingly, the threshold question of the authority of the arbitrator to decide this procedural issue is not before the court (see CPLR §7506[f]). In any event, the applicable AAA Rules provide ample authority for the question to be decided by the arbitrator (see AAA Rules, R-8[A][The arbitrator has full "power to rule on his...own jurisdiction"]).