Arbitral Award Confirmed Over Objection That Arbitrators Effectively Rewrote Force Majeure Clause

On March 27, 2023, Justice Margaret A. Chan of the New York County Commercial Division issued a decision in GFK US MRI, LLC v. LHK Partners, Inc., 2023 NY Slip Op 30969(U), confirming an arbitral award over an objection that the arbitration panel violated public policy, relied on a force majeure clause not addressed by the parties, and effectively rewrote the parties' force majeure clause, explaining:

As the purpose of arbitration is to allow final and binding resolution of the parties' claims without resorting to the courts, "lt is a bedrock principle of arbitration law that the scope of judicial review of an arbitration proceeding is extremely limited" (Frankel v Sardis, 76 AD3d 136, 139, 904 N.Y.S.2d 18 [1st Dept 2010]). Accordingly, an award will not be vacated "unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on the arbitrator's power" [*5] (id.). Courts defer to the arbitrator's decision "even if the arbitrator misapplied the substantive law in the area of the contract" (In re NYC Tr. Auth., 6 NY3d 332, 336 [2005]; see also Silverman v Benmor Coats, Inc., 61 NY2d 299, 308, 461 N.E.2d 1261, 473 N.Y.S.2d 774 [1984] [the arbitrator "may do justice as he sees it, applying his own sense of law and equity to the facts as he finds them to be and making an award reflecting the spirit rather than the letter of the agreement, even though the award exceeds the remedy requested by the parties"]).

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The Panel also did not rewrite the force majeure clause to defy the Agreement's requirement that, to invoke the force majeure clause, LHK must "immediately notify" GfK and "describe in reasonable detail the nature of such event" (Agreement, § 1.6). As the Panel found that the [*7] parties were in continual close contact about the pandemic's impact on the interviews (Award, ¶¶ 85-86), the Panel did not exceed its power in concluding that the notice requirement was met (cf. Bd. of Educ. of N. Babylon Union Free Sch. Dist. v N. Babylon Teachers' Org., 104 AD2d 594, 597, 479 N.Y.S.2d 536 [2d Dept 1984] [vacating the award as the arbitrator rewrote the agreement by adding a new provision not negotiated by the parties]).

As discussed above, the Panel did not construe the parties' agreements in a "completely irrational" way since it appropriately considered the force majeure clause in interpreting the intent of the parties and applying §§ 11.4 and 7.1 of the SOW. For the same reason, the Award is not vacated under the Federal Arbitration Act on the ground that the Panel exceeded its powers (9 USC § 10[a]).

GfK next argues that vacatur is warranted since the Award is punitive in nature and violates public policy. In particular, GfK argues that § 11.4 of the SOW is a schedule for liquidated damages, and to award damages based on it would amount to imposing an unenforceable penalty.

Under New York law, a contractual provision fixing damages in the event of breach will not be enforceable if the amount liquidated is "plainly or grossly disproportionate to the probable loss" since the provision "calls for a penalty" (JMD Holding Corp. v Congress Fin. Corp., 4 NY3d 373, 828 N.E.2d 604, 795 N.Y.S.2d 502 [2005], quoting Truck Rent-A-Ctr. v Puritan Farms 2nd, Inc., 41 NY2d 420, 425, 361 N.E.2d 1015, 393 N.Y.S.2d 365 [1977]). In this [*8] case, the Panel found that the provision is not punitive because "SOW Section 11.4 only pays out a percentage of the Core Costs each month, and the total payments will not exceed the contractual amount for the Wave" (Award, ¶ 74). Also, the Panel found that the parties' § 11.4 payment schedule was appropriate as it was designed "to reasonably track LHK's losses depending on when GfK cancelled or terminated" and "to protect LHK from loss of its sole customer" (id., ¶¶ 74-75). The Panel further noted that "[a]t the time of contracting, LHK's actual losses were not readily calculable because untangling the costs of one wave from another could be impossible or require a forensic accounting" (id., ¶ 74). As such, the Panel properly found that § 11.4 is reasonable and not punitive, and the monetary damages awarded in accordance with the payment schedule in § 11.4 did not violate public policy.

As this case shows, a court's review of an arbitral award is very limited, and an arbitrator's merely getting the law wrong or reaching an incorrect result is generally insufficient to vacate an arbitral award. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions about confirming or vacating an arbitral award.