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Posted: November 19, 2014

Court Rejects Arbitral Award

On November 7, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Matter of Kleinbart (Build Green Solutions LLC), 2014 NY Slip Op. 51599(U), granting a motion to reject an arbitral decision.

In Matter of Kleinbart, the court denied a motion to confirm an arbitral award and instead granted a motion to reject the award. As an initial matter, the court rejected the argument that the arbitration agreement was not valid:

An arbitration award may be vacated only upon the grounds enumerated in CPLR 7511 (b). CPLR 7511 (b) (2) permits vacating an arbitration award if the party seeking vacatur did not participate in the arbitration or receive notice of the intention to arbitrate and, among other circumstances, no valid arbitration agreement existed. Respondents herein contend that Tombak received no proper summons and that both his execution of the Arbitration Agreement and purported participation in the Givas Hamorah proceeding resulted from fraud, coercion or duress.

To sustain a claim for fraudulent inducement, there must be a knowing misrepresentation of material fact, which is intended to deceive another party and to induce them to act upon it, causing injury. Here, respondents argue that the notice Givas Hamorah used to call Tombak before the tribunal and its general conduct led him to believe that he was present only as a witness, not a party. Although the contents of the notice can be read as implying that Givas Hamorah sought testimony from Tombak in an arbitral proceeding against Volkovitz and Kornitzer, the Arbitration Agreement made clear that Tombak was agreeing to submit to binding arbitration (individually, and on behalf of corporations, LLCs, and all other entities involving this matter) all the controversies (claims and counter claims) between the undersigned parties. Such language unambiguously conveyed that Tombak was agreeing to appear before Givas Hamorah as a party to arbitration, not merely as a witness. A person who signs a document, even if misled as to its contents, is under an obligation to read the document before signing it, and cannot generally avoid the effect of the document on the ground that he or she did not read it or know its contents.

Tombak further asserts that he signed the Arbitration Agreement only because the Givas Hamorah panel threatened to issue a siruv against him, thus rendering the agreement voidable as a product of coercion or duress. The Appellate Division, Second Department, has established, however, that a threat of a siruv will not be treated as duress. While the facts in these cases may differ somewhat from the facts that produced the Arbitration Agreement herein, the case law indicates that prior refusals to consider siruv threats as coercive reflected the inherent nature of a siruv, rather than the circumstances particular to those cases. Accordingly, the Arbitration Agreement must be treated as valid and binding upon respondents.

(Internal quotations and citations omitted). The court went on, however, to vacate the award:

Judicial review of an arbitrator’s award is very limited, and an arbitrator need not observe substantive law or evidentiary rules in issuing a decision. New York favors arbitration as a method of dispute resolution, but CPLR 7511 (b) (1) permits vacating an arbitration award if, among other circumstances, the arbitrator exceeded his power or so imperfectly executed it that a final determination and definite award upon the subject matter submitted was not made.

An award may be found to have exceeded the arbitrator’s powers if it violates a strong public policy, is totally irrational or breaches an explicit limitation on such power. On review, an award may be found to be rational if any basis for such a conclusion is apparent to the court based up on a reading of the record.

Here, no apparent rational basis exists to justify an award to petitioner of $150,000. Petitioner makes no attempt to refute, and submits evidence that seems to confirm, that his claim sought a 7.5% commission on a $24,700 sale, thus equal to $1852.50, of which BGS had already paid half. No party attempts to explain how a claim pursuing $926.25 resulted in an award of more than 160 times that amount.

Furthermore, no rational basis supports holding Tombak personally liable for any failure by BGS to pay petitioner a sales commission. Petitioner formed an agreement with Volkovitz to seek buyers of BGS equipment for a specified commission, and petitioner does not contend that he had any direct interaction whatsoever with Tombak before the arbitration process. Petitioner erroneously relies on the general precept of contract law that an agent who forms a contract on behalf of an undisclosed or partially disclosed principal may be held personally liable for obligations thereunder. Tombak, though an agent of BGS, was indisputably not the agent who formed any agreement with petitioner, and, therefore, could not be held personably liable even if petitioner successfully established that BGS was inadequately disclosed as the true party to the contract. As no plausible basis exists for the Arbitration Award, it must be vacated and the petition to confirm it must be denied.

(Internal quotations and citations omitted). As to a remedy, the court ruled that “[t]he Arbitration Agreement, however, remains binding, and the controversy must, therefore, be remanded for further proceedings in accordance with this decision and order and the requirements of CPLR article 75.”

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