Confirmation / Vacation of Arbitration Awards

Jonathan Kessler brought a claim in arbitration against his former employer, Kent Building Services, after he was fired from his job as Kent’s president, asserting that he had not been fired for cause and was thus owed severance. The arbitrator determined that Kent breached Kessler’s contract by firing him without cause, a decision the arbitrator found was arbitrary and irrational and thus a breach of the implied covenant of good faith and fair dealing, and thus awarded him six month’s severance pay.

Kent challenged this award in federal court, arguing that the arbitrator’s decision on good faith and fair dealing demonstrated a manifest disregard of New York contract law. Kent based this argument on a New York trial court decision holding that termination of employment only breaches the implied covenant of good faith and fair dealing if it results from a “constitutionally impermissible purpose or [violates] statutory or decisional law,” something not shown during the arbitration. The court rejected this argument, finding that other case law makes it clear that unconstitutionality or illegality are “sufficient but not necessary” to support a claim based on the breach of the implied covenant of good faith and fair dealing. Further, the court found that the arbitrator applied the correct law in finding that Kent had discretion regarding whether to fire Kessler and that the irrational exercise of this discretion could support a breach of the implied covenant of good faith and fair dealing. The court therefore found that the arbitrator had not acted in manifest disregard of the law.

However, the court rejected Kessler’s motion for sanctions under 28 U.S.C. § 1927 for filing a meritless petition to vacate. While the court disagreed with Kent’s argument regarding the requirements of good faith and fair dealing claims under New York law, it found that making argument was not unreasonable. Kessler had also argued that Kent had acted in bad faith when it included in its petition allegations of numerous failures by Kessler in his job performance while failing to mention that the arbitrator had specifically found that these failures were not the basis for Kent’s decision to fire Kessler. The court found that this should be interpreted as simply an attempt by Kent “to provide greater context for the parties’ employment dispute,” rather than a bad faith attempt to mislead the court. Finding no frivolous argument and no bad faith, the court declined to award sanctions.

Kent Building Services, LLC v. Kessler, 17-CV-3509 (JPO) (S.D.N.Y. Mar. 14, 2018)

This post written by Jason Brost.

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The Fourth Circuit reversed and remanded the district court’s order granting Norfolk Southern Railway Company’s motion to confirm an arbitration award determining the amount Sprint must pay to Norfolk Southern for continued use of railroad rights. Under the parties’ contract, because the parties’ respective appraisers disagreed as to the proper amount, a third appraiser was instructed to arrive at a compromise with one (or both) of the other appraisers. Ultimately, the third appraiser agreed with the amount set forth by Norfolk Southern’s appraiser, but conditioned his assent to the award subject to two conditions- (1) that Norfolk Southern had marketable title and (2) that the value used by Norfolk Southern’s appraiser was reasonable. The third appraiser also reserved the right to withdraw his assent if his assumptions proved to be incorrect. The AAA panel found that this decision constituted a final and binding arbitration award, which upon Norfolk Southern’s motion, the district court confirmed.

Sprint appealed the district court’s confirmation of the award, and despite the deferential standard of review accorded to arbitration awards, the Fourth Circuit found that the district court did err in determining that the third appraiser’s decision was a “final” award. Specifically, the Fourth Circuit found significant that the third appraiser “made clear that he might withdraw his assent — thus dissolving the compromise and the arbitration award itself — at some point in the future.” Moreover, the Court noted that the third appraiser “did not merely base his assent on certain assumptions, but rather reserved the right to withdraw his assent [even] if his assumptions proved to be incorrect… [and therefore, could not] be squared with any conception of ‘finality.’” As such, the Fourth Circuit instructed the district court to vacate the award. Norfolk So. Railway Co. v. Sprint Comm’s Co. L.P., Case No. 16-2017 (4th Cir. Feb. 22, 2018).

This post written by Gail Jankowski.

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