Recently in Alternative Dispute Resolution Category

March 6, 2014

Court Stays Action Pending Arbitration

A recent order from a federal district court in Massachusetts sheds light on the analysis courts perform when addressing whether to stay a civil action pending arbitration. In MOCA Systems, Inc. v. Bernier and Penley Systems, LLC, the court considered the defendants' motion to stay an action pending arbitration. The defendants proffered only an unsigned employment agreement that included an arbitration clause, and testimony suggesting the agreement was valid. The court allowed the motion and stayed the litigation.

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December 26, 2013

New Optional Appellate Rules In Effect From AAA

Traditionally, arbitration has been an attractive option for the resolution of business and contract-related disputes. It is often less costly and provides speedier resolution than court litigation, and the proceedings are generally confidential rather than public. Complimenting these benefits is the concept that an arbitrator's award is final, binding, and can rarely be appealed. In some cases, however, parties may seek to avail themselves of these arbitration advantages, but preserve their right to appeal any decision in extreme or unforeseen circumstances. Until recently, right or wrong, the parties were bound to the arbitrator's decision as a final determination.

Effective November 1, 2013, the American Arbitration Association ("AAA") - a widely used and well-respected organization of arbitrators - has provided an optional appellate process for parties who arbitrate disputes through the AAA or its International Centre for Dispute Resolution. The text of the rules is available here: http://go.adr.org/AppellateRules. Under these new rules, a party may appeal an arbitration award on one of two specific grounds: (1) that the award was based upon a material and prejudicial error of law, or (2) that the award was based on clearly erroneous factual findings. However, because the parties' submission to arbitration is predicated upon their contractual agreement to arbitrate disputes, this optional appellate process is available only to parties who have agreed to the availability of an appeal of an arbitration award in their underlying contract, or by stipulation. Absent such an agreement, one party may not avail itself of the AAA's appeals process over the objection of the other party.

Importantly, the optional appeals process is not a new opportunity for a party to present its case. In fact, the rules specifically provide that the tribunal will typically render a decision based only upon the written submissions and the compiled arbitration record, and it is without power to order a new arbitration hearing or remand the case back to the original arbitrator for corrections or further review.

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April 12, 2013

Arbitrator's Error is a Risk Undertaken in Agreeing to Arbitrate

In a February 2013 decision, the Massachusetts Appeals Court declined to vacate an arbitration award, which the defendant claimed resulted from the arbitrator's error of law.

A dispute arose between Daniel McDonough and Kevin McDonough, each of whom owned one-half of the stock in McDonough Electric Construction Corporation ("MECC"). Both Daniel and Kevin had entered into a "Cross Buy-Sell Agreement" ("CBSA") relative to the stock. The CBSA contained an arbitration clause that required the parties to arbitrate any controversy or claim arising out of or relating to the CBSA.

Daniel filed suit seeking dissolution of MECC, and claimed that Kevin had breached his fiduciary duty to Daniel and the covenant of good faith and fair dealing. Kevin counterclaimed against Daniel with claims for specific performance of the CBSA, Daniel's breach of the covenant of good faith and fair dealing, and Daniel's breach of the CBSA. Because Kevin's counterclaims fell within the scope of the CBSA's arbitration clause, the court ordered that those counterclaims be submitted to arbitration. Daniel's direct claims against Kevin, however, stayed in the superior court.

The arbitrator found in favor of Kevin on his counterclaims against Daniel. The superior court affirmed the arbitrator's award, and dismissed Daniel's claims against Kevin. Daniel appealed, claiming that the arbitrator had exceeded her authority by construing the CBSA in a way that, according to Daniel, constituted a rewriting of the CBSA.

The Appeals Court noted that, under established Massachusetts law, even if the arbitrator committed an error of law, a court may not disturb an arbitrator's award. Moreover, even if the arbitrator's construction of the CBSA was erroneous, that would not mean that the arbitrator's action was beyond her authority. Instead, according to the Appeals Court, "[i]t would only mean that one of the risks to which Daniel subjected himself when he bargained for and agreed to the arbitration clause - the risk of a legal or factual error by the arbitrator, with no mechanism for substantive review by a court - came to fruition."

Accordingly, the Appeals Court upheld the superior court's affirmation of the arbitrator's award. However, the Appeals Court reinstated Daniel's claim against Kevin for breach of fiduciary duty, which alleged, among other things, that Kevin usurped the control and management of MECC, that Kevin made use of corporate assets for his own personal use, and that Kevin had attempted to force Daniel out of the corporation. Because the arbitrator's findings did not address Daniel's rights as a shareholder at the times relevant to this claim, the Appeals Court held that dismissal of that claim was inappropriate.