Opinion
7092/07.
Decided May 13, 2008.
Gerald Zisholtz, Esq. Zisholtz Zisholtz, LLP, Mineola, New York, Attorney for Petitioner.
Craig B. Johnson, Esq., Hackensack, NY, Attorney for Respondent.
Respondent One Key, LLC ("Onekey") moves pursuant to CPLR 7510 to confirm an arbitration award of $573,989.00 rendered by an independent arbitrator in the underlying matter and to add to the judgment $2500.00 in sanctions previously awarded by the court to Onekey on March 29, 2007 that has not been paid by petitioner, IBK Enterprises, Inc. ("IBK"). Onekey also asks the court to award an additional $8250.00 in sanctions for Onekey's costs to oppose IBK's cross-motion pursuant to CPLR 7511 to vacate the arbitration award.
BACKGROUND
This action arises out of a written contract ("IBK Contract") for the construction of a residential condominium building. Onekey, the general contractor, hired IBK as a subcontractor to pour a concrete superstructure at an agreed price of $1,875,000.00. Shortly after beginning work on the project, IBK informed Onekey that it could not continue the work because IBK was unable to obtain payment and performance bonds for the project. IBK indicated that the agreement between the parties was "null and void." Onekey subsequently entered a contract with Navillus for $2,195,000.00 ("Replacement Contract") for the pouring of the concrete superstructure. Due to various disputes with Navillus, Onekey also eventually hired two other subcontractors, EMC New York Contracting ("EMC") and Five Stone Construction ("Five Stone"), to complete the work at issue.
Pursuant to § 6.2.1 of the standard subcontract form from the American Institute of Architects used by IBK and Onekey in the IBK Contract, the parties participated in an unsuccessful mediation through the American Arbitration Association ("AAA"). Thereafter, pursuant to § 6.2.2 and § 6.2.3 of the IBK Contract, Onekey made a demand for arbitration as "[c]laims not resolved by mediation shall be decided by arbitration which, unless the parties mutually agree otherwise shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect," where upon IBK commenced the present action with this court by filing an application for a stay of arbitration. After oral arguments by both parties, the court denied the application on March 29, 2007 because, "[i]n light of the unequivocal terms of the signed contract, [IBK]'s application is found to be frivolous." The court granted Onekey's cross-motion for sanctions of $2500.00 and stayed the present action pending the arbitration.
The arbitrator selected by the AAA for this matter submitted a disclosure statement signed on May 17, 2007. The arbitrator indicated that "[i]n late 2004 or early 2005 I met Mr. Finbar O'Niel of Onekey through a mutual acquaintance. We spoke briefly about our companies and our different roles in the construction process. I have not met or spoken with Mr. O'Niel since." The arbitrator indicated that, "[t]he above disclosures would not affect my ability to render a fair and impartial decision." On May 18, 2007, the AAA notified the parties of the arbitrator appointed to the matter with the arbitrator's disclosure statement and requested that the parties notify the AAA of any objections to the appointment by May 25, 2007. On May 25, 2007, IBK's counsel objected to the appointment of the arbitrator because, "I do believe that the possibility exists based upon his mutual acquaintance, discussions and contacts that partiality may result." IBK requested that a "new panel of arbitrators" be provided. Onekey replied to IBK's objection by requesting that the AAA confirm the arbitrator's appointment. On June 1, 2007, the AAA reaffirmed the appointment of the arbitrator.
The arbitration was bifurcated and, after the first hearing, the arbitrator issued a ruling on July 27, 2007 finding that IBK had breached the contract by "fail[ing] to provide a bond" and "[r]efus[ing] to perform." The parties consented to a damages hearing to be held on October 11, 2007. IBK alleges that the attorney representing IBK in the first hearing, Stuart Zisholtz, spoke with Onekey's attorney on or about September 7th and 17th with the understanding that Stuart Zisholtz was scheduled to begin a complex trial in September and the parties would address the possibility of an adjournment of the arbitration hearing as it got closer to the arbitration date. On October 1st, Stuart Zisholtz communicated with the arbitrator and Onekey's attorney regarding the distribution of exhibits for the October 11th hearing. On October 5th, IBK contacted Onekey's counsel and the AAA requesting an adjournment of the hearing due to the attorney's engagement at trial. On October 9th, the arbitrator declined IBK's request for adjournment and notified the parties that the hearing would be held on October 11th as scheduled. The arbitrator noted that IBK's attorney had "been on trial for the past three weeks" and "[t]here was more than ample time to prepare another attorney from that firm to appear at the damages portion of the hearings or at the very least to notify the AAA as to Attorney Zisholtz's scheduling conflict." On October 10th, IBK brought an Order to Show Cause before this court to stay the damages hearing. The court heard oral arguments from both parties, denied the application and directed the parties to appear at the damages hearing on October 11th.
At the damages hearing on October 11th, Gerald Zisholtz appeared for IBK and objected on the record to proceeding with the arbitration as Stuart Zisholtz was engaged in a trial. After the arbitrator indicated that the hearing would proceed, IBK indicated that there was no further need for the court reporter. IBK claims that the arbitrator refused to grant a continuation of the hearing to subpoena witnesses from EMC and Five Stone to determine the value of the work they performed. On November 13, 2007, the arbitrator granted Onekey an award of $571,989.00. This total represented $387,200.00 for "Costs to Perform," $174,789.00 for "Delay Damages," $0 for "Loss of Reputation Prospective Business," and $10,000.00 for "Legal Costs." The arbitrator also noted that IBK "shall reimburse [Onekey] the sum of $2,000.00, representing that portion of said fees in excess of the apportioned costs previously incurred by [Onekey]" as "the compensation of the arbitrator totaling $4,000.00 shall be borne equally by the parties."
DISCUSSION
Onekey moves pursuant to CPLR 7510 to confirm the arbitration award of $573,989. IBK cross-moves to vacate the arbitration award under CPLR 7511. Pursuant to CPLR 7510, "[t]he court shall confirm an award upon application of a party made within one year after its delivery to him, unless the award is vacated or modified upon a ground specified in section 7511." As Onekey has applied for confirmation of the arbitration award within one year of its delivery, the court will confirm the award unless it should be vacated or modified pursuant to CPLR 7511. Therefore, the court must first address IBK's motion to vacate.
Once parties have participated in arbitration, a party's ability to have the courts vacate or modify the award is limited by CPLR 7511 ( Wicks Constr., Inc. v Green, 295 AD2d 527, 528 [2d Dept 2002]). Under CPLR 7511 [b] [1], "[t]he award shall be vacated on the application of a party who either participated in the arbitration or was served with a notice of intention to arbitrate if the court finds that the rights of that party were prejudiced by: (i) corruption, fraud or misconduct in procuring the award; or (ii) partiality of an arbitrator appointed as a neutral, except where the award was by confession; or (iii) an arbitrator, or agency or person making the award exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made; or (iv) failure to follow the procedure of this article, unless the party applying to vacate the award continued with the arbitration with notice of the defect and without objection." As IBK has alleged fraud, partiality of the arbitrator, an award that exceeded the power of the arbitrator and the failure to follow the procedure of Article 75, these issues will each be addressed individually.
The Court of Appeals has repeatedly indicated that "an arbitrator's award should not be vacated for errors of law and fact committed by the arbitrator and the courts should not assume the role of overseers to mold the award to conform to their sense of justice" ( Wien Malkin LLP v Helmsley-Spear, Inc. , 6 NY3d 471 , 479-480). Furthermore, "[a]n arbitrator's award will not be vacated unless it is clearly violative of some strong public policy, is totally irrational, or manifestly exceeds a specifically enumerated limitation on the arbitrator's power . . . An award is irrational if there is no proof whatever to justify the award . . . or the award gave a completely irrational construction to the provisions in dispute and, in effect, made a new contract for the parties" ( Matra Bldg. Corp. v Kucker , 2 AD3d 732 , 734 [2d Dept 2003]; citing Rockland County Bd. of Coop. Educ. Servs. v BOCES Staff Ass'n, 308 AD2d 452 [2d Dept 2003]).
IBK alleges that Onekey's claim was fraudulent, Onekey provided perjured testimony as to the amounts paid to the subcontractors replacing IBK, and the arbitrator relied on this information to the detriment of IBK. IBK specifically claims, among other allegations, that the $2,195,000 claim "was false, fraudulent and deceptive as submitted to the arbitrator" because the "claim of replacement costs with Navillus was in truth and in fact only $1,497,374.05" (IBK's affirmation in opposition ¶ 18, 22). In addition, IBK alleges the arbitrator relied on perjured evidence where "[t]he arbitrator found $350,000 for EMC and $560,000 for Five Stone and based calculations on ONE KEY'S figures, which were false" (IBK's affirmation in opposition ¶ 25).
IBK's motion to vacate the arbitration award based on fraud or misconduct pursuant to CPLR 7511 [b] [1] [i] is denied for failure to demonstrate fraud on behalf of Onekey or misconduct on behalf of the arbitrator. Although IBK requested to have a portion of the hearing transcribed for the purpose of objecting to the commencement of the hearing (IBK's affirmation in opposition ¶ 78), the record does not include a complete transcript of the proceeding and therefore, there is no evidence to support IBK's claim of misconduct. "Having opted not to have the hearing transcribed, petitioners cannot now have a trial to reconstruct what took place at the hearing. Accordingly, petitioners have not met their burden to demonstrate misconduct by clear and convincing evidence" ( NY State Corr. Officers Police Benevolent Ass'n v NY State Dept. of Corr. Servs., 304 AD2d 954, 955 [3d Dept 2003]). Furthermore, IBK's contention is contradicted by the arbitrator's award which specifically addresses that the award was based on the $2,195,000.00 replacement contract and not solely on the $1,497,374.05 paid to Navillus or the $350,000.00 and $560,000.00 claimed by Onekey for the EMC and Five Stone contracts. While the arbitrator did indicate that "Onekey has demonstrated they have paid Navillus, EMC, Five Stone at least the $2,195,000.00 to perform IBK's work," the arbitrator did not indicate how he reached that conclusion, nor was he required to do so ( Nationwide Mut. Ins. Co. v Steiner, 227 AD2d 563 [2d Dept 1996]; Matter of Hausknecht v Comprehensive Med. Care of NY, P.C. , 24 AD3d 778 , 779 [2d Dept 2005]).
IBK alleges that the arbitrator was biased or there was the appearance of bias due to the arbitrator's one brief encounter with someone associated with Onekey in 2004 or 2005. IBK's motion to vacate the arbitration award for fraud or misconduct pursuant to CPLR 7511 [b] [1] [ii] is denied for failing to demonstrate impartiality on behalf of the arbitrator. "[P]artiality may take two forms, actual bias, which must be proven by clear and convincing evidence, and the appearance of bias from which a conflict of interest may be inferred" ( New York Restaurants Exch. v Chase Manhattan Bank, N.A., 226 AD2d 312, 315 [1st Dept 1996], citations omitted). In support of the claim of actual bias, IBK merely suggests that the one previous encounter the arbitrator had with IBK occurred "about the time that the contract in this proceeding was executed" and "[the arbitrator] may have been a consultant on [the] job [at issue]" (IBK's affirmation in opposition ¶ 80, 85). As the award itself does not reveal any bias and petitioner's only claim of bias is based on the highly speculative suggestion that the arbitrator "may have been a consultant" on the project at issue, IBK failed to carry its burden of establishing actual bias through clear and convincing evidence ( see New York Restaurants, 226 AD2d at 315; Matter of Aviles v Allstate Ins. Co. , 47 AD3d 710 [2d Dept 2008]). Furthermore, "[i]t is well settled that mere occasional associations between an arbitrator and those appearing before him or her will generally not warrant disqualification of the arbitrator on the ground of the appearance of bias or partiality" ( Elias Eleni Rest. Corp. v 8430 New Utrecht Corp., 282 AD2d 705 [2d Dept 2001]; see also Hausknecht, 24 AD3d at 780; Infosafe Sys. v Intl. Dev. Partners, 228 AD2d 272 [1st Dept 1996]). Therefore, as there is no evidence that the arbitrator did anything other than speak casually with an individual associated with Onekey once, IBK has also failed to establish an appearance of bias so as to warrant an inference of a conflict of interest ( see Elias, 282 AD2d at 705). This decision is supported by the AAA case manager's reaffirmation of the appointment of the arbitrator after considering IBK's identical objection prior to the first arbitration hearing.
IBK alleges the arbitrator exceeded his power by re-writing the contract and granting an irrational award. IBK claims that the award was irrational because the arbitrator used incorrect contract sums in determining the award and improperly modified the contract by adding overhead and profit amounts in the award, allowing damages for delays on the project, and improperly awarding legal fees. IBK's motion to vacate the arbitration award based on the arbitrator making an award exceeding his power pursuant to CPLR 7511 [b] [1] [iii] is denied for failing to demonstrate that the arbitrator granted an award outside the scope of the contract between the parties. Where an arbitrator "clearly exceeds a specifically enumerated limitation on his or her power, the award may be vacated. However, such limitation must be specifically set forth within the arbitration clause" ( Town of Newburgh v Civil Serv. Employees Ass'n, 204 AD2d 464, 466 [2d Dept 1994], citations omitted; see Hausknecht, 24 AD3d at 779). The IBK Contract does not specifically preclude damages for delays or legal fees in the event of a claim pursuant to the contract. Section 9.3 of the IBK Contract does indicate that the parties were to "[i]nsert provisions, if any, for liquidated damages relating to failure to complete on time" and below this, the IBK Contract states "NONE." However, the party's desire not to create a provision for liquidated damages cannot be construed as a provision precluding damages for delays. Furthermore, § 9.3 of the IBK Contract states that "[t]he Work of this Subcontract shall be substantially completed not later than one hundred and thirty (130) days from the day this contract is signed." While this court defers to the arbitrator's ruling as to whether delay damages were appropriate in this matter, especially since the parties have not provided a transcript of the hearing, it appears as though the parties were anticipating the possibility of a delay in § 9.3 of the IBK Contract and the arbitrator awarded delay damages based on the finding that the work was not substantially completed by IBK within 130 days of the signing of the IBK Contract. The arbitrator's ruling cannot be interpreted as exceeding a specifically enumerated limitation ( see id.).
Although there is no express provision for the recovery of legal fees in the contract, § 6.2.2 of the IBK Contract does indicate that "[c]laims not resolved by mediation shall be decided by arbitration which . . . shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect." While neither party has submitted a copy of the relevant AAA rule, IBK does not dispute Onekey's representation that "Rule R-44 of the AAA's Construction Industry Arbitration Rules provides that the Arbitrator may award [attorney's] fees, as he deems appropriate" (Onekey's Affirmation in Opposition to Cross-Motion ¶ 90). As IBK did not dispute this representation and the arbitration rules were incorporated into the IBK Contract, IBK's contention that the arbitrator exceeded the limitations of the IBK Contract is unavailing. Therefore, IBK has failed to meet its burden by providing evidence that the arbitrator exceeded the limitations specifically enumerated in the IBK Contract, or the Construction Industry Arbitration Rules of the AAA incorporated into the IBK Contract, by awarding delay damages and attorneys' fees ( see Town of Newburgh, 204 AD2d at 466).
Furthermore, while IBK claims that the arbitrator re-wrote the contract by allowing for overhead and profit on the difference between the Replacement Contract and the IBK Contract, this court will not vacate the award "unless it is violative of a strong public policy, is totally irrational, or exceeds a specifically enumerated limitation on [the arbitrator's] power" ( Wicks, 295 AD2d at 527). Petitioner has failed to provide any evidence that the arbitrator violated public policy or awarded an amount of damages that was not directly based on Onekey's efforts to replace the IBK Contract. Although IBK implies that the profit and overhead included in the award were consequential damages that were specifically prohibited by § 15.4 of the IBK Contract, profit and overhead are an element of the price of the job and are therefore not "consequential damages" but are components of the loss directly sustained as a result of the breach. As noted by Onekey, and not disputed by IBK, the standard formula for computing profit and overhead in the construction industry is 21%, consistent with the arbitrator's award. As there is plausible justification for granting overhead and profit on the difference between the Replacement Contract and the IBK Contract, this court finds no fault with the award in this regard. The award may not be vacated where the "arbitrator offer[ed] even a barely colorable justification for the outcome reached" ( Wien, 6 NY3d at 479, citation omitted).
IBK alleges the arbitrator violated IBK's rights to due process by failing to adjourn the hearing due to the original attorney's engagement at a trial and for refusing to grant a continuation of the hearing so IBK could subpoena witnesses from EMC and Five Stone to elicit testimony as to how much of their work was related to the IBK Contract. IBK's motion to vacate the arbitration award pursuant to CPLR 7511 [b] [1] [iv] is denied for failing to demonstrate by clear and convincing evidence that IBK's rights were prejudiced by requiring IBK to appear for the hearing or denying the continuation of the hearing. Pursuant to CPLR 7506 (c), "[t]he parties are entitled to be heard, to present evidence and to cross-examine witnesses [at the arbitration]. Notwithstanding the failure of a party duly notified to appear, the arbitrator may hear and determine the controversy upon the evidence produced." Under, CPLR 7506 (b), "[t]he arbitrator shall appoint a time and place for the hearing and notify the parties in writing personally or by registered or certified mail not less than eight days before the hearing. The arbitrator may adjourn or postpone the hearing. The court, upon application of any party, may direct the arbitrator to proceed promptly with the hearing and determination of the controversy" (emphasis added). However, "[i]t is well settled that the decision of [w]hether to grant or refuse an adjournment is generally within the discretion of the arbitrator, and it is only if that discretion is abused that misconduct results'" ( M.T.M. Bevs. Corp. v Pepsi Cola Bottling Co., 262 AD2d 414, 415 [2d Dept 1999]; see also Cox v Mitchell, 188 AD2d 915, 917 [3d Dept 1992]; Shearson Lehman Hutton, Inc. v Meyer, 174 AD2d 496 [1st Dept 1991]). The burden of proving that the arbitrator's ruling constituted misconduct rests with IBK and "must be met by clear and convincing proof. . . . An arbitrator's refusal to receive evidence is not a sufficient basis to vacate an award; rather it must be shown that the excluded evidence was material and relevant to the issues present in the proceeding" ( Thompson v S.L.T. Ready-Mix, 245 AD2d 911, 913 [3d Dept 1997]).
IBK failed to provide "clear and convincing proof" that IBK's due process rights were violated by having to participate in the arbitration award hearing on October 11, 2007. Pursuant to CPLR 7506 [b], this court denied IBK's motion to stay the arbitration hearing and directed the damages hearing to proceed on October 11, 2007 after oral arguments on October 10, 2007. This court ruled in deference to the arbitrator's rational decision to reject IBK's belated request for an adjournment. This court will not now consider what amounts to a reargument for the adjournment of the hearing due to the engagement of an attorney nor hold that the arbitrator's ruling constituted misconduct when the arbitrator adhered to this court's ruling on the identical issue. Furthermore, the denial of the adjournment request so IBK could subpoena witnesses was within the discretion of the arbitrator and IBK has not demonstrated any relevant evidence to support IBK's claim that failing to adjourn the hearing constituted misconduct ( see CPLR 7506 [b]; M.T.M. Bevs. Corp. v Pepsi Cola Bottling Co., 262 AD2d at 415). IBK has failed to provide a complete transcript of the arbitrator's ruling on the adjournment to demonstrate that the testimony of EMC and Five Stone would have been material and relevant to the issue of damages ( see Thompson, 245 AD2d at 913). IBK "had a Court Reporter available for the 30-35 minutes of the Hearing to place on the record [it's] objections to the Hearing" and IBK's attorney specifically discharged the reporter by indicating, "I don't think at this point we need the reporter anymore" (IBK's affirmation in opposition ¶ 78; IBK's exhibit J, Page 33, Lines 23-24). The lack of evidence to support the present contentions is attributable to the fact that IBK discharged the court reporter and declined to have the minutes of the hearing recorded to provide this court with a transcript to review. Therefore IBK "cannot rely upon this fact to support his claim, inasmuch as he participated in the arbitration with knowledge that no record was being kept and thereby waived any issue regarding the lack of such record." Broderick v Suffolk County Bar Ass'n, 157 AD2d 780 [2d Dept 1990]; see also NY State Corr. Officers, 304 AD2d at 954-955. Moreover, the arbitrator's award indicates that it was based on the $2,195,000 contract with Navillus and not the contracts with EMC and Five Stone. Therefore it is highly unlikely that testimony by EMC or Five Stone would have been relevant to the issue before the arbitrator ( see Thompson, 245 AD2d at 913). IBK has failed to articulate any actual prejudice suffered as a result of the denial of this request.
Finally, IBK's claim of a deprivation of due process is further weakened by the pattern of delay tactics which suggest that the requests to the arbitrator for an adjournment and continuation were likely to have been raised for the purpose of delaying the resolution of this matter. As IBK has not met it's burden by demonstrating that the excluded evidence was material and relevant to the issues present in the proceeding, IBK has failed to demonstrate that the arbitrator did not follow the procedures of article 75 of the CPLR or violated IBK's rights to due process ( see Thompson, 245 AD2d at 913).
In addition to requesting an adjournment and continuation of the damages hearing from the arbitrator, IBK made numerous attempts to delay the resolution of this matter. IBK commenced this litigation and attempted to stay the initial arbitration hearing despite a clear arbitration provision in the contract between the parties. IBK objected to the individual arbitrator on the last day permitted by the AAA for objections, shortly before the first hearing, and requested a "new panel of arbitrators" to recommence the lengthy process of selecting an arbitrator. On the eve of the damages hearing, IBK brought an order to show cause to adjourn the hearing. IBK failed to timely file and serve its opposition to Onekey's motion to confirm the arbitration, resulting in further adjournment.
IBK's cross-motion to vacate the arbitration award pursuant to CPLR 7511 is denied. As the court has denied IBK's motion to vacate the award, Onekey's motion to confirm the arbitration award is granted under CPLR 7510.
In it's affirmation submitted in "Opposition To IBK's Cross-Motion to Vacate the Arbitration Award," Onekey moves for $8250 in sanctions pursuant to 22 NYCRR § 130-1.1. Onekey claims that IBK's papers in opposition to Onekey's motion to confirm the arbitration award and in support of IBK's cross-motion to vacate the award are frivolous, were submitted "for no legally valid reason" and IBK's "transparent purpose in submitting these papers is to thwart and/or to needlessly delay justice in this matter" (Onekey's affirmation in opposition to cross-motion ¶ 160). While the court declines to grant Onekey's request for sanctions for frivolous conduct, the court does award Onekey $1500 in sanctions for IBK's failure to timely file and serve its opposition to Onekey's motion to confirm the arbitration. This resulted in an unnecessary appearance by Onekey and thus five hours of attorney fees that should not have been incurred.
CONCLUSION
Accordingly, Onekey's motion to confirm the arbitration award of $573,989.00 is granted pursuant to CPLR 7510. Onekey is further awarded judgment for the $2500 sanction previously ordered by this court on March 29, 2007. Onekey is further awarded $1500 as a sanction for IBK's delay in timely responding to the motion to confirm, thus necessitating an appearance by Onekey which resulted in five hours of attorney fees that should not have been incurred. IBK's cross-motion to vacate the arbitration award is denied. Onekey is awarded a total judgment of $577,989.00 plus interest from November 13, 2007.
The foregoing constitutes the decision and order of the Court.