New York legislature considers Article 75 bill

Background
Criticisms
Potential impact on international arbitration
Similarities to Federal Arbitration Fairness Act
Comment

The New York state legislature is considering legislation that would permit the New York state courts to vacate arbitral awards on the grounds that an arbitrator was presumptively biased because of affiliations with one of the parties or a "direct or indirect" financial interest in the outcome of the arbitration (the 'Article 75 bill'). While legislation permitting an award to be challenged for arbitrator bias might not seem controversial at first glance, the proposed amendments to the New York state arbitration laws have garnered considerable criticism from various parties, who see the legislation as potentially damaging to both domestic and international arbitral awards.

Background

The Article 75 bill seeks to amend Section 7511 of the New York Civil Practice Laws and Rules, which currently permits New York state courts to vacate awards for arbitrator bias.(1) The Article 75 bill seeks to expand the definition of 'bias' under Section 7511 to include specifically any affiliation with a party or "any of its subsidiaries or affiliates", as well as any "direct or indirect financial interest" in the arbitration.(2) Consequently, under the proposed amendments any 'affiliation' with a party (which is broadly defined) or any financial interest, regardless of how minor or removed, would constitute express grounds for vacating an award.

Criticisms

The Article 75 bill has generated much debate among practitioners, who see its expanded definition of 'arbitrator bias' as potentially problematic. For instance, the Dispute Resolution Section of the New York State Bar Association has asserted that the proposed phrase "affiliated in any way" could encompass relationships as removed as membership in social clubs or professional organisations (eg, bar associations). Arbitration practitioners have also challenged the potential reach of the "indirect financial interest" proposal by questioning whether an arbitrator's ownership of competing stocks could qualify as an indirect financial interest in the outcome of an arbitration that would warrant vacature. Those concerns have led organisations like the Dispute Resolution Section to criticise the bill on the grounds that it will unnecessarily increase the number of challenges to arbitral awards and will deter parties from selecting New York as an arbitral seat.(3)

Potential impact on international arbitration

While the Article 75 bill would specifically amend New York state law and not the Federal Arbitration Act under which New York Convention awards are enforced in the United States, international arbitration practitioners must nevertheless be mindful of the bill because it could affect arbitrations seated in New York, as well as the manner in which New York federal courts interpret arbitrator bias under Chapters 1 and 2 of the Federal Arbitation Act. Consequently, the Article 75 bill could influence the manner in which New York federal courts consider enforcement defences brought under both Section 10 of the act and Article V of the New York Convention.

Similarities to Federal Arbitration Fairness Act

The concerns raised in response to the Article 75 bill are reminiscent of criticisms lodged against the Arbitration Fairness Act, which is proposed federal legislation that would invalidate pre-dispute arbitration agreements in civil rights, employment, consumer and franchise disputes, where "parties [are of] greatly disparate economic power".(4)

Notably, the Dispute Resolution Section has also taken issue with the Arbitration Fairness Act, including its potentially negative impact on international arbitration. For example, the Dispute Resolution Section has suggested that the draft Arbitration Fairness Act could impermissibly invalidate certain franchising agreements that would be subject to the New York Convention.(5) Consequently, like the Article 75 bill, the Arbitration Fairness Act has been hailed by its supporters as a measure for protecting parties with disparate bargaining power, but challenged by its detractors as a step backwards for arbitration.

Comment

The Article 75 bill could significantly alter not only domestic arbitration in New York, but also international arbitration, and could therefore impact on New York's position as an arbitral seat in the future. International arbitration practitioners should closely follow the status of the Article 75 bill to determine how it might affect their choice of New York as an arbitral seat.

For further information on this topic please contact JP Duffy or Kiran N Gore at DLA Piper by telephone (+1 212 335 4500), fax (+1 212 335 4501) or email ([email protected] or [email protected]).

Endnotes

(1) New York Civil Practice Laws and Rules § 7511(b) also permits New York courts to vacate arbitral awards where:

• corruption, fraud or misconduct were involved in the procurement of the award;
• the arbitrator exceeded his or her power or imperfectly executed that power, so that a "final and definite" award was not rendered; or
• the arbitration failed to follow the procedure outlined in the New York Civil Practice Laws and Rules, unless the party applying for vacature was on notice of the defect and continued the arbitration without objection.

(2) New York Civil Practice Laws and Rules § 7511(b) (McKinney's 2010); S 5798-2011 Sen (NY June 16 2011).