For many reasons, it's good to be New England Patriots
quarterback Tom Brady in Boston. However, in light of two recent
Massachusetts trial court decisions, it may have been good for him
that he was not in court in Boston over the summer when challenging
the NFL's adverse arbitration ruling. Over the space of two weeks
in late November and early December, the Massachusetts Superior
Court showed a markedly, if not surprising, pro-arbitration bent,
as it upheld a party's right to enforce an agreement to arbitrate,
even after eight months of litigation in court, and upheld an
arbitral award that applied out-of-state law in conferring multiple
damages against a respondent despite a choice-of-law clause in the
agreement mandating Massachusetts law. Either decision taken
individually would be indicative of significant judicial deference
to arbitration and arbitral awards. Together, they show the
challenges that parties may face when attempting to avoid both an
arbitration clause and/or a highly adverse, perhaps even peculiar,
result.
In the first case, Harelick v. CRIC, LLC, et al.,
Suffolk Superior Court Civil Action 2014 CV 3930 BLS1, the
plaintiff and one of several admittedly affiliated defendants were
party to an agreement requiring, essentially, arbitration of all
disputes between them. After Harelick served the complaint in
December 2014, the defendants moved to dismiss, but did not raise
the arbitration clause as a reason. Harelick sought to and did
amend his complaint, in response to which the defendants moved
again to dismiss or stay the matter in August 2015, this time
asserting the arbitration agreement between Harelick and one of
them. Sometime amid all of this, the defendants commenced
discovery, the extent of which was not described by the court.
It has long been the law in Massachusetts that a party may waive
its right to arbitration through delay, or by invoking the
jurisdiction of the trial court, and/or by engaging in the
mechanics of civil discovery (all of which are inconsistent with
the right to arbitration). However, in Harelick, the
Superior Court focused not so much on whether the party seeking
arbitration acted inconsistently with that right, but on a
balancing of the prejudice to the opposing party from "undue delay"
with the "strong judicial policy favoring arbitration." The court
found that even though CRIC waited eight months to assert its right
to arbitrate (on its second bite at the apple, no less) and even
though it had engaged in discovery, there had been only "slight"
prejudice to Harelick, who would have had to deal with discovery
requests in the arbitration in any case. (Again, it is unknown what
the discovery had been, and so, it is unclear whether this
pronouncement holds.)
Harelick is a refinement of Home Gas, Inc. v.
Walter's of Hadley, 403 Mass. 772 (1989), the seminal
Massachusetts case on waiver of arbitration, under which "undue"
delay coupled with engagement in civil discovery of any meaningful
kind was considered to be sufficiently inconsistent with the right
to arbitrate as to waive it. Cases subsequent to Home Gas
injected the notion of unfair prejudice to a determination of
waiver by conduct. The Harelick decision is further
evidence of the strength of the judicial policy in favor of
arbitration. However, parties should not consider the decision to
be permission to postpone assertion of arbitration rights. While it
is unknown what, exactly, constitutes "unfair prejudice" to the
litigating party, it is safe to conclude that something does, and
it may be most prudent not to sit on one's rights.
The second decision, Family Endowment Partners, LP, et al.
v. Sutow, et al., Suffolk Superior Court Civil Action 2015 CV
1411 BLS1, suggests that arbitral awards will continue to be
challenging for disappointed litigants to overturn. In that case,
the Sutows claimed that investment advisor Family Endowment
Partners (FEP) had been grossly negligent, breached fiduciary
duties and committed investment fraud in violation of state and
federal law. The agreement between them contained a choice-of-law
provision, requiring Massachusetts law in questions of its
interpretation and a broad, "all-disputes" arbitration provision.
The dispute was arbitrated for 13 days, after which the arbitrator
entered a $48 million award in favor of the Sutows, which included
multiple damages under Pennsylvania law.
The respondents sought to overturn the award in an action in
Superior Court, maintaining that the arbitrator was biased and had
exceeded his authority by applying Pennsylvania law, by awarding
multiple damages despite a limitation of liability clause in the
underlying agreement and by finding an individual liable even
though that individual was not party to the arbitration
agreement.
The Superior Court rejected all arguments for vacatur.
It held that, because the arbitration clause was far more broad
than the choice of law provision, "a tort claim for fraud, a breach
of fiduciary duty claim or a claim that FEP and Weiss violated
Pennsylvania statutes is beyond what is limited by the choice of
law provision, but are well within that scope of arbitration as
claims 'related to' the Agreement but one arising under the
Agreement." The court declined to review the question of whether
the arbitrator properly applied the Pennsylvania statutes and ruled
that because the limitation of liability clause did not
specifically exclude "punitive" damages, there was no bar to them
being awarded. Because the individual participated in the
arbitration without objection to jurisdiction or otherwise
attempting to preserve his rights to contest the arbitrator's
authority over him, he was held to have waived the ability to avoid
the award on jurisdictional grounds.
Taken as whole, Sutow appears to confirm Massachusetts
courts' reluctance to interfere in the arbitral process or to
overturn arbitrators' decisions. In Massachusetts, a party who
agrees to arbitrate disputes has little ability to limit the scope
of an arbitrator's decisions by seeking to vacate an award. The
lesson to parties and counsel is to draft arbitration clauses
prudently - if a party wants to restrict an arbitrator's authority,
he will be able to so only by drafting for it. It seems that, in
the absence of extreme circumstances, arguments over an
arbitrator's authority are likely to encounter stiff scrutiny on
actions to vacate.
Harelick and Sutow indicate that Massachusetts
courts remain increasingly unwilling to interfere where parties
have agreed to arbitration, and potentially more significantly,
that parties who agree to arbitrate will be held to the
consequences of such an agreement, good or bad. Now more than ever,
parties should not gloss over arbitration clauses since they will
live with the results, even if those results were not intended or
contemplated at the time of the contract.
Michael B. Donahue is a partner in Duane Morris'
Boston office and practices in the areas of construction law and
litigation, including arbitration and alternative dispute
resolution, public procurement law and the drafting of design and
construction agreements.