Arbitral Award of Legal Fees Upheld Despite No Specific Grant of Power in the Arbitration Clause

We are reminded by a painstaking recent opinion issued by a federal district judge in Manhattan that New York State arbitration law often will have a very limited role to play when the parties elect to conduct arbitration in New York under a contract that contains a general choice of law provision selecting New York law. This is certainly true for U.S. domestic arbitration, and should apply equally to international arbitration where the parties’ choice of New York as a seat of arbitration should reasonably imply that they have selected U.S. federal arbitration law, and not also the laws of New York State that limit the powers of arbitrators, as the lex arbitri. 

In In re General Security National Insurance Co., 2011 U.S. Dist. LEXIS 49518 (S.D.N.Y. April 29, 2011),  the Court rejected a motion to vacate an award of attorneys’ fees to the prevailing party, finding that the award did not exceed the powers of the arbitrator and that it was not made in manifest disregard of the law.

This award of legal fees  was contested because the arbitration agreement, incorporated in a reinsurance contract, did not specify any institutional or ad hoc rules, but did provide that the hearing would be held in New York. A general choice of law clause in the reinsurance agreement, separate from the arbitration clause, provided that the contract would be interpreted in accordance with New York law. New York’s arbitration statute, CPLR Article 75, provides in Section 7513 that  arbitrator fees, but not attorneys’ fees,  may be allocated in the final award.

It was entirely reasonable, the Court held, for the arbitrators to have assumed that Section 7513 of the CPLR did not govern the proceedings, because the contract’s general New York choice of law clause, under well-developed Second Circuit authority, calls for application only of substantive New York law and not New York law limiting the remedial powers of arbitrators.  Further, whereas the arbitration clause broadly provided for submission of all disputes to arbitration, and specified no limits on the arbitrator’s remedial powers, the agreement was reasonably construed by the arbitrator as conferring power to award attorneys’ fees.  In addition, fees were also requested by both sides in the course of the proceedings. Further, the Court recalled that in a 2009 case the Second Circuit had held that an arbitral tribunal has inherent power, even when the clause provides that each party shall bear its own legal costs (which was not the case here), to award attorneys’ fees based on its assessment of the conduct of the parties and counsel during the proceedings. (Reliastar Life Ins. Co. v. EMC Nat’l Life Co., 564 F.3d 81 (2d Cir. 2009), reported upon in Arbitration Commentaries in May 2009, a posting that is accessible by clicking on that month in the “Archive” section at the left margin).