The question before the Appellate Division, Second Department in In re D & W Cent. Station Fire Alarm Co. v. Flatiron Hotel, ___ A.D. 3d ___, 2023 N.Y. Slip Op. 6136 (2d Dep’t Nov. 29, 2023), was whether an arbitration award had to be vacated because the amount of fees the arbitrator awarded was irrational and excessive and therefore exceeded the arbitrator’s powers under N.Y. Civ. Prac. L. & R. (“CPLR”) 7511(b)(1)(iii). The arbitrator awarded fees that were 13.5 times the amount the prevailing party’s attorney said it charged its client on an hourly basis. The fee award was 44% of the amount the arbitrators awarded for the prevailing party’s claim. See 2023 N.Y. Slip Op. 6136 at *1.
The Court concluded that the fee award was irrational and violative of New York’s strong public policy against the enforcement of contracts or claims for excessive legal fees. It therefore reversed the trial court’s judgment granting the motion to confirm and denying the motion to vacate, and remanded the matter back to the trial court. See 2023 N.Y. Slip Op. 6136 at *2.
Flatiron Hotel is of particular interest because it shows that there is authority under New York arbitration law for challenging successfully awards of legal fees that are authorized by the parties’ contract but are off the rails in their amount. While not a high-stakes arbitration involving hundreds of thousands of dollars in legal fees, it was one where the losing party was socked with a fee that was so far out of proportion of what it consented to pay that there was nothing whatosever in the record to support it.
Fortunately for the appellant in Flatiron Hotel, the Appellate Division set aside the fee award even though the standard of review for granting such relief is highly deferential. While decisions vacating awards are understandably quite rare, this was one where vacatur was quite appropriate, as we shall see.
Background
The Flatiron Hotel arbitration arose out of a 2018 commercial fire alarm lease between a fire-alarm provider (the “Alarm Company”) and a hotel operations provider (the “Hotel”), which contained an arbitration agreement. The Alarm Company commenced an arbitration seeking $32,299.43 in damages and $16,149.72 in attorney’s fees. In July 2020 the arbitrator made an award in favor of the Alarm Company, which required the Hotel to pay $36,417.61 on the Alarm Company’s claim and $16,149.72 for attorneys’ fees. 2023 N.Y. Slip Op. 6136 at *1.
The Alarm Company commenced a special proceeding under Article 75 of New York’s Civil Practice Law and Rules (“CPLR”) for an order and judgment confirming the award and awarding the Alarm Company an additional $2,500.00 in attorneys’ fees. 2023 N.Y. Slip Op. 6136 at *1. The Hotel cross-petitioned “to vacate or modify so much of the arbitration award as awarded attorneys’ fees in the sum of $16,149.72.” 2023 N.Y. Slip Op. 6136 at *1.
In October 2020, the Court granted the petition, denied the cross-petition, and ultimately entered a judgment awarding the Alarm Company $57,781.13. The appeal followed.
The Second Department’s Decision Vacating the Award of Attorney’s Fees
The challenge to the fee order was made under CPLR 7511(b)(1)(iii), which provides that a court may vacate an award where an arbitrator “exceeds [her or] his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.” CPLR § 7511(b)(1)(iii). The Court explained that arbitrators exceed their powers where “the award violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator[s’] power.” 2023 N.Y. Slip Op. 6136 at *1 (citations and quotations omitted; cleaned up). An award is irrational, said the Court, when there is “no proof whatever to justify the award.” 2023 N.Y. Slip Op. 6136 at *1 (citations and quotations omitted). The standard of review for exceeding powers, explained the Court, is extremely deferential: “Courts are bound by an arbitrator’s factual findings, interpretation of the contract and judgment concerning remedies, even where an arbitrator makes errors of law or fact.” 2023 N.Y. Slip Op. 6136 at *1 (citations and quotations omitted).
The Court held that—even though the parties’ contract and the rules the parties selected to govern their arbitration authorized fee shifting—the arbitrator’s award of attorney’s fees in an amount exceeding $16,000.00 was not supported by any evidence whatsoever and was therefore irrational. 2023 N.Y. Slip Op. 6136 at **1-2
As to the legal standard for fee shifting in litigation, the Court explained that “[a]n award of an attorney’s fee pursuant to a contractual provision may only be enforced to the extent that the amount is reasonable and warranted for the services actually rendered.” 2023 N.Y. Slip Op. 6136 at *1 (quotation and citations omitted). In determining whether an award is reasonable, the court considers “such factors as the time, effort, and skill required; the difficulty of the questions presented; counsel’s experience, ability, and reputation; the fee customarily charged in the locality; and the contingency or certainty of compensation.” 2023 N.Y. Slip Op. 6136 at *1 (quotation and citations omitted).
There were, explained the Court, three reasons why there was no support whatsoever in the record for a fee award in the amount of $16,149.72, and that the award accordingly was irrational.
First, the Alarm Company’s counsel explained that it spent four hours of time on the arbitration, for which it billed $300.00 per hour, generating a fee of approximately $1,200.00. By contrast the $16,149.72 fee award was nearly 13.5 times that amount. See 2023 N.Y. Slip Op. 6136 at *1.
Second, while the $16,149.72 fee award was allegedly based on a fee arrangement agreed by the Alarm Company, “there was no proof that [the Hotel] agreed to unlimited or unreasonable fees, and no proof that [the Hotel] agreed to the fee arrangement that [the Alarm Company] made with its counsel.” 2023 N.Y. Slip Op. 6136 at *1 (quotation and citation omitted).
Third, and in any event, “the award of attorneys’ fees was contrary to [the Alarm Company’s] agreement with its counsel [because]. . . it was not one-third of the amount awarded to [the Alarm Company] on its claim, but approximately 44% of that amount.” 2023 N.Y. Slip Op. 6136 at *1.
The Court also held that the fee award “violate[d] the strong public policy against excessive fees, e.g., fee arrangements where the amount becomes large enough to be out of all proportion to the value of the professional services rendered.” 2023 N.Y. Slip Op. 6136 at *2 (quotations and citations omitted).
Because the award was irrational and violative of public policy the Court held that the trial court “should have vacated so much of the arbitration award as awarded [to the Alarm Company] attorneys’ fees in the sum of $16,149.72.” 2023 N.Y. Slip Op. 6136 at *2.
That left the $2,500.00 in fees the trial court awarded under the contract to compensate the Alarm Company for the fees it incurred for work concerning the petition to confirm and the Hotel’s cross-petition to vacate. That fee award, too, had to be vacated “since [the Alarm Company] has not prevailed in this litigation[,]” and accordingly “was not entitled to an award of additional attorneys’ fees.” 2023 N.Y. Slip Op. 6136 at *2 (citations omitted).
The Court accordingly “reverse[d] the judgment, den[ied] those branches of the petition which were to confirm so much of the arbitration award as awarded attorneys’ fees to [the Alarm Company] in the sum of $16,149.72 and for an award of additional attorneys’ fees in the sum of $2,500, grant that branch of the cross-petition which was to vacate the aforementioned portion of the arbitration award, and remit the matter to the Supreme Court, Nassau County, for further proceedings consistent herewith, including remitting the matter to the arbitrator for a new hearing and thereafter a new determination on the issue of the amount of attorneys’ fees to award [the Alarm Company].” 2023 N.Y. Slip Op. 6136 at *2.
A Word About Attorney’s Fees Awards in Arbitration. . .
Attorneys’ fee awards in arbitration are prevalent in cases where parties authorize fee-shifting to prevailing parties. In these contract-based fee shifting cases, fees can be awarded even if the losing party was not acting in bad faith.
As a general rule, arbitrators are not shy about awarding fees to prevailing parties in cases where the parties have agreed to shift fees. That is fully consistent with the precept that a principal purpose of contract law is to allocate risks according to the parties’ wishes.
But in the author’s experience parties, including some relatively sophisticated ones, do not always understand the practical import of a contract provision or contractually incorporated arbitration rule authorizing an arbitrator to award the prevailing party its reasonable legal fees. Fees (even “reasonable fees”) are expensive and in some relatively high-stakes, complex disputes, they can total hundreds of thousands of dollars (or more). For parties that do not have substantial monetary resources, even considerably more modest fee awards can be financially crippling.
Fee shifting provisions change the dynamics of arbitration and litigation strategy quite profoundly from what most U.S. litigants ordinarily expect.
Under the so-called “American Rule,” litigants ordinarily bear their own legal fees unless a statute, or a contract provides otherwise.
Where the parties do not provide for fee shifting in their contract (and do not otherwise authorize arbitrators to allocate attorney fees among the parties), then an arbitration claimant’s main downside risk if it does not prevail is that it must bear its own attorney fees. But if the claimant has agreed to a fee-shifting provision, then, in addition to its own fees, the claimant must pay the other side’s fees as well. And if the other side happens to be a large, sophisticated company, those fees may be double, triple or more of the fees the losing party has already paid its own, less expensive lawyers.
As one can imagine, a person in this position is like someone who has been kicked when she is already down. Is it fair? Not really, but it is arguably fair in the sense it was what the losing party agreed, whether they realized the import of their agreement or not.
Parties must pay careful attention to what they are agreeing and if they agree to a fee shifting position, or to arbitration authorizing fee shifting, then, to protect their rights, they need to plan their litigation and arbitration strategy accordingly and wisely.
For other articles about attorney’s fees, see here, here, and here.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Phil Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is a partner and founding member of the Loree Law Firm. He has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation.
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Tags: American Rule, Attorney Fees, Attorney's Fees, Bad Faith, CPLR Article 75, CPLR § 7511(b)(1)(iii), Exceeding Powers, Excessive Fees, Fee Shifting, fees, Flatiron Hotel, Legal Fees, Nassau County, New York, New York Appellate Division, Public Policy, Second Department, Supreme Court, vacate award, Vacatur
