WAEHNER v. FROST (2003)

Plaintiffs, developers of a condominium project on Lake George, sued defendant, Thomas R. Frost, Jr. (hereinafter Frost), the project's architect, and Thomas J. Bien and Associates, Inc. (hereinafter Bien), the general contractor, for damages allegedly caused by faulty design and construction.   Plaintiffs settled with Bien for $60,000.00.   Plaintiffs and defendant then agreed to submit their dispute to binding arbitration.   On July 15, 2003, the arbitrator fixed plaintiffs' total damages at $86,620.00 and apportioned ninety (90) percent liability against Frost for a faulty roof design and ten (10) percent against nonparty Bien for construction defects.

Plaintiffs now move to confirm the award, and defendant cross-moves to reduce the award to $26,620.00 to reflect an offset attributable to the $60,000.00 settlement.   Defendant argues that the award violates New York's rule prohibiting duplicative recoveries, since, should the award stand, plaintiffs would recover a total of $137,958.00, i.e., $51,338.00 more than they were awarded in total damages.

 Arbitration is a favored method of dispute resolution in New York. Matter of Smith Barney Shearson, Inc. v. Sacharow, 91 N.Y.2d 39, 49, 666 N.Y.S.2d 990, 689 N.E.2d 884 (1997).   Judicial interference with the process and outcome of arbitration is discouraged.  Matter of New York City Transit Auth. v. Transport Workers Union of America, Local 100, AFL-CIO, 99 N.Y.2d 1, 6, 750 N.Y.S.2d 805, 780 N.E.2d 490 (2002).   Unless the parties agree otherwise, arbitrators are not bound by principles of substantive law or by rules of evidence and may “do justice as he [or she] sees it, applying his [or her] own sense of law and equity to the facts as he [or she] finds them to be and making an award reflecting the spirit rather than the letter of the agreement [and][an] award will not be vacated even though the court concludes that ․ [the arbitrator] misapplies substantive rules of law, unless it is violative of a strong public policy, or is totally irrational ․”.  Matter of Silverman [Benmor Coats, Inc.], 61 N.Y.2d 299, 308, 473 N.Y.S.2d 774, 461 N.E.2d 1261 (1984);  accord Matter of New York State Correctional Officers and Police Benevolent Assn. v. State of New York, 94 N.Y.2d 321, 326-327, 704 N.Y.S.2d 910, 726 N.E.2d 462 (1999).

 The record in this case demonstrates that the arbitrator was keenly aware of the settlement between plaintiffs and Bien, (see Report of Arbitrator and Itemization of Award, Footnotes 1 and 3, annexed as Exhibit B to plaintiffs' notice of motion).   Moreover, it is clear that although the arbitrator considered the settlement in his deliberations, he chose not to treat it as an offset (see Letter of Arbitrator dated August 25, 2003, annexed as Exhibit E to defendant's cross motion)

 The issue narrows to whether the arbitrator's conscious failure to offset the damages awarded by the settlement amount is sufficiently violative of public policy to require vacatur.   An “extremely narrow” exception has been established in New York to set aside arbitration awards if public policy is disregarded.  Matter of United Federation of Teachers, Local 2, AFT, AFL-CIO v. Board of Educ., 1 N.Y.3d 72, 769 N.Y.S.2d 451, 801 N.E.2d 827 (2003), citing Matter of New York City Tr. Auth. v. Transport Workers Union of Am. Local 100, AFL-CIO, 99 N.Y.2d 1, 9, 750 N.Y.S.2d 805, 780 N.E.2d 490 (2002).   Violations of public policy may take two forms.   The first which has no application here is when state law absolutely “prohibits the particular matter from being decided in the arbitration.   The second is when an arbitrator issues an award which does not follow well-defined constitutional, statutory, or common law of this State.”

 Defendant's objection, once again, is premised upon longstanding public policy in this State that litigants are to be fairly compensated but that duplicative recoveries and windfalls should be avoided.  Fisher v. Qualico Contr. Corp., 98 N.Y.2d 534, 537, 749 N.Y.S.2d 467, 779 N.E.2d 178 (2002);  Whalen v. Kawasaki Motors Corp., 92 N.Y.2d 288, 292, 680 N.Y.S.2d 435, 703 N.E.2d 246 (1998);  Sawtelle v. Waddell & Reed, Inc., 304 A.D.2d 103, 116, 754 N.Y.S.2d 264 (1st Dept 2003).   Research has not disclosed a New York decision setting aside an arbitration award on the basis of a duplicative recovery.   However, under the Federal Arbitration Act, an arbitrator's award was modified “[w]hen an arbitration award orders a party to pay damages that have already been paid”.  Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d 1250, 1254 (7th Cir.1994), cert. denied 512 U.S. 1205, 114 S.Ct. 2675, 129 L.Ed.2d 810 (1994);  Companhia de Navegacao Maritima Netumar v. Armada Parcel Serv., Ltd., 2000 WL 60200, 2000 U.S. Dist LEXIS 558 (U.S. Dist. Ct., S.D.N.Y., 2000).

 In New York, double recoveries are prohibited and discouraged both in common law, Fisher, supra;  Whalen, supra, and by statute, CPLR 4545;  GOL 15-108.  CPLR 4545 codifies the common law collateral source rule which prohibits recovery of damages for losses which have been replaced or indemnified by certain sources.  GOL 15-108 requires that a verdict be reduced by the greater of the settlement amount or the settlor's attributable share of damages.   Here, plaintiffs' claim, if tried before the court, would be subject to a GOL § 15-108 offset.   The arbitrator found defendant negligent, determined the full measure of plaintiffs' damages, and apportioned those damages between the defendant and the settling tortfeasor Bien, but then did not apply the principles of GOL 15-108. Public policy was violated.   If the award were to remain intact, plaintiffs would receive a windfall.   The award cannot stand.

Yet, the record in this case does not permit the court itself to modify the award and order an offset of the full $60,000.00 settlement, since there is an assertion by plaintiff that the settlement made with Bien also encompassed damages plaintiffs sustained by reason of construction defects beyond the roof.   Plaintiffs are entitled to the opportunity to prove that some or all of the $60,000.00 settlement included damages which are unrelated to the roof defects and which should not be setoff against the award to plaintiffs.

Remand to the arbitrator to determine what, if any, portion of the $60,000.00 settlement is attributable to damages unrelated to the roof defects is appropriate. see Sawtelle v. Waddell & Reed, Inc., supra, at 117, 754 N.Y.S.2d 264.

Plaintiffs' motion to confirm the award of $77,958.00 is denied, without costs.

Defendant's motion is granted, without costs, and the award is vacated to the extent that the matter is remanded to the arbitrator for further proceedings not inconsistent herewith.

This memorandum shall constitute both the decision and the order of the court.   All papers, including this decision and order, are being returned to defendant's counsel.   The signing of this decision and order shall not constitute entry or filing under CPLR 2220.   Counsel is not relieved from the applicable provisions of that section relating to filing, entry and notice of entry.

So Ordered.

THOMAS D. NOLAN, JR., J.