Arbitration can be an effective alternative for parties seeking to avoid drawn-out and costly litigation. As a result, it has become common practice for parties to negotiate arbitration clauses into their agreements. However, parties consenting to arbitration should be prepared to abide by an arbitrator’s discretion, especially regarding discovery. If not, parties might be left empty-handed realizing that New York courts are in no rush to entangle themselves in arbitration proceedings.
Background
In Matter of Investcloud Inc. v Siegal, Investcloud, Inc. (“Petitioner”) sought judicial intervention to compel third party discovery from Siegal and PricewaterhouseCoopers (“Respondents”) in an arbitration proceeding. The arbitration was governed by JAMS Comprehensive Arbitration Rules and Procedures (“JAMS Rules”) and the Federal Arbitration Act (“FAA”).
Before finding themselves in arbitration, Petitioner and Manning & Napier Advisors (“Manning”) had an agreement under which Petitioner would develop software for Manning. Petitioner was selected to provide such services through a request for information process (“RFI”). The RFI process was overseen by Respondents.
Since the RFI process was relevant to the parties’ dispute, Petitioner sought pre-hearing discovery from Respondents in the arbitration proceeding. In spite of multiple subpoenas, Petitioner claimed that Respondents were not fully complying with demands for all relevant discovery needed to arbitrate the dispute. Instead of raising this issue with the designated arbitrator, Petitioner decided to initiate a special proceeding with the court seeking an order compelling Respondents to comply with Petitioner’s discovery demands. The court stayed the arbitration proceeding until resolution of the issue.
Takeaway
Justice Daniel J. Doyle made it clear that New York courts should not inject themselves into arbitration proceedings, especially concerning issues around pre-hearing discovery. In coming to this conclusion, Justice Doyle first considered whether the FAA even allowed for non-party pre-hearing discovery. Noting a circuit split on this issue, Justice Doyle concluded that the court was bound by the Second Department and its holding that an arbitrator is “authorized to order non-party discovery (through subpoena) upon a showing of ‘special need or hardship.’”
However, Justice Doyle explicitly stated that the determination of “special need or hardship” should be made by the arbitrator and not by courts. Justice Doyle noted that parties voluntarily consent to arbitration to avoid litigation, and “unnecessary entanglement” with courts would hinder that purpose. Further, since the rules of arbitration are “not arbitrary” and sufficiently protect due process, there was no reason for the court to intervene. Finally, Justice Doyle reasoned that arbitrators are in the best position to make these determinations, and any contrary rule from New York courts would act as impermissible entanglement in such proceedings.
Thus, Justice Doyle refused Petitioner’s invitation to get involved in the arbitration proceeding, and denied Petitioner’s request to compel third party discovery.
Conclusion
Arbitration acts as an avenue for parties to resolve their disputes privately and avoid litigation. With that, parties must be prepared to abide by an arbitrator’s rules and procedures. Otherwise, a party might find themselves without any back up, as New York courts are extremely hesitant to intervene in such proceedings.