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Prasad v. Investors Associates, Incorporated

82 F. Supp.2d 365 (D. N.J. 2000)

ARBITRATION; VACATION—In a federal action, any attempt to vacate an arbitration award must be commenced within three months even if the applicable state’s rules would allow for a longer period.

An agreement between a customer and a securities broker required binding arbitration and contained a choice-of-law clause mandating New York law. The customer won an arbitration award. Three months after the award was issued, the customer sought to confirm the award in the United States District Court for New Jersey because the brokers, officers and principals were located in New Jersey. In response, the broker and its officers sought to vacate the award. Under the Federal Arbitration Act (FAA), an arbitration award may not be challenged more than three months after it has been issued, even in response to a motion to confirm the award. The broker and its officers, however, contended that by designating New York in the agreement’s choice-of-law clause, the parties agreed that the time period for challenging an arbitration award was governed by New York law, not the FAA. New York also has a 90-day period within which to vacate arbitration awards, but New York courts have interpreted the rule to permit a challenge to an arbitration award to be raised in opposition to a motion to confirm the award, even if no challenge was raised in the first 90 days. “The FAA was enacted to foster the public policy favoring arbitration and to give effect to parties’ contractual agreements to arbitrate,” but the United States Supreme Court has held that it does not preempt state arbitration rules. Therefore, an agreement to arbitrate can adopt state arbitration rules and state confirmation procedure. This agreement, however, was not explicit. It provided that New York governed the parties’ rights under the contract, and that arbitration would be governed by the rules of the National Association of Security Dealers. Those rules do not provide a limitation period for objections. Thus, the Court needed to determine whether under the agreement, and Federal policy, the FAA or New York law applied. In doing so, the Court looked to the case of Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995) for guidance. There, in a dispute as to whether punitive damages could be awarded in an arbitration proceeding, the Supreme Court held that “due regard must by given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration.” By making no reference to New York’s rules governing confirmation proceedings, “the general choice-of-law clause here at most incorporated an ambiguity as to what body of law governs this confirmation proceeding.” While the Court felt that the New York confirmation rule did not expressly defeat arbitration, “it unquestionably undermines the finality of arbitration awards and expands the reach of judicial review of such awards.” Further, the Court held “that permitting challenges to arbitration awards to be asserted as defenses to a motion to confirm, filed after the time period for filing motions to vacate has run, contravenes federal policy favoring quick resolution of arbitrations and the enforcement of arbitration awards. Moreover, it expands the opportunity for judicial review of arbitration awards, which Congress expressly sought to limit through the FAA.”


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