Westinghouse Elec. Corp. v. New York City Transit Authority

• Decision Date: 19 October 1993
• Citation: 623 N.E.2d 531,603 N.Y.S.2d 404,82 N.Y.2d 47
• Parties: , 623 N.E.2d 531, 62 USLW 2250 WESTINGHOUSE ELECTRIC CORPORATION, Plaintiff, v. NEW YORK CITY TRANSIT AUTHORITY et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

Page 404

603 N.Y.S.2d 404

82 N.Y.2d 47, 623 N.E.2d 531, 62 USLW 2250

WESTINGHOUSE ELECTRIC CORPORATION, Plaintiff, v. NEW YORK CITY TRANSIT AUTHORITY et al., Defendants.

Court of Appeals of New York.

Oct. 19, 1993.

Smith, Pachter, McWhorter & D'Ambrosio (Peter M. D'Ambrosio and John V. Snyder of counsel, of the Virginia Bar, admitted pro hac vice) and Davis, Scott, Weber & Edwards, P.C., New York City (John A. Redmon and Ellen Wahl Parker of counsel), for plaintiff.

Ira J. Lipton, Albert C. Cosenza, Diane J. Morgenroth, Martin B. Schnabel and Richard Schoolman, Brooklyn, for defendants.

Berman, Paley, Goldstein & Kannry, New York City (Robert G. Benisch and Alvin Goldstein of counsel), for General Contractors Ass'n of New York, Inc., amicus curiae.

Murtagh, Cohen & Byrne, Garden City (Edward T. Byrne of counsel), for New York Elec. Contractors Ass'n, Inc., amicus curiae.

Milton H. Pachter, Arthur P. Berg, Carlene v. McIntyre and Kathleen M. Collins, New York City, for Port Authority of New York and New Jersey, amicus curiae.

OPINION OF THE COURT

BELLACOSA, Justice.

The issue in this case, certified to this Court by the United States Court of Appeals for the Second Circuit so that we might resolve a question of New York law, is whether New York public policy prohibits an "alternative dispute resolution ('ADR') provision that authorizes an employee of a party [the New York City Transit Authority and Metropolitan Transportation Authority] to a contract dispute, where such employee is personally involved in the dispute, to make conclusive, final, and binding decisions on all questions arising under the contract" (Westinghouse Elec. Corp. v. New York City Tr. Auth., 990 F.2d 76, 79). We answer the certified question in the negative and conclude that the challenged ADR provision, which expressly provides for judicial review, does not in these circumstances violate New York public policy.

I.

In 1983, Westinghouse Electric Corporation, a Pennsylvania corporation, bid on, won and entered into a contract with the New York City Transit Authority (NYCTA) and the Metropolitan Transportation Authority for the sale, delivery, and installation of power rectifier equipment to five substations for the New York City subway system. During the course of Westinghouse's performance under the contract, numerous disputes arose between the parties concerning whether Westinghouse was entitled to damages for delay or compensation for additional work; whether NYCTA could properly delete certain portions of the work from the contract; whether Westinghouse was being restrained from performing under the contract; and whether Westinghouse was entitled to unilaterally stop work under the contract. The alternative dispute resolution provision, article 8.03, provides:

"(a) In the event the Contractor and Authority are unable to resolve their differences concerning a determination by the Superintendent, the Contractor may initiate a dispute in accordance with the procedure set forth in this Article. Exhaustion of these procedures shall be a precondition to any lawsuit permitted hereunder.

"(b) The parties to this contract authorize the Superintendent, acting personally, to decide all questions of any nature whatsoever arising out of, under, or in connection with, or in any way related to or on account of, this Contract * * * and his decision shall be conclusive, final and binding on the parties.

* * * * * *

"(c) If the Contractor protests the determination of the Superintendent, the Contractor may commence a lawsuit in a Court of competent jurisdiction of the State of New York under Article 78 of the New York Civil Practice Law and Rules or a United States Court in New York, under the procedures and laws applicable in that court, it being understood the review of the Court shall be limited to the question of whether or not the Superintendent's determination is arbitrary, capricious or grossly erroneous to evidence bad faith."

Westfall (whose title is Chief Electrical Officer) is a NYCTA employee and functioned as the Superintendent and ADR adjudicator. By letter dated November 3, 1988, Westinghouse notified Westfall that the NYCTA's failure to resolve numerous long-standing design problems and other restraints and prohibitions on Westinghouse's work constituted a constructive stop work order. The letter requested that the NYCTA resolve all outstanding performance problems within 90 days. In a subsequent letter dated February 3, 1989, Westinghouse advised Westfall that it was suspending further performance effective February 3, 1989, because the NYCTA did not respond to the problems set forth in the earlier letter. Westfall responded by letter dated February 8, 1989, acknowledging Westinghouse's formal advice that it was suspending performance under the contract. Westfall further stated that this was a breach of contract and directed Westinghouse to discontinue all work. In addition, Westfall advised Westinghouse that a recommendation would be made that it be held in default and, on June 13, 1989, the NYCTA advised Westinghouse that that had been formally effectuated. On June 21, 1989, Westinghouse submitted to Westfall a "Request for Additional Compensation and Time Extension," including the costs of additional labor, equipment, and general and administrative expenses Westinghouse claimed it incurred to perform the contract due to the NYCTA's alleged failure to discharge its contract obligations. Westinghouse asked that the NYCTA's default declaration be rescinded and for a Superintendent's decision, as required by article 8.03. It thus submitted itself to the ADR mechanism. By letter dated July 26, 1989, Westfall advised Westinghouse that he rejected its claims.

On August 2, 1989, Westinghouse sued in the District Court of the Southern District of New York for breach and rescission of the contract. Westinghouse argued that article 8.03 contravenes New York public policy and, therefore, is void and unenforceable. In Westinghouse Elec. Corp. v. New York City Tr. Auth., 794 F.Supp. 79 [S.D.N.Y. 1991, Haight, J.], the District Court upheld enforceability of the provision, believing that the greater weight of the intermediate appellate authority in New York supported validity.

Westinghouse appealed to the United States Court of Appeals, Second Circuit, arguing that article 8.03 imposes a procedure for dispute resolution by a functionary inseparable from one of the parties to the dispute and, thus, fosters a predisposed adjudication process, which is contrary to New York public policy. Pursuant to this Court's Rules of Practice (22 NYCRR), § 500.17, the Second Circuit certified the issue to our Court for the articulation of New York State law and public policy (Westinghouse Elec. Corp. v. New York City Tr. Auth., 990 F.2d 76, supra).

II.

Article 8.03 arrives at this Court with a dubious reputation, though its validity has been upheld by lower courts. In K.G. Indus. v. Metropolitan Transp. Auth. (Sup.Ct., NY County, Oct. 8, 1987, Wilk, J., index No. 5761/86, affd. 149 A.D.2d 992, 541 N.Y.S.2d 1007), the Court affirmed a decision which dismissed the contractor's action seeking a declaratory judgment involving the alternative dispute procedures in the parties' contract. The claim was that they were invalid and against public policy because the contract designated the Chief Engineer, an employee of the NYCTA, to serve as adjudicator of all disputes arising under the contract. The contractor's contention was similarly rejected in NAB Constr. Corp. v. Metropolitan Transp. Auth., 167 A.D.2d 301, 562 N.Y.S.2d 44.

Matter of Astoria Med. Group (Health Ins. Plan), 11 N.Y.2d 128, 227 N.Y.S.2d 401, 182 N.E.2d 85 and Matter of Siegel (Lewis), 40 N.Y.2d 687, 389 N.Y.S.2d 800, 358 N.E.2d 484, provide persuasive authority affecting the rationale of NAB Constr. and K.G. Indus. at the Appellate Division. In Matter of Siegel, the parties designated a lawyer and an accountant of one of the parties as the arbitrators of any dispute arising from a stock purchase agreement. A dispute arose resulting in a demanded arbitration, but before a decision was rendered, one party refused arbitration and brought a proceeding to vacate the designation of the lawyer and the accountant as arbitrators. This Court dismissed the action, stating that as it has long been the policy of New York courts to interfere as little as possible with the freedom of consenting parties, "[t]herefore, strange as it may seem * * * a fully known relationship between an arbitrator and a party, including one as close as employer and employee * * * will not in and of itself disqualify the designee" (Matter of Siegel, 40 N.Y.2d 687, 690, 389 N.Y.S.2d 800, 358 N.E.2d 484, supra [emphasis added]. Our strong, albeit cautionary, sentiments expressed in Matter of Siegel and Matter of Astoria Med. Group have been extended to apply to alternative dispute resolution provisions contained in municipal contracts (see, Maross Constr. v. Central N.Y. Regional Transp. Auth., 66 N.Y.2d 341, 497 N.Y.S.2d 321, 488 N.E.2d 67; see also, Ardsley Constr. Co. v. Port Auth., 54 N.Y.2d 876, 444 N.Y.S.2d 907, 429 N.E.2d 414).

Considerable authority thus supports the validity and enforceability of alternative dispute resolution mechanisms, which reflect the informed negotiation and endorsement of parties. It is firmly established that the public policy of New York State favors and encourages arbitration and alternative dispute resolutions Matter of Nationwide Gen. Ins. Co. v. Investors Ins. Co., 37 N.Y.2d 91, 95, 371 N.Y.S.2d 463, 332 N.E.2d 333; see also, Matter of Weinrott [Carp], 32 N.Y.2d 190, 344 N.Y.S.2d 848, 298 N.E.2d 42). These mechanisms are "well recognized as an effective and...