In a recent decision (Protostorm, Inc. v. Foley & Lardner LLP et al.), the First Department reversed a lower court’s order granting the plaintiff’s motion to stay an arbitration against it for unpaid legal fees and denied the defendants’ cross-motion seeking a stay of the legal malpractice action. The First Department held that it must compel arbitration of the law firm’s claim for unpaid legal fees and stay a pending legal malpractice action pending completion of the arbitration.
The court cited CPLR § 7503 (a) which provides that the court shall direct parties to arbitrate where there is no significant question whether a valid arbitration agreement was made or complied with and that such order “shall operate to stay a pending … action.” After identifying a valid arbitration agreement, the court noted that a stay is warranted only where the matter submitted to arbitration is beyond the arbitrator’s power.
In Protostorm Inc., not only was there a valid agreement to arbitrate any dispute for unpaid fees, but also the court recognized that the arbitrable claim for fees was so “inextricably intertwined” with the legal malpractice claim that the proper course was to stay the legal malpractice action until the completion of the arbitration due to the potential that a determination in the arbitration could dispose of the malpractice claim.
In practice, counsel should closely review any arbitration provisions and the terms and conditions of the same. The First Department distinguished Protostorm Inc. from instances where it would be appropriate for the court to stay an arbitration pending the resolution of an action, such as where the agreement explicitly provides that all disputes, with a narrow exception, would be decided in New York courts or where arbitration can only take place after numerous preliminary issues are resolved.1 Thus, Protostorm, Inc. suggests that there is a reluctance to stay arbitration in favor of a pending action absent a compelling reason.
1 See Primavera Laboratories Inc. v. Avon Products Inc., 297 A.D.2d 505 (1st Dept. 2002).
If you have any questions regarding the content of this alert, please contact Tara Sciortino, counsel, at tsciortino@barclaydamon.com; Amanda Miller, associate, at amiller@barclaydamon.com; or another member of the firm’s Professional Liability Practice Area.