(2014/5775)

Kol Torah is honored to present an important and precedent setting ruling of the Beth Din of America.  We thank Rav Shlomo Weissman, the director of the Beth Din of America, for kindly granting permission to print this ruling.  We hope our publishing this article will help to raise the profile of dispute resolution in proper Batei Din. This week, we will present the facts of the case and the first part of the discussion. Next week, we will conclude with the remainder of the discussion and the decision.

Introduction

The Beth Din of America, having been chosen by the Parties to commence administration of an arbitration case pursuant to an arbitration agreement (the “Arbitration Agreement”), dated as of May 20, 2012, between United Savings, LLC, with an address at 555 Ceder Rd, Buffalo, NY, (the “Claimant”) and Dunkirk Center for Health, Inc. (“Dunkirk”) and Royal Rehabilitation LLC (“Royal”) with an address at 888 Washington Street, Dunkirk, NY, (Columbus and Royal, collectively, the “Respondent”) (the Claimant and Respondent, collectively, the “Parties”), with respect to certain differences and disputes in reference to monies owed with respect to a cost savings, with each Party having certain claims and counterclaims against each other, does decide as follows:

HEARING:

Hearings (the “Hearings”) in this matter took place at the Beth Din on October 12, 2012; January 17, 2013; April 8, 2013; and June 3, 2013.  Following the Hearings, the Parties made various written submissions to complete the record in this case.  Present at the Hearings were Mr. Harvey Goldman, on behalf of the Claimant, and Dr. Mark Furst and Mr. Yosef Green, on behalf of the Respondent.  The Claimant was represented Michael Schwartz, Esq. and Jonathan Miller, Esq.; the Respondent was represented David Goldberg, Esq.  For the sake of convenience, in this decision, unless it would lead to a lack of clarity, written correspondence to us from or statements made before us by attorneys on behalf of the Parties are attributed to the Parties rather than the attorneys.

FACTS AND CLAIMS:

The Agreement

The Claimant is a utility-cost-savings consultant.  On January 10, 2008, Mr. Joe Bush (“JB”), an individual, who represented that he was authorized to sign a contract on behalf of Dunkirk, signed a cost recovery agreement (the “Agreement”) that authorized the Claimant to try to recover utility costs expended by Dunkirk.  The Respondent provided us with two versions of the Agreement.  In one, JB did not date, enter his title, or print his name.  In the other, we noted JB’s title and the date (January 10, 2008) he purportedly executed the Agreement. (We note that the Respondent submitted to us an undated copy of a “Letter of Authorization” signed by JB that included his printed name, and “Owner,” as his title.).  The Agreement, in general, provided that JB, on behalf of Dunkirk, retained the Claimant to correct and reduce its gas, electric, and oil costs, including taxes, and that any dispute arising under it “will be resolved in accordance with the laws of the State of New York State [sic].”  The Agreement also generally provided that the Claimant would be entitled to receive an amount equal to one-third of the total utility savings generated by the Claimant as compensation for its services.  The savings generally would be calculated based on actual cost recovery, as well as for 30 months of projected savings.  We also note that although the Claimant did not provide us with a cost-recovery agreement executed on behalf of Royal, the Claimant’s August 20, 2013 letter to us asserts that such an agreement was executed.

The Respondent asserted that the Agreement is invalid because it was not signed by an officer of the Respondent who was authorized to enter into agreements on behalf of the Respondent.  The Claimant argued that JB was authorized by the Respondent to execute the Agreement, and that even if JB was not actually authorized to act on behalf of the Respondent, his signature on the Agreement is nevertheless legally binding upon the Respondent under the secular legal doctrine of apparent authority.  Under this doctrine, a principal can be bound by the actions of a purported agent in some circumstances if a reasonable person would conclude, based on various factors, that the agent duly represents the principal.

JB was no longer alive by the time we convened; thus, we were never able to interview him.

The Savings

The Parties disagree about how much the Claimant saved, if any, for the Respondent.

Ultimately, the Claimant requested that, pursuant to the Agreement, we award it $243,130.77 for invoices related to savings for Dunkirk, $4,333.22 for invoices related to savings for Royal, plus an unspecified amount of attorneys’ fees.  Initially, the Claimant requested a higher amount, $312,990, but after questioning by the arbitrators, the Claimant reduced its claim.

The Claimant assumes that without its intervention the Respondent would have paid a negotiated rate (the “Negotiated Rate”) of an amount equal to 19.539 percent less than the posted interruptible transportation rate (the “Posted Rate”).  The Claimant bases its assertion on looking at an average percentage difference between (a) the actual rate the Respondent was billed and (b) the Posted Rate for the seven months from February through August 2009, as cited in an email dated May 23, 2013, from Mr. Chris Johns to Mr. Fred Strand.  Ultimately, the Claimant switched to a firm transportation rate (the “Firm Rate”), resulting in significant savings compared to the Negotiated Rate. 

In contrast, the Respondent asserts that even without the Claimant’s intervention and a switch to the Firm Rate, it is reasonable to assume that over time its Negotiated Rate would have been lowered to a rate equal to 20 percent more than the Firm Rate.  The Respondent bases its assertion on what four customers on a negotiated Posted Rate paid compared to those on the Firm Rate.  Accordingly, the Respondent argued that the baseline for determining savings should be a rate equal to 20 percent more than the Firm Rate, and even if we were to rule against it on every other issue, the most it should be required to pay is $37,136.15.

Particularly with respect to certain gas-price savings, the Respondent asserts that the Claimant did not achieve the savings on behalf of the Respondent it claimed because New York Gas Company, the gas-transportation company used by the Respondent, would have inevitably, without the Claimant’s intervention, offered to the Respondent the cost-effective Firm Rate (albeit the Claimant may have accelerated the period when the savings began) and therefore the claimed savings were never achieved by the Claimant.

In addition, the Respondent counterclaimed that it had been overbilled (and therefore had overpaid) for invoices 77-1352, 77-1364, and 77-1376.  Applying a 19.539 percent discount to the posted firm rates of the months to which those invoices pertain yields an amount of $4,548.77 due to the Respondent.[1]

DISCUSSION:

The Arbitration Agreement

The Arbitration Agreement provides that the arbitrators may choose to resolve the controversy in accordance with either Din (strict application of the law) or Pesharah HaKerovah LaDin, which essentially grants Dayanim (arbitrators) discretion on many issues to arrive at a conclusion that is equitable, in a manner that may depart from the application of Jewish law in its strictest sense.   The Rules and Procedures of the Beth Din state that unless there is an agreement otherwise, the case will be resolved according to Pesharah HaKerovah LaDin.  Although they had the discretion, the arbitrators saw no compelling reason not to resolve the controversy in accordance with Pesharah HaKerovah LaDin.  There is a general preference in Halachah (Jewish law) for the resolution of conflicts in an equitable manner.  Consistent with that, some of the decisions contained in this ruling may reflect the application of Pesharah HaKerovah LaDin. 

The Agreement

The Agreement is effective and the Parties are bound by the Agreement.  We base this conclusion on six separate lines of reasoning:

1: Apparent Authority as a Custom of the Marketplace

Although JB was not technically authorized to bind the Respondent, he possessed apparent authority to do so.  As a matter of New York law, “a principal is bound by a transaction entered into by its agent where the principal’s conduct creates the appearance that the agent has such authority.”[2]

The doctrine of apparent authority is a creature of secular law, with no equivalent theory under Halachah.  By engaging in commerce through the mechanism of a corporation or limited liability company, the Respondent, however, has implicitly agreed to be bound by Dina DeMalchuta (secular law) and by the customs that generally pertain to corporate entities and limited liability companies. 

Except in the context of major transactions, it is generally customary to rely on the apparent authority of an individual to bind an entity, and not to demand evidence that such authority exists.  In turn, all business entities understand that unless they adequately notify third parties to the contrary, individuals who appear to possess authority may legally bind them in some instances.  By engaging in business in the general marketplace as a corporation or limited liability company, the Respondent implicitly accepted the norms of that marketplace and subjected itself to liability through the doctrine of apparent authority.

Based on the testimony we heard, it is our view that JB possessed apparent authority.  Notwithstanding the fact that the Respondent convinced us that it attempted to take steps to demonstrate that JB had no actual authority, the issue is whether those steps were sufficient to put outsiders on notice as to his lack of authority.  The facts and circumstances of his relationship with the Respondent lead to the conclusion that the Respondent was aware or should have been aware of his activities, and that the Respondent should be held responsible for any misapprehension regarding his ability to bind the company.

2: Dina DeMalchuta Dina

In some cases, Halachah sanctions the binding nature of secular rules and regulations that are legislated for the economic benefit of the marketplace.[3] The doctrine of apparent authority allows the market to conduct business in an efficient manner, as it allows its participants to rely on their reasonable perceptions of who is able to bind an entity, without burdening them with the requirement of obtaining detailed corporate documents and certificates to transact routine business.  Given the sound policy basis for allowing parties to rely on apparent authority, we feel that, in the case at hand, Chatam Sofer would recognize the binding nature of this doctrine.

3: Apparent Authority as a Halachic Doctrine

According to a strict interpretation of Halachah, the Claimant should have ascertained from the Respondent the scope of the authority of JB, was not permitted to rely on JB’s representation alone, and bore the risk that JB was not authorized to bind the Respondent. 

Notwithstanding the foregoing, the argument can be made that Halachah itself recognizes some concept of apparent authority, based on the view of Shach.[4]  Shach addresses the case of an agent who was authorized in writing, but where the principal later revoked the agent’s authority.  The third party, unaware of the revocation, acted in reliance on the written Harsha’ah (authorization) presented to him by the agent; the Halachah recognizes the validity of that transaction.  We think it is reasonable to argue that Shach’s opinion is not limited to a case where there was a valid Shelichut (agency) that was later revoked, but that such opinion applies to any case where the third party acted reasonably in reliance on the validity of the agency.  The reasonableness of relying on an individual's capacity as a Shaliach (agent) is based on the circumstances of the particular case.  As described above, it is our view that in the contemporary business context the Claimant reasonably relied on JB’s apparent authority.

[1] We believe that the Claimant made a mechanical error and used the wrong meter charge when it recalculated the revised amount due on invoice 77-1352.  See Exhibit B.

[2] Goldston v. Bandwith Technology Corp., 859 N.Y.S. 2d 651, 654 (2008) citing Hallock v. State of New York, 485 N.Y.S.2d 510 (1984).

[3] R. Moshe Sofer (1762–1839), Shu”t Chatam Sofer, Choshen Mishpat, No. 44.

[4] Shach, Choshen Mishpat, 122:11.