Baseless Motions to Vacate Arbitrated Awards Rebuked

By John S. Mrowiec

Many construction disputes are arbitrated under the auspices of an arbitration association, rather than litigated in the state or federal court systems.

Arbitrators are lawyers or construction industry participants paid by the arbitrating parties. The court system uses judges and juries paid by taxpayers.

Under the American Institute of Architects' family of construction documents, parties to construction and design contracts agree to arbitrate their disputes unless they affirmatively strike the arbitration provision.

Arbitration is touted as cheaper, quicker and more efficient than litigation for the resolution of a contract dispute.

In recent years, some have criticized the arbitration process as not achieving the claimed benefits over litigation.

Arbitrator's fees are said to be too high, discovery in arbitration is said to approximate that in litigation delaying hearing commencement and hearings are said to be too long. It has been said that "lawyers have hijacked arbitration."

Not Enough Law

'Manifest Disregard' Argument

A federal appeals court recently addressed a disappointed party's use of the "manifest disregard" argument in B. L. Harbert International, LLC v. Hercules Steel Co., 2006 U.S. App. LEXIS 5035 (11th Cir., Feb. 28, 2006).

The case involved a dispute regarding an office complex built for the U.S. Army Corps of Engineers at Fort Bragg, N. C. The general contractor, B. L. Harbert, subcontracted the steel fabrication and erection to Hercules Steel.

The subcontract referenced both a "Project Schedule" and a "Progress Schedule."

However, those terms were not defined by the subcontract, and no schedule was attached.

The contractor generated two schedules. One had earlier dates for completion of the subcontractor's work. The other had later dates. The contractor gave the schedule with the later dates to the owner, and used the schedule with earlier dates to manage the work of the subcontractors.

The dispute concerned which of the two schedules governed the subcontractor's work.

The subcontractor's work was behind schedule if the stringent schedule were used but finished on time under the lenient schedule.

The contractor stopped payments to the subcontractor for alleged lack of timely progress and sought delay damages. The subcontractor initiated arbitration.

The arbitrator was a former federal district court judge for 13 years-nine of which were as Chief Judge-and then was a general counsel of a large construction company for 13 years. He conducted a seven-day arbitration.

Arbitrator Makes Decision

The arbitrator held for awarding the entire subcontract balance plus interest. The arbitrator denied the contractor's counterclaim.

Apparently, the parties had agreed that the award was to contain specific findings on particular issues including "what was the schedule to which the [subcontractor] was bound under its subcontract?"

The contractor asked the arbitrator to modify the award to provide the answers to the questions posed by the parties. The arbitrator did so, answering that the governing schedule in this dispute was the one the contractor gave to the owner.

The contractor moved the federal district court to vacate the award. The contractor argued that the arbitrator manifestly disregarded the law. The contractor relied on evidence in the arbitration that the more stringent schedule had been sent to the subcontractor before the subcontract was signed.

Nevertheless, the trial court held there was no "manifest disregard of the law." The trial court denied the contractor's motion to vacate the award and, instead, confirmed the award as a judgment in favor of the subcontractor.

The contractor appealed. The Hercules Steel court characterized the dispute as one of contract interpretation. Even if a court might have ruled differently, that alone is not "manifest disregard of the law" sufficient to vacate an arbitration award:

"There is no evidence that the arbitrator decided the dispute on the basis of anything other than his best judgment-whether right or wrong-of how the law applies to the facts of the case. There is, in short, no evidence that the arbitrator manifestly disregarded the law. The only manifest disregard of the law evidence in this case is [the contractor's] refusal to accept the law of this circuit which narrowly circumscribes judicial review of arbitration awards" Hercules Steel, 2006 U.S. App. LEXIS 5035, * 16-17.

Contractor Castigated

The Hercules Steel court then further castigated the contractor: "In litigating this case without good [*22] basis through the district court and now through this court, [the contractor] has deprived [the subcontractor] and the judicial system itself of the principal benefits of arbitration.

"Instead of costing less, the resolution of this dispute has cost more than it would have had there been no arbitration agreement. Instead of being decided sooner, it has taken longer than it would have to decide the matter without arbitration. Instead of being resolved outside the courts, this dispute has required the time and effort of the district court and this court.

"When a party who loses an arbitration award assumes a never-say-die attitude and drags the dispute through the court system without an objectively reasonable belief it will prevail, the promise of arbitration is broken.

Arbitration's allure is dependent upon the arbitrator being the last decision maker in all but the most unusual cases.

"The more cases there are, like this one, in which the arbitrator is only the first stop along the way, the less arbitration there will be. If arbitration is to be a meaningful alternative to litigation, the parties must be able to trust that the arbitrator's decision will be honored sooner instead of later.

Courts cannot [*23] prevent parties from trying to convert arbitration losses into court victories, but it may be that we can and should insist if a party on the short end of an arbitration award attacks that award in court without any real legal basis for doing so, that party should pay sanctions.

A realistic threat of sanctions may discourage baseless litigation over arbitration awards and help fulfill the purposes of the pro-arbitration policy contained in the FAA.
It is an idea worth considering" Hercules Steel, 2006 U.S. App. LEXIS 5035, * 21-23.

Ultimately, though, the Hercules Steel court did not order the contractor to pay the subcontractor's legal fees in defending the motion to vacate and the appeal. Without benefit of the court's warning until this case, the Hercules Steel court thought it might be unfair to impose fees.

The court cautioned "to protect arbitration as a remedy we are ready, willing, and able to consider imposing sanctions in appropriate cases" Hercules Steel, 2006 U. S. App. LEXIS 5035, * 24.

Regardless of whether there is evidence for critics' views about arbitration, many construction participants passionately defend their beliefs regarding arbitration, citing personal anecdotes.

Indeed, the concern is such that the American Institute of Architects Contract Documents Committee is discussing whether the AIA A201 General Conditions 2007 edition form should use a "check the box" dispute resolution provision.

Arbitration might be only one of the listed choices rather than the default mechanism it has been. The Hercules Steel court's admonishment is another call to return arbitration closer to its original promise.