| 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 Some are dissatisfied with arbitration for a different reason: not too
much law, but not enough.
Arbitrators sometimes are accused of "not
following the law" and making outcomes "arbitrary."
A feature
of arbitration, at least theoretically, is arbitration's much narrower grounds
on which a disappointed party may "appeal" as compared to litigation.
Critics argue that courts must be able to vacate arbitration awards that disregard
the law.
Both the Federal Arbitration Act and states' Uniform Arbitration
Act provide specified, "narrowly limited" grounds on which to base a
petition in court to vacate an arbitration award. The statutory grounds primarily
concern misconduct or bias of the arbitrator.
There also are a number of
bases to vacate an arbitration award developed by various federal and state courts.
One of these judge-made bases for vacating an arbitration result seems to be more
popular with disappointed parties than any other-"the award was made in manifest
disregard for the 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. John S. Mrowiec
is a partner with Chicago-based Conway & Mrowiec, a construction and public
contracts law and litigation practice. He may be reached at (312) 658-1100. For
information, go to the firm's Web site at www.cmcontractors.com. |