Generally, contractors choose arbitration because it is a cost-effective method of dispute resolution, and primarily because an award issued in arbitration is final. Vacating an arbitration award is only permitted on very narrow grounds. A party must demonstrate that the award was procured by corruption, fraud, or undue means, or that an arbitrator exceeded his/her power (very high burdens). Arbitration rules in other states are similar to the Washington statute. Stated simply, it is very difficult to reverse an arbitration award—or is it? These two cases do not indicate a trend but do remind us that an arbitrator’s power is limited to that power granted to him/her by contract.
The Seventh Circuit reversed a District Court’s decision upholding an arbitration award in Bankers Life & Cas. Ins. Co. v. CBRE, Inc.[ii] The insurance company (“Bankers”) hired a real estate firm (“CBRE”) to negotiate its sublease of Bankers’ space and to find Bankers a new location. CBRE and Bankers signed a Listing Agreement providing, among other things, that CBRE would assist Bankers in presenting offers, and answering Bankers’ questions relating to those offers, and CBRE advised that it wanted $7 million in savings from the deal. In turn, CBRE presented Bankers with a series of cost-benefit analyses (“CBAs”). One CBA showed $6.9 million in net savings, and Bankers accepted the deal. Then, Bankers subleased its space and relocated.
As it turned out, CBRE’s calculations were inaccurate, and Bankers’ savings were only $3.8 million. At the arbitration, Bankers sought to recoup the deficiency and avoid paying commissions. It contended that CBRE violated the Listing Agreement by failing to provide accurate information. The arbitration panel (“Panel”) acknowledged the Listing Agreement required CBRE to answer questions accurately and that CBRE made a material mistake. Nevertheless, the Panel issued an arbitration award in favor of CBRE reasoning that the CBAs constituted the analysis that, under the Listing Agreement, CBRE was required to provide. The CBAs contained a disclaimer for errors in the CBAs, and thus the Panel ruled that CBRE had not violated the Listing Agreement.
Bankers challenged the award in District Court. The Seventh Circuit reversed in a majority opinion authored by Judge Posner (a highly respected jurist) holding that the Panel exceeded its authority by relying on the disclaimers in the CBAs. As far as the Seventh Circuit was concerned, the disclaimers only appear in the CBAs, and the CBAs were not part of the contract. Thus, the CBAs did not amend the Listing Agreement. The Court cited the federal law recognizing that arbitrators may not exceed their authority. The Panel was authorized to interpret the parties’ contract, which was the Listing Agreement. The Panel was not authorized to rely on the disclaimer because the disclaimer only appeared in the CBAs, and the CBAs were not part of the Listing Agreement. The Court concluded that, consequently, by relying on the disclaimer, the Panel exceeded its authority.
Comment: This Court arguably expands the circumstances under which arbitration awards may be vacated. When an arbitration panel exceeds its authority by committing something similar to an error, as has occurred here, it constitutes a substantial expansion of the basis upon which an arbitration award may be vacated.
On January 3, 2017, a Rhode Island Supreme Court issuing a decision reversing an arbitration award.[iii] In that case, the underlying project appears to have been a mess. Work started late, continued slowly, and with improper workmanship. The owner, Flynn, notified the contractor, Napa, to stop work, citing instances of improper work. The contractor promptly issued a new requisition of payment, which was not paid, and then terminated the contract for non-payment. After finding that Napa was “not justified” in terminating the contract, the arbitrator then went on to invoke the termination-for-convenience clause, stating:
At the same time, it seems obvious that the combative, contentious, dysfunctional relationship between [the] Flynn[s] and Napa had to be brought to a conclusion. The most practical method to accomplish that end, I have determined, is to consider the Contract to have been terminated according to Para. §14.4 of the General conditions; TERMINATION BY THE OWNER FOR CONVENIENCE: Under this interpretation neither Napa nor [the] Flynn(s) [are] in breach of the [contract]; and the contractor is entitled to the best measure of fair and reasonable value of the work done.
The Court held “[a]n arbitrator may misconstrue a contract; however, he may not manifestly disregard a contractual term or ignore ‘clear-cut contractual language.’” The Court agreed with the arbitrator that the owner was entitled to stop work, and the contractor was not entitled to terminate the contract for cause. When the arbitrator adopted the fiction of the owner’s termination for convenience to bring to an end the “combative, contentious, dysfunctional relationship,” according to the Court, the arbitrator ignored clear contract language. The Court made two essential conclusions. First, where the arbitrator’s decision “conflicts with the express terms of the agreement, it fails to draw from the essence of the agreement.” Second, the arbitrator’s final decision (that there should be a termination for convenience) conflicted with his subsidiary findings (the contractor was in breach). The Supreme Court held the arbitrator’s authority is not without bounds, but instead “it is rather circumscribed by the plain language of the parties’ contract.” The case was remanded to the trial court with a directive to grant the owner’s motion to vacate the arbitration award.
Comment: Both cases can be summarized as follows: arbitration decisions that go beyond the scope of the contract from which the arbitrator draws its authority may be reversed. In Bankers, the contract did not incorporate the disclaimer, and when the arbitrator attempted to read the disclaimer into the contract, the arbitrator exceeded its authority, and the case was reversed. Similarly, in the Napa matter, the contractor manifestly disregarded the parties’ contract. Even though the arbitrator believed the result to be fair and within his authority under the contract, the arbitrator’s decision conflicted with the express terms of the agreement, and, therefore, the Court vacated the award.
[i] This blog comes to us courtesy of Cliff J. Shapiro, partner and chair of the Construction Law Practice Group at Barnes and Thorburg, LLP.
[ii] 830 F .3d 729 (2016).
[iii] Napa Constr. Mgmt., LLC v. Flynn, 2017 WL 28182 (Jan. 23, 2017).