Vacating An Arbitrator’s Award – Recent Caselaw

By: Wener Sabo, Of Counsel

Arbitration awards are overturned by the courts only on very rare occasions. This is particularly true in construction cases where the parties use the American Institute of Architects (AIA) standard forms which contain a “broad form” arbitration clause. A recent decision by the Rhode Island Supreme Court , Nappa Const. Mgmt., LLC v. Flynn, 2017 WL 281812 (Jan. 23, 2017), provides one example of such a case, although it is an example that is unlikely to be followed by other courts.

The owner, Flynn, hired Nappa to be the general contractor for the construction of an automobile repair facility. The parties used a standard form AIA A101-2007 agreement. The project started in late December, 2012 and proceeded at a slow pace, prompting complaints from the owner. In June, 2013, the attorney for the owner sent a letter to the contractor that directed that work should stop because the work did not conform to the plans and specified the foundation and concrete flooring as evidence of the noncompliance. The contractor then submitted an application for payment, including payment for the flooring. The owner refused to pay. On July 29, 2013, the contractor notified the owner that he was in breach of contract and demanded mediation. On September 4, 2013, the contractor terminated the contract for non-payment. Arbitration followed.

The arbitrator issued an award, finding that there was fault by both parties and that there were, indeed, problems with the flooring. He also found that the contractor was not justified in declaring the owner in breach and terminating the contract for failure to pay. However, the contractor went on to invoke the termination-for-convenience clause in the AIA agreement as the best way to resolve the issue, because that would mean that neither side terminated the agreement. He then calculated the amount owed the contractor, including overhead and profit for work not executed, less the cost to repair and other back charges.

The contractor then asked the court to confirm the award and the owner asked for it to be vacated. The trial court confirmed the award, citing the extremely high bar for overturning an arbitrator’s award and concluding that there were not sufficient grounds to do so.

The Rhode Island Supreme Court reversed, with two justices dissenting. The court found that the arbitrator had exceeded his authority when he ignored “clear-cut” contractual language and, in effect, failed to follow the provisions of the AIA agreement. The termination-for-convenience provision in the agreement (¶14.4.1 of A201) allows only the owner, and not the contractor or the arbitrator, to terminate the agreement for convenience. Further, none of the correspondence from the owner to the contractor evidenced a desire to terminate the agreement. Finally, the award contradicted the arbitrator’s evidentiary findings, including the finding that the general contractor had breached the agreement while the owner had not. Therefore, the award was vacated.

The dissent would have upheld the award. It stated that the arbitrator attempted to be fair to both parties and issued an award that he believed was within his authority under the contract and within prior court holdings. By using a provision within the contract as the basis for the award, the award was based on the contract and should have been confirmed.

It is incredibly rare to have an arbitration award in a construction case overturned by an appellate court. These cases are always fact-intensive, so that no two cases are alike. As a matter of public policy, arbitration awards are given great deference by most courts. In this case, the dissent probably has the better view, and most courts in other jurisdictions would likely follow the reasoning of the dissent and confirm the award. Readers should, therefore, be very cautious in relying on this case in attacking an arbitrator’s award.

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