Wednesday, March 25, 2015

What Should the Remedy be when an Arbitrator Exceeds His Authority? Remand for Clarification or Vacate and Require a New Arbitration?

In an opinion issued on March 2, 2015, The United States District Court for the Southern District of New York joined other courts by ruling that an arbitrator who issues an improper form of award has in fact exceeded his power.  In the case of Tully Construction Company/AJ Pegno Construction Company, J.V. v. Canam Steel Corporation, No. 1:2013cv03037 - Document 27 (S.D.N.Y. 2015), the court ruled that an arbitrator who did not issue the “reasoned award” required by the Arbitration Agreement had exceeded his power, and the proper remedy is to remand the award back to the arbitrator for clarifications and a true “reasoned award”.

The dispute arises out of a project awarded to Tully Construction Company/AJ Pegno Construction Company, J.V (Tully) by the State of New York to replace a portion of the Whitestone Bridge.  Tully contracted with Eastern Bridge LLC (Eastern) for several million dollars to fabricate and deliver structural steel to the project.  In July of 2007, Canam Steel Corporation (Canam) entered into an Asset Purchase Agreement (APA) with Eastern and acquired the project contract. 

Steel fabrication and delivery disputes plagued the project in 2007 and 2008.  Tully and Eastern entered into a revised fabrication schedule and agreement in May of 2007.  The agreement stipulated that any disputes would be settled with binding arbitration in accordance with the rules of the AAA.  Tully filed a Demand for Arbitration with the AAA on December 30, 2009 seeking damages in excess of $20 million for breach of contract and intentional and negligent misrepresentation. Canam counterclaimed for nearly $5.25 million in damages for delays caused by Tully. 

Tully and Canam entered into an ad-hoc, private arbitration in November of 2012 governed by the AAA rules.  The arbitrator heard seventeen days of testimony from nine fact and two expert witnesses along with more than 800 exhibits of evidence.  The arbitrator released his two page final award with monetary awards for Tully in nine individual line items and one grand total in the amount of $6,883,936.00. Canam’s award was identified in seven individual line items with one grand total in the amount of $366,914.00.  There was no language expressly giving the rationale behind the awards.  Two days after the award, Canam requested that the arbitrator withdraw his final award and issue a final award in accordance with the Arbitration Agreement’s “reasoned award” requirement.  The arbitrator responded to Canam that his final award was a “reasoned award” and Tully moved to confirm the award. Canam filed an opposition to Tully’s petition and cross-moved to vacate the award. 

 The court examined Canam’s claim that the arbitrator failed to issue a “reasoned award”.  It found that a “reasoned award” was required as part of the private Arbitration Agreement citing Rule 44 and L-6 of the AAA Arbitration Rules for Complex Construction Cases. The court also found that all parties expected a “reasoned award”, not a line item award as issued.

The court examined what constitutes a “reasoned award” and settled upon the definition offered in Cat Charter, LLC v. Schurtengerger, 646 F.3d 836, 844 (11th Cir. 2011), that “a reasoned award is an award that is provided with or marked by the detailed listing or mention of expressions or statements offered as a justification…[for] the decision of the [arbitrator].”  The court further cited Rain CII Carbron v. ConocoPhillips Co., 674 F.3d 469 (5th Cir 2012) and the Fifth Circuit’s decision that the award in that controversy was “reasoned” because in the, “eight page [award], the arbitrator laid out the facts, described the contentions of the parties, and decided which of the two proposals should prevail.” The court found that the arbitrator’s line item award did not satisfy either of those criteria and therefore was an improper award.

The Second Circuit has not addressed whether an improper award constitutes an arbitrator exceeding his authority.  Therefore, the court looked to rulings of the Third, Fifth, Sixth, and Ninth Circuits to determine that an improper award does exceed an arbitrator’s authority.  The multiple circuit court cases the court examined framed the issue of an improper award within a contractual framework. The parties private Arbitration Agreement stipulated that the AAA Arbitration Rules for Complex Construction Cases would govern.  Those rules required a “reasoned award”.  The arbitrator’s line item award did not comply with the agreement and therefore the authority granted to the arbitrator in the agreement was exceeded, and accordingly, the award cannot stand. 

Tully presented the argument that if the line item award was found to be improper, the proper remedy would be to remand it back to the arbitrator for an actual “reasoned award”.  The court presented the view from two district courts that a remand to the same arbitrator would be improper due to functus officio. Citing T.Co. Metals, LLC v. Dempsey Pipe & Supply, Inc. 592 F.3d 329, 342 (2d Cir. 2010), the court defined, functus officio as a “doctrine [which] dictates that, once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, ‘their authority over those questions is ended,’ and ‘the arbitrators have no further authority, absent agreements by the parties, to redetermine th[ose] issues.’”  The court also presented three exceptions to the doctrine, the third and most relevant stated an exemption exists in order, “to clarify an ambiguity in an otherwise seemingly complete award.” Cat Charter, 691 F. Supp. 2d at 1345

Looking to the circuit courts, the court found that functus officio has been rejected in similar circumstances of an improper award.  The circuit courts pointed to the third exception to functus officio stating, “the purpose of this exception is to permit the arbitrator to complete and assigned task…”Green v. Ameritech Corp., 12 F. Supp. 2d 662, 666. The court further found that the circuit courts require remand back to an arbitrator in order for the arbitrator to explain his award so that it can be effectively enforced. Functus officio is not applicable because the duty charged to the arbitrator has not been completed and remand “serves to give the parties what they bargained for – a clear decision from the arbitrator.” Galt v. Libbey-Owens-Ford Glass Co., 397 F.2d 439, 442 (7th Cir. 1968).

This case summary was written by Brendan Carter, former Law School Liaison to the ABA Forum on Construction Law.  Brendan is a recent graduate from the University of Massachusetts, Dartmouth School of Law.  He has worked in the construction industry for many years, most recently for a general contracting company in Massachusetts.  

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