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).
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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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