R.I. Supreme Court Overturns Arbitration Award - Manifest Disregard Lives On

It is a rare event for a court to vacate an arbitration award, but the Rhode Island Supreme Court in the recently decided opinion Nappa Construction Management, LLC v. Flynn, No. 2015-211-Appeal, --- A.3d--- (R.I. Jan. 23, 2017) held that vacatur was warranted. In reaching this outcome, the Court was divided 3 justices to 2 with a filed dissent.

The underlying case concerned the construction of automobile repair shop that did not proceed smoothly.  The focal issue was the cement floor and foundation. The owner was displeased with the installation and ordered the contractor to stop work.  Nonetheless, the contractor submitted a pay application for the floor work, which went unpaid by the owner.  The contractor, claiming material breach for non-payment, terminated for cause. The owner sued the contractor for wrongful termination. The case ultimately ended up in arbitration with the contractor claiming it was owed for work performed.  There, the arbitrator held that both parties were at fault and therefore the contractor could not terminate for cause. Instead, the arbitrator held that the contractor terminated for convenience by the contractor. As such, the arbitrator awarded the contractor its fair and reasonable value of the work performed.

The parties next applied to superior court with the owner moving to vacate the award while the general contractor moved to confirm.  The superior court confirmed and the owner appealed arguing that the arbitrator "manifestly disregarded a contractual provision by holding that the contract was terminated for convenience" by the contractor.

The majority of the Court agreed with the owner.  The three justices acknowledged that "judicial review of arbitration awards is extremely limited," but held that the case met the threshold for vacatur under the R.I. General Laws.  The Court explained that where "the arbitration award fails to ‘draw its essence from the agreement, if it was not based upon a passably plausible interpretation thereof, if it manifestly disregarded a contractual provision, or if it reached an irrational result" the Court must vacate the award.  Here, the majority concluded that the arbitrator exceeded his authority by "manifestly disregard[ing] a contractual term or ignor[ing] 'clear-cut contractual language.'” In sum, because the AIA contract's termination for convenience clause could only be exercised the owner completely in the owner's discretion, the arbitrator had ignored and manifestly disregarded that distinction by applying the clause in favor of the contractor.  Accordingly, the Court ordered the award vacated.

As for the dissent, the two justices focused on the great deference the Court affords to an arbitrator's decision and that "review of the contract as a whole reveal[ed] that the arbitrator's award did not exceed the language of the agreement." In essence, because the clause was present in the contract and the arbitrator did not create the contractual basis out of whole cloth, the dissent was satisfied that arbitrator could interpret and apply the contract as such.  And at the least, the dissent concluded, this Court was not empowered to second guess that interpretation.

Putting aside that this case was decided under state law, it is important to note that in the federal sphere, under the Federal Arbitration Act 9 U.S.C. §§ 10 & 11, the "manifest disregard" rationale for vacating an arbitration award has more limited applicability and not all Circuits recognize the standard.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Massachusetts Appeals Court Awards Attorneys’ Fees for Public Works Bond Claim and then Vacates Fees for Unfair and Deceptive Business Practice Claim

The Plaintiff in Aggregate Industries – Northeast Region, Inc. v. Hugo Key & Sons, Inc., 90 Mass.App.Ct. 146 (2016) contracted with the Defendant to supply and install asphalt for a public works project in Salem, Massachusetts.  The project’s Defendant general contractor furnished a payment bond as required by state statute (Bond Statute).  In January of 2011, the Plaintiff submitted a bid for the asphalt scope of work that contained two qualifications: 1) costs for additional grader services at $400/HR, and 2) the cost of asphalt material would escalate accordingly with the price of liquid asphalt.

The Plaintiff submitted two revised bids in May 2011, neither of which were accepted by the Defendant because of the asphalt escalation clause.  With no agreement in place, the Defendant sent a purchase order to the Plaintiff in mid-May 2011 for the revised bid price but did not include the grader costs or escalation clause.  The Plaintiff returned the purchase order marked up to include the grader unit costs and escalation clause which the Defendant immediately rejected.  The Defendant then issued another purchase order which identified the unit cost of asphalt in order to expressly exclude the escalation clause. Plaintiff signed this purchase order and executed the work.  During the course of the project, the Defendant required the Plaintiff to perform grading activities which the Plaintiff completed and subsequently submitted pricing with the $400/HR unit cost.  The Plaintiff submitted its final invoice on July 6, 2011 in the amount of $89,989.90, $11,400 of which was for the grader rental and asphalt escalation costs.  With not payment received as of October 31, 2011, the Plaintiff filed a complaint in Superior Court.

The Plaintiff’s complaint alleged breach of contract and quantum meruit claims under the state’s Bond Statute.  The complaint also contained claims for violations of the state’s unfair and deceptive business practice statute (Business Statute) for withholding payments due at the completion of the project.  Following the filing of the complaint, the Defendant issued a check to the Plaintiff for $68,525.40 and offered to negotiate for reasonable grader costs.  The Plaintiff refused the payment and the Defendant then counterclaimed violations of the Business Statute.

The trial court found that the contract entered into by the parties did not contain the asphalt escalation clause nor the $400/HR grader unit cost, but under the quantum claim, the Plaintiff was entitled to reasonable grader cost in the amount of $7,125. The trial court further found that “fairness would be the victim” if recovery under the Bond Statute and its attorneys’ fees were allowed.  The trial court reasoned that the Defendant was “ready, willing, and able to resolve at [a] fair and reasonable” cost the disputed work. The trial court also ruled for the Defendant on the cross-Business Statute claim calling the Plaintiff’s claims under the Bond Statute “extortion.” Instead of awarding damages under the Business Statute, the court withheld pre and post-judgement interest on the quantum claim and then awarded attorneys’ fees to the Defendant in the amount of $67,319.  The Plaintiff appealed.

The Massachusetts Appeals Court examined the case and found the trial court’s finding of fact accurate that a valid contract did exist which excluded the asphalt escalation clause and grader unit costs of $400/HR.  Accordingly, no breach of contract occurred based upon the Defendant's issuance of payment for the base contract scope of work.  The Court next reviewed the Bond Statute claim and the Plaintiff’s claims for attorneys’ fees under that statute.  The Plaintiff argued that the once the trial court found damages in quantum for the grader rental, the Bond Statute provision of attorneys’ fees must apply because the elements of the statute were satisfied.  The Court agreed.

The Court reviewed the Bond Statute’s elements along with its attorneys’ fees provision which requires a judgement in favor of a claimant “shall include reasonable legal fees.” The Court found the Plaintiff plainly met the requirements by 1) filing an action with the Superior Court, 2) within the one-year period from completion of the work, 3) which alleged nonpayment within sixty-five days of the last invoice, and 4) prosecuted the claim "to final adjudication and execution for the sums justly due the claimant as provided in this section."  Accordingly, the Court found the compulsory usage of “shall” required the award of attorneys’ fees to the Plaintiff.

The Court next reviewed the Plaintiff’s argument that its refusal to negotiate with the Defendant over the asphalt escalation and grader unit costs “did not constitute unfair or deceptive acts or practices in the course of trade or commerce” as required by the language of the Business Statute.  The Court once again agreed with the Plaintiff finding that “ordinary contract disputes, or the failure to negotiate a settlement in lieu of litigation, however, typically fall outside the reach of the statute.” The Court further mused that even if the Plaintiff’s claims were weak, it was within its rights to file suit and litigate them.

The Court remanded the Bond Statute claim back to the trial court to award of pre and post-judgement interest plus reasonable attorneys’ fees and then vacated the award of attorneys’ fees for the Defendant’s Business Statute claim.

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

Fees to the Prevailing Party: Tennesse and the American Rule

I’Ashea Myles-Dihigo
Hagan Law Group, PLLC

Tennessee generally follows the American Rule regarding the payment of attorneys’ fees, which permits the recovery of fees in very limited situations. Many clients are disappointed when they win their case but still have to pay their attorney’s fee.

 

Contractual provisions, which provide for attorneys’ fees, have become a regular practice in contract drafting to hedge against the outcome of American Rule for the prevailing party.  These provisions are a very important consideration for construction industry clients and were the discussion of a recent Tennessee Court of Appeals case.

 

In Barrett v. Ocoee Land Holdings, LLC the Court strictly construed the terms of the parties’ construction contracts regarding a claim for an award of attorneys’ fees.  In that case, the homeowners sued the homebuilder, real estate developer, and other individuals involved in those entities related to the purchase of, and planned construction of a house on a lot in a subdivision.  The homeowners sued under various theories including breach of contract, civil conspiracy to commit wrongdoing, the Consumer Protection Act, and the Fraudulent Conveyance Act.  The case was tried before a jury, and the homeowners lost their claims.  There was a provision in the contract between the homeowners and defendants, which provided an award for attorneys’ fees for the prevailing party.  The jury never heard any proof about the attorneys’ fees, and there was no space on the jury verdict form for an award of fees.  The trial court reserved the issue of fees and ultimately denied defendants’ claim for an award of attorneys’ fees and expenses.

 

The defendants appealed the decision of the trial court, and the Court of Appeals reversed.  The Court of Appeals held that, “Tennessee allows an exception to the American Rule where the contract specifically or expressly provides for the recovery of attorneys fees.” The Court went on to explain that the litigation between the parties fit the exact situation contemplated by the fee provision, as the parties contract stated that they “agree to an award of reasonable attorney’s fees and expenses to the prevailing party in litigation ‘arising out of [the] Contract.”  Based on the terms of the contract, the defendants were ‘each entitled to the enforcement of their contractual right to recover reasonable attorney’s fees and expenses’ under the ‘plain terms of the attorney’s fee provision.’”

 

So, at least in Tennessee, those prevailing party fee provisions in construction law contracts are very important to the outcomes in litigation as an exception to the American Rule.

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The author, I'Ashea Myles-Dihigo, is a contributor to The Dispute Resolver and Of Counsel Attorney with Hagan Law Group, PLLC based in Murfreesboro, TN.  She may be contacted at 615.546.4066 or iashea@hanganlg.com.