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.