COURTHOUSE REPORTER SERIES: Louisiana Strikes a Blow Against Judicial Review of Arbitral Error

Continuing with the theme of last week’s post, the Louisiana First Circuit Court of Appeal recently upheld a trial court’s confirmation of an arbitration award of over $500,000, even though the award contained two errors of undisputed fact that the dissenting opinion argued, if corrected, would have resulted in an award in favor of the non-prevailing party. Coastal Indus., LLC v. Arkel Constructors, LLC, 2021-0906 (La.App. 1 Cir. 9/1/22); 350 So.3d 912, writ denied sub nom. Coastal Indus., LLC v. Arkle Constructors, LLC, 2022-01489 (La. 11/22/22), 350 So.3d 500.

The Coastal Industries case involved an arbitration between a subcontractor and the general contractor on a project to construct a building at a petroleum refinery. The subcontractor brought a claim to recover for amounts it contended it was due under its subcontract. The general contractor asserted a counterclaim seeking to recover for, among other things, the excess cost of completing the subcontract because of the subcontractor’s alleged abandonment of the project prior to completion. 

After a nine-day arbitration hearing, the arbitrator issued an award in favor of the general contractor. In rendering the award, the arbitrator found that the general contractor was entitled to recover $44,755.98 on its counterclaim.

The arbitrator calculated the award by taking the subcontract amount and subtracting therefrom the amounts the arbitrator determined the general contractor was due for excess completion costs and back charges, as well as the amounts previously paid to the subcontractor, resulting in what the arbitrator determined to be an overpayment of $44,755.98 to the subcontractor.

The arbitrator also awarded the general contractor its attorneys’ fees of $408,772.46 and various costs, for a total award of $530,574.02. The trial court confirmed the arbitrator’s award. 

On appeal, the subcontractor contended that the award should have been vacated because the arbitrator improperly calculated the award on the counterclaim by including back charges that were withdrawn by the general contractor and excess completion costs that the general contractor acknowledged should not have been included in its claim. 

In affirming the trial court’s confirmation of the arbitration award, the majority opinion held that errors in factual or legal conclusions will not invalidate an otherwise fair and honest arbitration award: 

This was a complicated case, with considerable evidence submitted by both parties. Upon review of that evidence, this Court may have reached different conclusions as to the interpretation of the Subcontract or the amount of damages. However, a court may not substitute its conclusions for those of the arbitrator. 

The court then went on to conclude that “the arbitrator's ‘improvident, even silly, factfinding’ does not provide a basis for a reviewing court to refuse to enforce the award.” 

However, the dissent in the case agreed with the subcontractor and found the arbitrator had made two mistakes of undisputed fact in rendering the award by including: 

• $19,507.50 in excess completion costs, despite the fact that the general contractor acknowledged in its post-hearing brief that amount should not have been included in its claim; and
• $44,906.67 in back charges that were withdrawn, as shown by the general contractor’s damages summary.

The dissent noted that had those two errors of undisputed fact not been part of the arbitrator’s calculation, the subcontractor would have been the prevailing party and awarded $14,781.31. The dissent went on to note that the arbitrator’s award of attorneys’ fees to the general contractor was founded on the erroneous determination that the general contractor was the prevailing party. 

The dissent found that based on state and federal case law, the arbitration award should have been vacated because of the errors of undisputed fact: "where the record that was before the arbitrator demonstrates an unambiguous and undisputed mistake of fact and the record demonstrates strong reliance on that mistake by the arbitrator in making his award, it can fairly be said that the arbitrator ‘exceeded his powers, or so imperfectly executed them’ that vacation may be proper.” 

Notwithstanding the dissenting view, the Supreme Court of Louisiana has denied the subcontractor’s application for writ of certiorari, meaning any judicial relief from the arbitral errors will not be forthcoming.

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Author and Editor Stu Richeson is an attorney in the litigation section of Phelps Dunbar’s New Orleans office, primarily focusing on commercial litigation with an emphasis on construction matters, intellectual property issues and insurance.

COURTHOUSE REPORTER SERIES: Federal Court Confirms Liberal Federal Policy Favoring Arbitration Awards

A recent federal case, Industrial Steel Construction, Inc. v. Lunda Construction Company, is an important reminder that convincing a court of an arbitrator's error is not enough to overturn an arbitral award. 33 F.4th 1038, 1041 (8th Cir. 2022).

The case related to the construction of a bridge over the Mississippi River between Iowa and Illinois. The state of Iowa hired Lunda Construction Company (Lunda) as the general contractor for the project, which contracted Industrial Steel Construction, Inc. (ISC) to fabricate the structural steel for the bridge. A breach of contract dispute arose between Lunda and ISC that resulted in an arbitration pursuant to the contractual dispute resolution provisions. The arbitrator ruled entirely in favor of Lunda, including awarding Lunda its attorneys’ fees and expert costs, and requiring ISC to reimburse Lunda for its half of the cost of the arbitration.

Lunda moved the U.S. District Court for the Southern District of Iowa to confirm the final award. ISC in turn moved to vacate in part or modify the award, specifically challenging the arbitrator’s authority to award Lunda attorneys’ fees and expert costs. The district court ruled that the arbitrator exceeded its authority. Lunda appealed to the U.S. Court of Appeals, Eighth Circuit.

While the contract provided that disputes could be resolved in arbitration and that ISC, if it prevailed, was entitled to its costs, the parallel provisions for Lunda’s costs contained handwritten strikeouts and red text. The paragraph addressing Lunda’s right to damages provided that ISC “shall be liable for incidental and consequential damages (including attorneys fees and liquidated damages) resulting from delays caused solely by Seller in delivery, from the breach of any warranties, from defective goods and from any other breach of the term and conditions.” The stricken and underlined portions appeared in a different font color, and the bottom of the page bore two sets of initials. ISC argued that Lunda was thus not entitled to its arbitration costs.

The court of appeals noted that the Supreme Court has long held a “liberal federal policy favoring arbitration agreements.” It requires courts to enforce the results of arbitration liberally and may only vacate such results “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” This is a “heavy burden,” and the “sole question” for the court is whether the arbitrator read and interpreted the parties’ contract, “not whether he got its meaning right or wrong.” An “arbitrator does not ‘exceed his powers’ by making an error of law or fact, even a serious one.”

The court ruled that the arbitrator construed the contract as it related to attorneys’ fees and expert costs. The court gave significant deference to the portion of the award that stated that “the Arbitrator has reviewed R-48 of the Construction Industry Rules of the American Arbitration Association (AAA) and finds that an award of attorneys’ fees and costs is appropriate in this matter” because a contract provision indicated that the AAA’s Construction Industry Rules would govern procedural matters that were not otherwise addressed. Since ISC’s liability for Lunda’s costs was stricken from the contract, the contract arguably did not address the matter, obliging the arbitrator to apply Rule R-48 to fill in the gap. The fact that ISC disagreed with the arbitrator’s interpretation was immaterial due to the “liberal federal policy favoring arbitration agreements.”

The court made clear that it could not examine the accuracy of the arbitrator’s decision, but only whether the arbitrator attempted to interpret the arbitration provision and set forth its logic in its award. Since the arbitrator did so, the court held that the award must be confirmed in full as “convincing a court of an arbitrator's error — even his grave error — is not enough. . . . The potential for those mistakes is the price of agreeing to arbitration.”

Parties must be cognizant of this issue when negotiating arbitration provisions and litigating in arbitral forums. As the court noted here, parties “cannot impose a heightened standard of judicial review even by mutual agreement.”

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*This blog article was previously posted on Troutman Pepper Hamilton Sanders LLP's construction law blog, ConstructLaw.com.

Author Matthew Quirin is an associate in Troutman Pepper's construction practice group. He is a seasoned litigator who represents owners and developers of major construction projects from contract negotiation to complex litigation and trial. 

Editor Jane Fox Lehman is an associate in Troutman Pepper's construction practice group. She has substantial experience representing a variety of construction industry players in disputes arising from industrial, commercial, and multifamily-residential construction projects. Jane is the co-editor of the firm’s construction law blog, ConstructLaw.com.

Announcing the 2023 Toolbox Talks Series - Register Now!

We are pleased to announce the schedule for the six Division 1 Toolbox Talk Series (TTS) programs planned for 2023. For those who may not be aware, Division 1 created the TTS to provide a mechanism for a discussion separate and apart from the Forum's three national meetings. It is a great way to learn something new in a collaborative environment and only takes 30 minutes out of your busy day!

To ensure you don't miss a thing, register now for all of the TTS programs now by clicking the links below. You can also access the handout (with links) by clicking on the picture below. Spread the word to your friends and colleagues as these programs are open to anyone that would like to attend.

A special thanks goes out to the 2023 TTS Team which helped put this great program together: Marcus Quintanilla, Manuel del Valle, Stephen Swart, Andrew Vicknair, David Ponte, Jen Millender, Jessica Knox, Mike Martin, and Patricia Thompson. This team was led by Kanita Williams and Tom Dunn. If you have any questions about the TTS series, please feel free to contact Tom at rtdunn@PierceAtwood.com or Kanita at kwilliams@mwc-law.com.  

Improving Arbitration: In-house Counsel's Perspective

March 23, 2023 at 11 pm CST/12 pm ET

Program Description: Interview with Leslie King O'Neal about her perspective, as in house counsel, of how outside counsel can do better in arbitration

Speakers: Patricia Thompson, JAMS and Leslie O'Neal, JAMS
March Registration Link

Optimizing Dispute Resolution Clauses

April 26, 2023 @ 11 pm CST/12 pm ET

Program Description: Guidance on how to make such clauses clear, actionable, and pragmatic -- not illusory. How should the clauses be adjusted based upon contract size, scope, and risks? 

Speakers: Manuel del Valle, Vice President, Peritia Partners
April Registration Link

Strategy in the Hot Tub

May 25, 2023 @ 11 pm CST/12 pm ET

Program Description: Prospects, pitfalls, and best practices for the use of expert-witness conferencing in construction arbitration
Speakers: Marcus Quintanilla, Global Dispute Resolution
May Registration Link

Arbitration Motion Practice -- Is it worth it? 

June 22, 2023 @ 11 pm CST/12 pm ET

Program Description: Do motions actually assist in steamlining the process or are they more likely to be denied without prejudice pending testimony 

Speakers: Jennifer Millender, Director of ADR Services, American Arbitration Association
June Registration Link

5,280: A Measured Mile, Yes...But is the Scheduling Methodology that Straightfoward?

October 26, 2023 @ 11 pm CST/12 pm ET

Program Description: What is and what is NOT a measured mile. The discussion leaders will guide us on how to use the preferred scheduling methodology and ways to effectively counter incorrect applications

Speakers: Andrew Vicknair, Darcy Vicknair, LLC and David Ponte, P.E., CFCC, Ankura Consulting Group, LLC
October Registration Link

Round 'em up: Surveying Your Data for Productive Rule 26(f) Conferences

December 7, 2023 @ 11 pm CST/12 pm ET

Program Description: Best practices for understanding the what and where of clients' data, and the cost to collect it, for a prepared, productive Rule 26(f) conference

Speakers: Stephen Swart, Williams Mullen and Julian Ackert of Discovery Solutions
December Registration Link

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Assistant Editor-in-Chief Jessica Knox is an Associate in the Minneapolis office at Stinson LLP. She represents owners, general contractors, and subcontractors in litigation disputes. Jessica can be contacted at jessica.knox@stinson.com. 

TOP TAKE-AWAY SERIES: The 2023 Mid-Winter Meeting in Puerto Rico

It was great seeing so many D1 members at FCL's mid-winter meeting in San Juan, Puerto Rico last week!  To help sum up the amazing programming and social events, the Dispute Resolver team has established a new "Top Take-Aways" series  that will run following each of our in-person Forum meetings. Since there is no way a single perspective can possibly capture all the learnings from these events, we encourage our readers to share their own thoughts by adding a comment following the post. Below are my top 10 take-aways from this year's mid-winter meeting. What are yours?

10. Puerto Rico is still recovering from Hurricane Maria. It's not often (if ever) that a sitting governor takes the time to stop by our Forum events. That is likely why this meeting's keynote speaker -- the Honorable Pedro R. Pierluisi, Governor of Puerto Rico -- was particularly noteworthy in his own right. An attorney of 35 years who practiced construction law before pursuing a life in politics,  Governor Pierluisi spoke at length on the widespread infrastructure improvements which are just now getting under way following the widespread devastation caused by Hurricane Maria (a category 5) in 2017. It was difficult to hear that some Puerto Ricans were without power for almost a year following this event. Governor Pierluisi reminded us that, while Puerto Ricans are U.S. citizens, they lack many of the benefits which we take for granted. While Puerto Rico is represented in the U.S. Congress, for example, their representatives can introduce bills but not actually vote on them.

9. Pre-fab and modular construction presents new contractual challenges. Although not by any means a "new" technology, according to Ronald Ciotti, Bruce Merwin, and Kristin Protas, modular construction seems to be having a moment. Of course, COVID could have something to do with that. The use of pre-fab construction allowed builders to rise to the challenge presented by the pandemic by increasing bed capacity in a fraction of the time compared to conventional construction. That said, notwithstanding greater acceptance of pre-fabricated and modular construction techniques, until recently, there was no form contract designed to address the unique issues that may arise when project participants rely on this form of construction. In light of the hybrid nature of what is both a "good" and a "service," particular consideration needs to be given on the applicability of the UCC. Special attention also needs to be given to flow-down considerations, termination clauses, inspection rights, and, the interplay of various legal regimes. If your clients are considering off-site construction and you are looking for form contract language, you might consult ConsensusDocs 753 (standard form agreement between constructor and prefabricator) and ConsensusDocs 253 (standard form agreement between owner and prefabricator) as a starting place.

8. "Private judging" could offer litigators the best of both worlds. Available by stipulation in some jurisdictions, "private judges" can be selected by the parties to preside over cases pending in a court of law. Although the costs of the private judge are split by the parties, they are not the same as an arbitrator, most notably because the legal issues in any opinion rendered by a private judge remain appealable within the court system. According to Luis Pratts, John Freud, and Bobby Moore, the advantages to private judges are many and include greater control over who will be deciding your case and greater control over scheduling. So far, not all states have a private judge statute but, if the trend catches on, this could present a "best of both worlds" scenario where without sacrificing the speed and efficiency traditionally afforded by arbitration.

7. The world's largest distillery of premium rum is in Puerto Rico. Although rum was not invented in Puerto Rico, we were advised that it was most certainly perfected there. I learned this and many other important skills (like how to make the perfect mojito) at the Division 1, 7, and 11 social event at Casa Bacardí. Another fun fact about rum and Puerto Rico: the piña colada was first concocted there. Exactly where on the island the piña colada was first served is hotly disputed so the discriminating traveler would be wise to try them all. Click on the video below to watch D1, D7, and D11 mixing up a hand-shaken piña colada at Casa Bacardí:

6. There is risk with reward when it comes to the Infrastructure Investment and Jobs Act (“IIJA”). While everyone is jumping at the bit to get a piece of the $1.2 Trillion IIJA pie, contractors need to understand how to safely take a slice without exposing themselves to undue risk under the Federal and State False Claims Acts. Andy Howard, Justin Barkowski, and Matt Gillies cautioned that, virtually anything that could justify withholding of payment to the contractor could justify a false claims act. With a whistleblowing provision to tempt disgruntled workers and treble damages for every false "claim" (which itself could be interpreted broadly as every pay app, every RFI, etc.) the panelists aptly referred to these acts as "company-killing statutes."

5. The best trial attorneys are good storytellers. There's a reason why it is important to have a compelling theme/theory of your case and, as it turns out, it's grounded in science. According to Jeffrey Isler and Professors Carlos Concepción and Laura Rose, compelling story creates an emotional response in your listener. Emotion releases dopamine which helps your factfinder remember things. By using "functional MRI" studies (which image the brain while it is working), we know that memories are broken down and stored in different parts of the brain. A good story can be the "glue" that helps a factfinder accurately reassemble the various pieces of the case. Story aids in retention, invests the factfinder in the outcome, and helps the factfinder test the veracity of the witness against their own real life experience.

4. The labor and supply chain issues which we saw during COVID are not over. The manufacturing industry is still experiencing a labor shortage, caused in part by COVID and in part by reduced labor force participation. Danny Jarrett, Jennifer Therrien, and Mike Cortez spoke of the economic factors leading to price escalation on construction materials. There is scarcity due to the reduced capacity leading to higher prices. Manufacturers have been forced to increase wages to entice good workers which, in turn, leads to increased prices. While increased wages for laborers may seem like a positive development for the laborers, the inconvenient truth is that these workers actually have less purchasing power than before after taking into account inflation and price increases.

A photo of Arecibo from our site visit

3. Puerto Rico will likely never recover from the loss of the Arecibo Observatory. On December 1, 2020, the Arecibo radio telescope collapsed after almost 60 years in operation. As critical as it was to mapping asteroids and pulsars, we learned that the telescope represents much more than the sum of its science to the Puerto Rican people. John Abruzzo of Thornton Tomasetti provided an informative presentation on the cause of the collapse and the post-event clean-up. I was surprised to learn that the collapse of the telescope was anticipated and that, at the time of the collapse, Thornton Tomasetti was making plans for the telescope's intentional demolition. Thanks to the generosity of John Abruzzo, a small group of meeting attendees were able to visit the Arecibo site and hear first-hand from the scientists that still work there (mostly analyzing historic data that the telescope had collected before the collapse). The sadness in the room was palpable when we were told that, rather than spend the $750 million or so that it would cost to repair the telescope, the National Science Foundation has announced that it intends to permanently close the facility in August.

2. Artificial intelligence presents a double-edged ethical sword for attorneys. Attorneys can no longer afford to stick their head in the sand when it comes to understanding the artificial intelligence revolution and what benefits (and risks) it may present for their clients. This was but one of the messages conveyed by the ethics panel, comprised of Jim Doppke, Sanjay Kurian, and Catherine Delorey. Attorneys have an ethical duty under Model Rule 1.1 to educate themselves on what AI is and how it can be most effectively employed. And, when attorneys choose to employ these tools, they invoke another ethical duty under Model Rule 5.3 to supervise the AI tool as “nonlawyer assistance” and ensure it is performing correctly. To avoid being caught in this Catch 22, attorneys should strive to gather a keen understanding of the workings of AI tools.

1. Puerto Rico is an amazing place! Attending Forum events is not ALL about the great CLE and amazing networking. If one of the reasons these events rotate from location to location is to give us all a chance to experience different cultures, then Puerto Rico takes the cake. Karen Denys and Jason Quintero did an amazing job putting together a wonderful program and schedule of activities. Puerto Rico was full of excellent food and endless adventure. Thankfully, my memories of rainforest rope swings and colorful coral reefs will remain long after my bruises from these exciting adventures finally subside.

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Author Marissa L. Downs is a construction attorney in Chicago, Illinois where she has been practicing law since 2009. Marissa is a partner at Laurie & Brennan, LLP and represents owners, general contractors, and subcontractors in all phases of project procurement, claim administration, litigation, and arbitration/trial. Marissa can be contacted at mdowns@lauriebrennan.com.