Friday, December 23, 2016

The AAA Permitted to Pull Rank to Disqualify a Named Arbitrator

In the recently decided case, LD Miller Construction, Inc. V. Kirschenbaum, - P.3d - (N.M. App. Dec. 1, 2016) the Court of Appeals of New Mexico affirmed the hearing justice's order that the American Arbitration Association ("AAA") indeed could disqualify an arbitrator from arbitrating a dispute between a contractor and homeowners for the failure of the arbitrator to follow the AAA Rules.

The Homeowners hired the Contractor to do concrete and framing work on their property in Santa Fe, New Mexico.  Contractor completed the work, but the Homeowners disagreed that is was done properly.  They hired someone else to correct the work.  A short time later, the Contractor submitted an invoice for the concrete and framing work to the Homeowners.  The Homeowners only paid half of what was claimed owed by the Contractor.  Apparently in recognition that a dispute had arisen, about two weeks later, the Homeowners and Contractor entered into an arbitration agreement:
Contractor and Owner agree to binding arbitration under AAA (American Arbitration Association) for any dispute (claim, work, material, etc.) between Contractor and Owner . . . . Contractor and Owner agree that the designated arbitrator shall be Roger Lengyel.
Fast forward two years later, the Contractor filed a complaint in court for the unpaid amount.  The Homeowners answered with an affirmative defense that the action must be dismissed in light of the arbitration agreement. The Court agreed and issued an order that stated in pertinent part:
the parties are compelled to arbitrate this matter pursuant to the terms of the arbitration agreement, requiring binding arbitration under the [AAA] with . . . Roger Lengyel as the designated arbitrator.
The parties attempted arbitration but it quickly devolved with the Contractor sending a letter to the AAA requesting disqualification of the arbitrator for non-neutrality.  According the Contractor, the arbitrator was having ex parte communications with the Homeowners and setting rules that only served to delay the arbitration (which benefited the Homeowners). The Homeowners insisted that the Court's order had designated the named arbitrator and usurped AAA's power to disqualify him.  The AAA sought clarification from the court.  The hearing justice concluded based on the language of the order that the AAA could disqualify. AAA did just that.  The Homeowners appealed.

On appeal, the court applied New Mexico contract law for the interpretation and construction of the agreement. Because neither party argued that the agreement was ambiguous, the court simply was to determine "what do the words of the agreement mean and what is their legal effect"? The Homeowners argued for an "integral-ancillary" bifurcation of the agreement under the Rivera v. Am. Gen. Fin. Servs., Inc., 259 P.3d 803 (N.M. 2011).  They claimed that because the designation of the arbitrator was introduced with the precatory "shall be Roger Lengyel," this provision is integral and must be abided, whereas the "under the AAA" was merely ancillary. The Court explained that Rivera was limited to its facts, where the parties had "clearly intended to use a designated institutional arbitration provider" but that provider no longer existed. As a result, the Rivera court held that the arbitration provision would have to stricken in its entirety because arbitrating with the chosen provider was integral to the agreement and the section could not be rewritten by the court.  The Court continued that the instant dispute was much different. To treat the two cases as the same "would unreasonably treat as equivalent an unavailable arbitration provider and a disqualifiable arbitrator" with an available provider. Plus the Court noted that Rivera did not even get to the issue presented by the Homeowners -- weighing the relative value of two, separate provisions.

In the Court's de novo review of the agreement's language, the Court held that "most reasonable construction of this language is that 'under AAA' incorporates all of the AAA rules normally applicable to proceedings held under AAA's auspices." There was nothing in the agreement that limited the AAA's powers or made certain rules inapplicable.  The Court acknowledged that the use of "shall" to designate the arbitrator is strong evidence that the parties agreed to use him. However there was nothing in agreement that this arbitrator could be non-neutral, which is contrary to the AAA rules. If this arbitrator could be non-neutral in violation of the AAA Rules, then it would "potentially cause [the Rules] to have no meaning." In sum, the Court held that "The most natural construction of the Arbitration Agreement is that the parties intended to arbitrate disputes between them concerning [the Contractor's] construction work under all of the AAA rules, with Lengyel serving as a neutral arbitrator. To interpret the Arbitration Agreement designating Lengyel to trump the AAA rule permitting replacement of a neutral arbitrator in certain circumstances would risk rendering the AAA Rules meaningless." Accordingly, the hearing justice's order and the AAA's disqualification were affirmed.
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

Thursday, December 15, 2016

Certified, Schmertified: Federal District Court Rules Against Subcontractor’s Breach and Quantum Claims Due to its Fraudulent Davis-Bacon Payrolls

The Plaintiff in METRIC ELECTRIC, INC., v. CCB, INC. and THE HANOVER INSURANCE COMPANY was an electrical subcontractor who was contracted by the Defendant to provided electrical services for a GSA project at the John F. Kennedy Federal Building in Boston. The subcontract was executed on December 2, 2013 for a value of $1,380,301 with the project to be completed over four phases.  The project fell under the Davis-Bacon Act which required that working tradesmen be paid the geographically designated Department of Labor prevailing wage rate.  The Davis-Bacon Act, along with the subcontract, required that subcontractors submit weekly payroll reports that certify under signed oath the tradesmen on the project were paid for all hours worked for the appropriate prevailing wage. In accordance with the Davis-Bacon Act and the specific language in the subcontract, the Plaintiff submitted signed certified payrolls during the course of the project from December 21, 2013 until April 26, 2014.

In March of 2014, six employees of the Plaintiff filed a lawsuit for unpaid wages in Massachusetts District Court and summary judgement was issued on April 6, 2014 in favor of the employees.  When the Defendant learned of this judgement, it advanced funds to the Plaintiff to pay the back wages, but ultimately the Plaintiff’s employees quit the project on April 23, 2014. The Defendant later found that the funds it provided were not paid to the employees until three months later in July 2014.  On May 16, 2014, the Defendant put the Plaintiff on notice of breach for failure to maintain schedule, and then formally terminated the Plaintiff on June 10, 2014, citing the failure to pay wages and to timely perform the contract schedule.  At the time of termination, Plaintiff had only completed 75% of the Phase I work and was 44% complete on the entire job.

In May of 2015, the Plaintiff filed suit against the Defendant in federal district court for: 1) breach of contract; 2) quantum meruit; 3) violation of the Miller Act; and 4) violation of the Massachusetts unfair business practices act. Defendant counterclaimed for breach of contract and violation of the unfair business practices act, plus a cross-complaint against the Plaintiff’s owner for fraud.

The Court began its analysis of the Plaintiff’s claim by simply stating that the Plaintiff’s failure to pay its employees in a timely fashion, as required both by the Davis-Bacon Act and the subcontract, was a material breach.  That material breach in turn relieved the Defendant of any duty to make payments on the contract to the Plaintiff.  The Court then rejected the Plaintiff’s argument that the act of the Defendant paying the employee’s back wages constituted waiver of that breach.  The Court discounted this argument by stating there was no “clear, decisive, and unequivocal conduct” indicating waiver by the Defendant.

The Court next reviewed the Plaintiff’s claim in quantum meruit for $158,823.14 in work it claimed to have performed before its termination.  To start this analysis, the Court pointed to the maxim of Equity that, “a party coming before the court seeking equitable relief must do so with clean hands.”  The Court declared that the Plaintiff in this instance not only failed to follow Federal law, it also failed to adhere the terms of the subcontract by paying its tradesmen in a timely fashion, and it finally then filed perjured certified payrolls, compounding the issues.  As such, a claim in equity for “quantum meruit…is a nonstarter.”

Based upon its ruling on the first two counts of the complaint, the Court rejected the Miller Act and unfair business practices claims outright and granted Summary Judgment in favor of the Defendant.

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