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.”
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.
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