Courthouse Reporter Series: Nebraska Court of Appeals Vacates Arbitration Award for Misconduct

Vacating an arbitration award is often seen as an uphill battle. Indeed, the U.S. Supreme Court has stated that “courts may only vacate an arbitrator’s decision ‘only in very unusual circumstances.’” Oxford Health Plans, LLC v. Sutter, 569 U.S. 564, 568 (2013). The Federal Arbitration Act provides limited grounds to seek the vacatur of an arbitration award. In Lund-Ross Constructors v. Duke of Omaga, LLC, ___ N.W.3d ___, 33 Neb.App.73, the Nebraska Court of Appeals found that an arbitrator’s conduct warranted the partial vacatur of the award, which granted relief to a subcontractor who filed a counterclaim after the arbitration hearing had closed.

Lund-Ross contracted with Duke of Omaha to build an apartment complex in Omaha. Lund-Ross, in turn, sub-contracted with A Raymond Plumbing. Following completion of the building, Owner withheld payment from Lund-Ross, who in turn, withheld payment from Raymond. Both Lund-Ross and Raymond filed mechanics liens and initiated suits; Raymond’s suit ultimately was dismissed for want of prosecution. Lund-Ross proceeded to arbitration with Owner, naming Raymond as a respondent. Raymond did not participate in the arbitration as a claimant at the time of the hearing.

During the arbitration, Raymond’s principal testified and sought to assert its claims against Lund-Ross. As Lund-Ross sought to cross-examine Raymond, the arbitrator terminated the examination and determined that it did not have jurisdiction to hear Raymond’s claims. After the hearing closed, but before the arbitrator issued an award, Raymond sought to enter the arbitration with a counter-claim against Lund-Ross. The arbitrator permitted the counterclaim. Lund-Ross objected that Raymond’s counterclaim was untimely. Without ruling on Lund-Ross’ objection, the arbitrator entered an award granting relief to Lund-Ross, but also awarding over $215,000 to Raymond and against Lund-Ross. The arbitrator denied Lund-Ross’ motion to correct the award.

Lund-Ross filed a motion in court to confirm the award in part (to its award) and to vacate the portion of the award granting relief to Raymond. With respect to the motion to vacate, the trial court found that none of the four grounds in Section 10 of the Federal Arbitration Act were present and thus the award had to be confirmed. Section 10 permits vacatur of an arbitration award where:

1. The award was procured by corruption, fraud, or undue means;

2. There was evident partiality or corruption in the arbitrations or either of them;

3. The arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any misbehavior by which the rights of any party have been prejudiced; or

4. 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.

On appeal, Lund-Ross argued that the third and fourth grounds warranted vacating the arbitration award. The court noted that a party seeking relief from an arbitration award “bears a heavy burden.” With respect to Lund-Ross’ argument the arbitrator exceeded his powers or executed them imperfectly, the Court noted that the only question to review was if the arbitrator interpreted the contract. Because the record showed the arbitrator did interpret the contract, relief under that theory was unavailable.

However, with respect to the argument that the arbitrator conducted misconduct by terminating Lund-Ross’ cross-examination of Raymond’s principal, the Court found that argument had merit. The Court held that the FAA does not require the arbitrator to hear every piece of evidence; parties must be accorded with a fair hearing and an adequate opportunity to present their case. If the arbitrator refuses to hear “pertinent and material” evidence and that refusal prejudiced the party’s rights, a court properly may vacate an award. Turning to the facts, the Court held that in terminating the Lund-Ross’ cross-examination of Raymond’s principal, and then considering the post-hearing counterclaim, the arbitrator was "guilty of misconduct and misbehavior that prejudiced Lund-Ross’ rights."

The Court finally turned to whether the Nebraska law or the FAA allows the simultaneous partial confirmation and partial vacatur of an arbitration award. Finding no applicable precedent in Nebraska or the Eighth Circuit, the Court noted that courts in Connecticut and the Second Circuit have frequently permitted the partial confirmation and partial vacatur of an arbitration award. Relying on those cases, the Court affirmed the part of the award in Lund-Ross’ favor but vacated part of the award in Raymond’s favor.

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Editor Brendan J. Witry is an Associate at Laurie & Brennan LLP. His practice focuses exclusively on representing and advising owners, contractors, and trade contractors in construction disputes at all stages.