For more than a hundred years the construction industry has been a leading user of arbitration to resolve disputes. Over the last decade, arbitration has lost some of its favor with the industry. This may be the result, at least in part, of the increasing use of discovery and motions practice in arbitration; practices that substantially increase the cost of arbitration. This loss of favor is reflected in the addition of litigation as an alternative means of dispute resolution in ConsensusDocs 200 and other standard form construction contracts. Still many in the industry continue to prefer arbitration to litigation. One major advantage of arbitration is finality. ConsensusDocs 200’s arbitration clause provides as follows:
12.5.4 An award entered in an arbitration proceeding pursuant to this Agreement shall be final and binding upon the Parties, and judgment may be entered upon an award in any court having jurisdiction.
While the finding of a judge or jury may be appealed, perhaps for years, the “final and binding” language is intended to severely limit appeals of arbitration awards. Not only can this save substantial attorneys’ fees, it also allows companies to return their full attention to the business of building. But what does “final and binding” really mean?
The Federal Arbitration Act
What “final and binding” means is governed primarily by the Federal Arbitration Act or FAA, which was first enacted in 1925. The FAA applies broadly to all contracts that evidence a transaction involving interstate commerce. This includes virtually all construction contracts in the United States. For more than 50 years, federal courts treated the FAA as a procedural rule applicable only to federal cases. This limited the enforceability of construction arbitration agreements. In a 1983 decision,Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), the United States Supreme Court established a federal policy favoring arbitration and of resolving any doubts as to the scope of arbitrable issues in favor of arbitration. Since the Moses Cone decision the FAA is recognized to preempt state laws that would otherwise prevent enforcement of a construction arbitration agreement.
In addition to making arbitration agreements enforceable in state and federal courts, the FAA also proscribes the circumstances under which an arbitration award can be corrected, modified, or vacated. These latter rules, which will be discussed further below, establish the extent to which an arbitration award is final and binding.
Clarification of an Award
An arbitrator’s authority generally ceases when an award is issued. As used in this article, the term “arbitrator” includes both a single arbitrator and a three person panel. Issuing an award renders the arbitrator functus officio, Latin for office performed. There are, however, exceptions to this rule. The Construction Industry Arbitration Rules of the American Arbitration Association (Rule 51) give either party 20 days after transmittal of an award to request modification of the award. The arbitrator’s is allowed to correct any clerical, typographical, technical or computational errors in the award. The arbitrator is not allowed to redetermine the merits of any claim decided by the original award. If an award is ambiguous, some courts have allowed the arbitrator to interpret or clarify, but not alter the merits of the award.
Confirmation of an Award
An arbitration agreement empowers the arbitrator to issue an award, but the arbitrator has no authority to enforce the award. Fortunately, enforcement is usually unnecessary. Most losing parties, having agreed to arbitrate, pay the arbitrator’s award and move on. But not always. As is noted above, ConsensusDocs 200, paragraph 12.5.4 provides that an award is final and binding and that “judgment may be entered upon an award in any court having jurisdiction.” If the losing party refuses to pay an award, the prevailing party must go to court. Or, the losing party may choose to file a motion to vacate. While the FAA gives the prevailing party one year to apply for an order confirming the arbitration award, the losing party has only three months to file a motion to vacate. If a motion to vacate is filed, the prevailing party can file a cross-motion to confirm.
If the court grants the motion to confirm, it will enter judgment on the award. That judgment can then be enforced like any other court judgment. The judgment entered on the award is appealable, but appellate review will be limited to the FAA’s grounds for vacating, correcting, or modifying an award discussed below. Neither the trial court nor an appellate court can alter the merits of an arbitration award.
Correction or Modification of an Award
The FAA provides three grounds for correction or modification of an award:
1. Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.
2. Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.
3. Where the award is imperfect in matter of form not affecting the merits of the controversy.
The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.
An action to correct or modify an award must be served on the adverse party within three months after the award is filed or delivered.
It is important to note that the FAA does not give a court the authority to review the evidence submitted to the arbitrator and reach a different decision on the merits. For the most part, a court’s review is limited to defects or miscalculations that are evident in the award itself. This is true even if it is evident that the arbitrator made a mistake of fact or law in reaching the decision underlying the award. The main exception is the court’s ability to correct an award where the arbitrator has ruled on a matter not submitted. For example, courts have removed attorneys’ fees from awards in cases where the parties’ contract contained no provision for attorneys’ fees.
Vacating an Award
The FAA provides four grounds for vacating an award:
1. Where the award was procured by corruption, fraud, or undue means.
2. Where there was evident partiality or corruption in the arbitrators, or either of them.
3. Where 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 other misbehavior by which the rights of any party have been prejudiced.
4. 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.
An action to vacate an award must also be served on the adverse party within three months after the award is filed or delivered.
The authority to vacate an award does not give a court the authority to review the evidence submitted to the arbitrator and reach a different decision on the merits. The Supreme Court has held that under the FAA, the sole question for a court reviewing an arbitration award is whether the arbitrator, even arguably, interpreted the parties’ contract, not whether the arbitrator got it right or wrong. A court cannot vacate an arguably correct decision even if the court is convinced the arbitrator got it wrong.
While a court cannot review the merits of an arbitrator’s decision, it can look at whether the losing party received a fair hearing. The first three grounds listed above provide a statutory guarantee of due process, that is fair treatment, in private arbitration. A party seeking to vacate an award on the basis of corruption, fraud, or denial of a fair hearing will bear a high burden of proof—more than a mere preponderance of the evidence. Any doubts should be resolved in favor of upholding the arbitration award.
The last ground for vacating an award rests not on considerations of fairness, but on the contractual nature of arbitration. An arbitrator’s authority to decide a dispute is based solely on the parties’ contractual agreement to arbitrate. Arbitrators have no power to decide issues not submitted by the parties or matters beyond the scope of the parties’ contract. Here also, the party seeking to vacate an award bears a high burden of proof. It is presumed that arbitrators do not exceed their authority.
In addition to the four grounds expressly stated by the FAA, some courts have recognized two additional grounds for vacating an arbitration award: manifest disregard of the law and violation of public policy. While the various federal circuit courts differ on what exactly constitutes manifest disregard, it is uniformly agreed that manifest disregard must go beyond erroneous application of the law or failure to correctly understand and apply the law. To manifestly disregard the law an arbitrator must act so as to deprive the losing party of a fair hearing and its rights under the contract. A number of federal circuits interpret manifest disregard as shorthand for the four grounds stated in the FAA.
Violation of public policy is a doctrine that originated from judicial review of labor arbitration agreements. The doctrine is based on a court’s common law authority not to enforce a contract that violates public policy. To serve as grounds for vacating an award a public policy must by explicit, well-defined and dominant. It cannot be based on a single court’s understanding of the public interest. It is at least questionable whether violation of public policy is a valid grounds for vacating a commercial or construction arbitration award. Several circuit courts look only at whether enforcement of an arbitration award would require one of the parties to violate public policy.
An arbitration award issued pursuant to the ConsensusDocs arbitration clause is not absolutely final and binding. The FAA allows appeals of judgments confirming arbitration awards and provides grounds for correcting, modifying, or vacating arbitration awards. But an arbitration award is far more final and binding than a decision by a state or federal trial court. A party seeking to avoid enforcement of an arbitration award bears a heavy burden of proof. It is not enough to show the arbitrator’s decision was wrong, even seriously wrong. It is necessary to show by clear and convincing evidence that the award was the product of fraud or corruption; that the complaining party was deprived of a fair hearing, or that the arbitrator went beyond the powers granted by the parties’ contract. As a practical matter, an arbitration award is far less likely to be appealed than the decision of a court. manner.
Smith, Currie & Hancock LLP is a national boutique law firm that has provided sophisticated legal advice and strategic counsel to our construction industry and government contractor clients for fifty years. We pride ourselves on staying current with the most recent trends in the law, whether it be recent court opinions, board decisions, agency regulations, current legislation, or other topics of interest. Smith Currie publishes a newsletter for the industry “Common Sense Contract Law” that is available on our website: www.SmithCurrie.com.