Arbitration remains commonplace in the construction industry. Major form contract documents like the American Institute of Architects A-201 general conditions incorporate arbitration as a default dispute resolution mechanism, and the American Arbitration Association has a set of rules tailored expressly for construction disputes.
Proponents of arbitration tout its advantages over traditional litigation. Arbitration proceedings tend to be shorter (and thus cheaper) than litigation because of limited discovery and freedom from the court system’s clogged dockets. Arbitration is more flexible: instead of a “one size fits all” litigation template, the parties by agreement can customize nearly every facet of arbitration, from the scope of discovery mechanisms to the use of experts and the availability of cross-examination. Arbitration also has the advantage of finality, due to statutorily circumscribed review in the courts that has the effect of limiting and discouraging appeals. These unique characteristics of arbitration are embodied and promoted in the Federal Arbitration Act (FAA) and similar state arbitration statutes.
A pair of recent cases arising under the FAA highlight the importance that courts put on the goal of finality in arbitration, even at the expense of the flexibility typically afforded to the parties to shape arbitration by agreement.
HALL STREET: FINALITY TRUMPS FLEXIBILITY
Until last year, it was widely assumed in many jurisdictions that the parties’ freedom to customize arbitration proceedings extended to the scope of judicial review. In other words, while the FAA sets forth particular grounds for overturning an arbitration award on appeal to the courts (arbitrator corruption or misconduct, fraud, or exceeding their powers), the parties to an arbitration agreement could heighten the level of judicial review to include mere legal or factual error. The ability to enter into an agreement for heightened review quelled many litigants’ fear of being stuck with an arbitration award that ignores the law or simply “splits the baby.” Among the jurisdictions allowing this sort of tailoring was the federal First Circuit, which includes Massachusetts.
The Supreme Court’s recent decision in Hall Street Associates L.L.C. v. Mattel, Inc. did away with that assumption. In the Hall Street case, the Court struck down an arbitration agreement that allowed the courts to overturn an arbitration award that contained legal errors or factual findings that were not supported by “substantial evidence.” The Court recognized that where the parties attempt to heighten the level of judicial scrutiny for arbitration awards, the FAA’s policy of allowing flexibility to the parties clashes with the equally important policies of finality and efficiency in arbitration. Permitting enhanced court review of arbitration awards, the Court said, “opens the door to the full-bore evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.” The Court viewed that as an unacceptable outcome, especially in light of what it saw as clear language in the text of the FAA restricting judicial review to the grounds specifically listed in the statute. The Court held that the goal of flexibility must yield to “a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway.”
The lesson of Hall Street for those in the construction industry is that by entering into an arbitration agreement, a party necessarily gives up most rights of appeal – rights that could be very valuable when faced with a bad decision. Parties cannot reserve those rights of appeal, even when they agree to do so. Despite a number of clear advantages, arbitration is not something to be entered into lightly.
EASTERN SEABOARD: ARBITRATORS GET A “SECOND CHANCE” AT A FINAL AWARD
Another recent notable arbitration case considered what it means for an award to be final. In Eastern Seaboard Construction Co., Inc. v. Gray Construction, Inc., a site work subcontractor asserted extra work claims against the general contractor and its payment bond, and the general contractor counterclaimed for the cost of completing the subcontractor’s work. In the course of the arbitration briefing and hearings, the parties discussed and did not dispute that there was a remaining subcontract balance of $66,000.
The arbitrator issued a lengthy decision which (among other things) awarded the general contractor $77,000 for the cost of completing the subcontractor’s work. The award said nothing about the subcontract balance. The subcontractor asked the arbitrator to “clarify” its award to deduct the remaining subcontract balance from the $77,000 awarded to the general contractor. The arbitrator issued a revised award making that deduction, and the general contractor appealed the award, eventually reaching the federal First Circuit Court of Appeals.
The general contractor argued that once an arbitrator issues an award, the award is final, and the arbitrator cannot go back and re-open the dispute or change the award. The Court agreed with that general rule, but held that arbitrators are permitted to clarify or make minor, ministerial changes to their awards, and that is what this arbitrator had done. “Our cases still tend to differentiate between a second award which is fundamentally inconsistent with the first award and one which simply fleshes out the remedy announced initially.” The Court said that this case was a close call, but that the right of an arbitrator to clarify an unclear award extends even to an award that is “seemingly complete” but in reality “leaves doubt whether the submission [to the arbitrator] has been fully executed.”
While the Court in Eastern Seaboard in essence allowed the arbitrator to alter his award, the Court’s decision was nevertheless grounded in the policy of finality. The Court placed great emphasis on the limited scope of judicial review, and held that courts’ “deferential review of arbitration awards” extended to the arbitrator’s reasoning for revisiting and clarifying his award. If an arbitrator says that he or she intended to make a particular finding or ruling but inadvertently left it out or stated it incorrectly, the courts’ respect for arbitration precludes judicial second-guessing of the arbitrator.