Watch Your Stipulation! Award Confirmed Despite Arbitrator Exceeding Contractual Scope of Authority

Jim Archibald, Amandeep S. Kahlon & Luke D. Martin | Buildsmart

Once parties agree to arbitrate, courts generally defer to the arbitrator’s judgment regarding resolution of a dispute. The prevailing approach in many states is to not set aside an arbitration award unless the arbitrator clearly exceeded his or her authority and to exercise every reasonable assumption in favor of the validity of an award. The Minnesota Court of Appeals recently confirmed this view in Faith Technologies, Inc. v. Aurora Distributed Solar LLC.

In that case, the court upheld the arbitrator’s award for equitable relief, despite the parties’ contract prohibiting the arbitrator from providing any equitable remedy. The court found the parties’ stipulation to arbitrate all disputes effectively waived the contractual prohibition on equitable relief, especially where the equitable claim for abandonment was pled and not objected to until after the final award.

In 2016, Aurora hired Biosar to design and construct solar-power generators for a project in Minnesota. Biosar hired Faith Technologies to provide labor, materials, and services for the project. The EPC contract between Aurora and Biosar permitted arbitration to resolve disputes arising out of the contract but prohibited the arbitrator from “awarding nonmonetary, injunctive, or equitable relief.”

In 2017, disputes arose on the project. Aurora and Biosar commenced arbitration against one another, and Biosar separately filed an arbitration demand against Faith. In 2018, the three parties agreed to, and filed with the local district court, a stipulation to stay litigation and submit their claims to binding arbitration under the JAMS rules (a private arbitration service) “to finally and expeditiously resolve all their claims against each []other in one forum.”

The arbitrator entered an award in favor of Biosar and Faith finding Aurora abandoned and rescinded the terms of the parties’ EPC contract. Faith was awarded nearly $30 million in damages and fees on its quantum meruit claim, and Biosar was awarded approximately $3 million in attorneys’ fees. In the award, the arbitrator referred to both the stipulation and the EPC contract as sources for his jurisdiction over the dispute.

Biosar and Faith then sought to enforce the award in the district court. The district court affirmed the arbitrator’s award finding (1) the parties’ stipulation supplanted the EPC agreement arbitration clause, allowing for equitable relief, (2) any ambiguity in the stipulation should be resolved in favor of arbitration of equitable claims, and (3) the arbitrator determined the parties intended to arbitrate all claims, including those for equitable relief, a decision to which the district court must defer under the Federal Arbitration Act.

On appeal, Aurora argued the district court erred because the arbitrator exceeded the scope of his authority by granting equitable relief to Faith and Biosar and attorneys’ fees to Biosar. The court of appeals agreed with the district court that Aurora waived the prohibition on equitable relief in its contract by entering the stipulation and, also, by failing to object to arbitrating the abandonment claim until after final award.

The court relied on the JAMS rules for its analysis of whether Aurora’s failure to object to the abandonment claim constituted waiver. Under the JAMS rules, jurisdictional challenges are deemed waived unless raised in a demand or counterclaim or promptly thereafter, when circumstances first suggest the issue of arbitrability. Had the stipulation not included incorporation of the JAMS rules to the parties’ disputes, the court suggested it may have performed a different waiver analysis. Nevertheless, given the stipulation that the JAMS rules applied, Aurora’s failure to object to the abandonment claim in its initial pleadings, or promptly thereafter, meant it waived the contract prohibition on associated relief.

Aurora also argued that the arbitrator erred in granting Biosar attorneys’ fees because, having been awarded no monetary damages, it did not qualify as a “prevailing party” under the EPC contract. The court of appeals deferred to the arbitrator’s award, which determined the party that prevails on the underlying merits, regardless of whether the party receives compensation, is the “prevailing party” as defined in the EPC contract.

Lessons from Faith Technologies

Parties agreeing to arbitrate disputes should appreciate the finality courts associate with such awards. When arbitrators’ written support for their awards is confusing or appears to get the contract, facts, or applicable case law wrong, it can be tempting to challenge the enforcement of an award. However, unlike traditional trial court judgments, the options for judicial review of arbitration awards are limited. Because courts defer to arbitrators and treat arbitration awards as presumptively reasonable, they are unlikely to overturn an award, absent egregious conduct by the arbitrator or evidence that the arbitrator clearly exceeded the scope of his or her powers.

In Faith Technologies, had Aurora worded the stipulation more carefully and/or objected from the start of the proceeding to arbitrating any equitable claims, it might have had a strong argument that the arbitrator clearly exceeded his authority to resolve disputes under the arbitration provision of the parties’ contract. But, Aurora’s decision to arbitrate the abandonment claim fully, without objection, probably doomed its post-award effort to enforce the contract’s prohibition on an arbitrator awarding equitable relief.

Questions To Ask When Changing Your Arbitration Clause

Jay Ramsey and Abby Meyer | Class Action Defense Strategy Blog

In a prior post (here), we highlighted some questions that companies may want to ask when evaluating whether their arbitration clauses are enforceable.  If changes need to be made to those clauses, then companies should consider how to implement those changes so as to ensure those are enforceable too.  The following is what you should be thinking about and asking.

If an agreement needs to be amended to add or modify an arbitration clause, you should strongly consider having customers re-agree to a contract or set of terms and conditions with the new arbitration clause.  This could be done a number of ways, including by having customers agree to an entirely new contract or having them agree to just a replacement arbitration clause.  For companies who engage their customers online or through mobile applications, this may be as simple as requiring customers to re-register or log-on in a way that confirms their assent to the new agreement.

In some cases, the original agreement may have a provision that permits the company to amend or modify the agreement unilaterally.  These provisions generally require that the company post the amended terms to its website or in some other location and indicate that a customer’s continued use of the company’s services constitutes agreement to the amended terms.  The provision may also require that the company provide its customers with some type of notice of the amended terms.

The law permitting unilateral amendments in accordance with these types of modification provisions is still developing.  Some courts have permitted unilateral amendments if the company follows the terms of the modification provision, even if notice of the amended terms is not separately provided.  See Miracle-Pond v. Shutterfly, Inc., No. 19 cv 04722 (N.D. Ill. May 15, 2020).  Other courts have rejected modifications if notice was not provided. See, e.g.Douglas v. U.S. District Court, 495 F.3d 1062 (9th Cir. 2007).  What constitutes adequate notice is often up for debate.

In light of this mixed law, if you are considering modifying a set of terms without requiring a new agreement from your customers, you should consider at least the following:

  1. Does the original agreement permit modifications?  If so, are you complying with the modification provision?
  2. Does the modification provision require that a particular notice be sent to the customer regarding the amended terms?  Should you provide that notice even if the provision does not require it?
  3. Does any notice that you are sending out clearly indicate that changes are being made to the terms?  What does the subject line of the email notification say?  If changes are mailed, do the documents make clear that your company’s terms are changing?  Is there anything on the envelope indicating that changes to the terms are included inside?
  4. Does any notice that you are sending not only provide the amended terms or access to them, but also describe any material changes to the terms?  Does the notice clearly indicate that the customer agrees to the amended terms by continuing to use the company’s services?
  5. Is the notice being sent to the best, most up-to-date contact information for the customer?

As we noted in our last post (here), the above questions may not cover everything that you and your company should consider when updating your agreements or terms and conditions, particularly when adding or modifying an arbitration provision.  Crafting a solution for each company, while satisfying the concerns and desires of the legal department, the marketing department, and the business teams can sometimes be challenging, but it should be done.  There is no reason to risk unnecessary exposure to consumer class actions.

Does Your Construction Contract Involve Interstate Commerce? If So, Expect Your Arbitration Agreement to Be Enforced

Jim Archibald, Ryan L. Beaver & Amandeep S. Kahlon | Buildsmart

Whether an arbitration agreement is enforceable is a frequently litigated matter in construction disputes. Federal policy strongly favors arbitration. Typically, the Federal Arbitration Act (FAA) will preempt any contrary state law that might otherwise void an arbitration provision. On June 10, 2020, the South Carolina Court of Appeals reaffirmed this view when it overturned a trial court’s decision denying a motion to compel arbitration.

In Patricia Damico, et al. v. Lennar Carolinas, LLC, et al., a group of homeowners sued the developer, general contractor, and subcontractors of a development in Berkeley County, South Carolina, alleging construction defects in their homes. The general contractor, Lennar Carolinas, sought to compel arbitration. The trial court denied the motion to compel ruling that (1) the South Carolina Uniform Arbitration Act (SCUAA) applied to the parties’ agreement instead of the FAA, (2) the general contractor failed to comply with the SCUAA’s conspicuous notice requirement, and (3) the arbitration agreement included a provision from the parties’ sales agreement, as well as terms from a separate warranty agreement, and was unconscionable. The general contractor appealed.

The Court of Appeals overturned the trial court and ruled that the FAA applied to the parties’ contract. The court explained that the FAA applies to transactions involving interstate commerce, and the parties specifically agreed in their sales agreement that the transaction involved interstate commerce. The court applied basic rules of contract interpretation to enforce this provision, as written, like any other contract term. Moreover, because construction of the homes required use of out-of-state subcontractors and material and equipment suppliers, the court concluded the transaction in fact involved interstate commerce.[1] Therefore, the FAA applied.

The court next determined the trial court improperly voided the sales agreement’s arbitration agreement as unconscionable. The trial court should have considered the validity of the arbitration provision in isolation without reference to separate arbitration language in the warranty agreements or the arbitrability of certain disputes thereunder. Questions of arbitrability of a particular dispute are to be decided by the arbitrator, and the trial court should have addressed only whether the arbitration agreement was enforceable. Once the Court of Appeals concluded the agreement was valid, the FAA required it to be enforced, and the court reversed the trial court’s order denying the motion to compel.

Closing Thoughts

If you agree to arbitrate disputes in your construction contract, think carefully before pursuing litigation and trying to contest a motion to compel. While there are instances where an arbitration agreement may be void or inapplicable to a particular dispute, more often than not the trial court will enforce the arbitration provision and grant the motion to compel. And, even if you succeed at the trial level, this is one of the few circumstances when appellate courts routinely reverse lower court decisions. Absent unique contract language or a novel set of facts, this particular fight may not be worth the time or expense.

In contrast to the above circumstances, if you want your arbitration agreement enforced and would rather avoid the cost of appealing an incorrect ruling from a state trial court, consider reviewing, prior to execution, the form arbitration language in your contract for compliance with state law. Here, had the sales agreement complied with the conspicuous notice requirements of the SCUAA, the general contractor might have, at least partially, avoided the bad result from the trial court.

Arbitrating Construction Matters: A Preferable Means of Resolution in Light of the COVID-19 Pandemic?

Adam J. Hiller | Gordon Rees Scully Mansukhani

Do we advise our contractor clients to litigate or arbitrate? It is a question that is considered frequently in the construction context; however, with the COVID-19 pandemic and a “new normal” that is all but certain to develop, arbitration may become a preferred means to resolve disputes.

The general theme in Tennessee arbitration law (as well as federal law) is that courts will uphold the parties’ contractual agreement to arbitrate disputes. In fact, arbitration agreements are favored in Tennessee courts. See Benton v. Vanderbilt University, 137 S.W.3d 614, 617 (Tenn. 2004). In adherence with the Tennessee Arbitration Act, courts are required to construe an arbitration agreement as broadly as the words and intentions of the parties and will resolve any ambiguities in favor of arbitration. Wachtel v. Shoney’s Inc., 803 S.W.2d 905, 908 (Tenn. Ct. App. 1991).

With that being said, here are some key factors to consider when advising a client whether to agree to arbitrate:

  1. Ability to have all Players Agree to Arbitrate

A party cannot compel another to arbitrate unless that person agrees and if parties have contractually agreed to arbitrate, one party cannot compel another party to litigate. Thus, it is important that all potential parties have a consistent dispute resolution protocol in place. For example, if a prime contractor is involved in a claim from an owner and seeks to assert a corresponding claim against a subcontractor, it is important that they be involved in the same dispute resolution process to ensure a consistent outcome. To do so, the prime contractor must make sure that each contract it enters has consistent dispute resolutions protocols.

  1. Need for Discovery

While litigation affords parties the opportunity to conduct whatever discovery that is “relevant to the subject matter involved in a pending action” as per Tennessee Rules of Civil Procedure, the amount of discovery allowed in arbitration is generally far more limited, since arbitration rules do not give the parties the right to conduct discovery. In situations where reducing costs is a high priority, arbitration – with its limitations on discovery – would be the preferable option over litigation.

  1. Ability to Appeal a Decision

Both federal and state arbitration law provides the bases to vacate an arbitration award; however, successfully doing so is extremely difficult. Thus, it is safe to say that a decision rendered in arbitration will not be subject to review by a court. Additionally, arbitration rules have not included a process by which a party can appeal a decision. As such, if a client has misgivings about bestowing the decision-making over to an arbitrator without the chance for judicial review, then the inability to appeal would be a drawback to arbitration.

  1. Predictability

Litigation is governed by various rules set forth in the Rules of Evidence, Civil Procedure, and common law. For example, an attorney representing a prime contractor will generally be able to predict what other party(ies) may be joined to the case based upon the nature of the claim, how much discovery will be needed to prove or defend against a particular claims, and what to expect from a particular judge or within a particular venue. Thus, with litigation comes a certain degree of predictability. Conversely, in arbitration, a lot of these issues are left to the discretion of the arbitrator and thus more difficult to predict how they will be decided.

  1. Costs

Traditionally, recognized arbitration providers (e.g., American Arbitration Association) have advertised arbitration as a more cost-effective means to resolve disputes than litigation. Recently, however, such a position has been called into question, largely due to the administrative fees charged by the nationally recognized arbitration providers. For example, the American Arbitration Association charges fees ranging from $1,550.00 for a claim up to $75,000.00, and $77,500.00 for a claim that exceeds $10 million. In addition, parties must also pay the arbitrator’s fees. Such fees vary based upon the nature of the claim. In a large, complex construction dispute, which typically involves a three-person panel of arbitrators (who may each bill an hourly rate of $400.00 + per hour), the fees could become significant. Therefore, as a general rule, arbitration is usually less expensive in small cases but is not always the case in more complex matters.

The arrival of the COVID-19 pandemic has impacted all aspects of daily life and the full extent of its fallout has yet to be determined. The extent of the impact on local contractors, business owners, design professionals and the construction industry itself remains to be seen; however, it is almost certain that those most affected psychologically and financially will want to reassess their respective state of affairs, including any dispute resolution procedures. Arbitration agreements may afford the means to achieve a more controlled, cost-effective resolution process for disputes. But since every client is unique, this process becomes a fact-drive, case-by-case analysis.

Is The “Clear And Unmistakable” Hurdle For Delegation Of Arbitrability Issues To An Arbitrator Uniform Or Variable?

Gilbert Samberg | Mintz

The United States Supreme Court established that questions of arbitrability are presumptively for a court unless the parties clearly and unmistakability manifest their intention (i.e, agreement) that such issues should be determined by an arbitrator in the first instance. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995); see also Opalinski v. Robert Half Int’l Inc., 761 F. 3d 326, 335 (3d Cir. 2014). But is the “clear and unmistakable” standard uniform in all circumstances or variable?

For example, should a court adjudicate what is “clear and unmistakable” one way when the alleged delegation agreement is between “sophisticated” parties (e.g., commercial entities) and another way when at least one of the parties is “unsophisticated” (e.g., a non-executive employee or a consumer)?1 And should the “clear and unmistakable” hurdle be raised or lowered depending upon the arbitrability issue in question – e.g., (a) claim or subject matter arbirability vs. (b) party arbitrability vs. (c) class arbitrability?

Party “Sophistication”

The Third Circuit Court of Appeals recently held (i) that a plain delegation is “clear and unmistakable” independent of the “sophistication” of the parties, and (ii) that the incorporation by reference of the Commercial Arbitration Rules (“CAR”) of the American Arbitration Association (“AAA”), which included its Rule 7(a) concerning the power of an arbitrator to rule on his/her own jurisdiction, was “about as “clear and unmistakable” as language can get.” See Richardson v. Coverall N. Am., Inc., 2020 U.S. App. LEXIS 13568 (3d Cir. April 28, 2020) at *5. The latter holding was a particularly enthusiastic endorsement of what is by now a common holding in the federal circuits. See id. at *5n.2.

The former holding was more novel. As is common, in Richardson, an agreement to delegate was not set out expressly in the principal contract document, but was arguably manifested by the incorporation by reference in the principal arbitration agreement of institutional arbitration rules that empower an arbitrator to adjudicate his/her own jurisdiction. The implicit question was whether an “unsophisticated party” — however that term is defined — should be bound by a term that is merely incorporated by reference in the principal text of a contract, rather than expressly set out in that principal text.

One of the objects of the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1, et seq., was that an arbitration agreement should in general be treated the same as any other contract. As such, the interpretation of an arbitration agreement is principally governed by state contract and related law principles, as the Third Circuit acknowledged, see id. at *4, citing Jaludi v. CitiGroup, 933 F.3d 246, 254-55 (3d Cir. 2019).

The Richardson case concerned two franchisees of commercial cleaning service company Coverall North America, Inc. (“CNA”). They had acquired their respective franchises from Sujol LLC, the CNA “master franchisee” for the territory that included New Jersey, wherein the claimants seemed to have been domiciled. When disputes arose, the two franchisees commenced a putative class action in New Jersey state court, alleging that they were actually employees of Sujol and CNA under New Jersey law, and that the defendants had violated the New Jersey Wage Payment Law by “misclassifying [plaintiffs] as independent contractors, charging them for a job, and taking unlawful deductions from their wages.” 2020 U.S. App. LEXIS 13568 at *3. CNA and Sujol removed the case to federal court and moved under FAA § 3 to stay the proceedings in favor of arbitration. See id.

The District Court declined to send the arbitrability issue to an arbitrator based on its finding that the incorporation by reference of the AAA CAR did “did not satisfy the clarity needed for delegation, at least with an ‘unsophisticated party’.” See id. On appeal under FAA § 16(a)(1)(A), the Third Circuit reversed in that regard and remanded.

The pertinent arbitration agreement with Sujol covered “all controversies, disputes or claims” between Sujol and the franchisee, and provided that any such arbitration be conducted in accordance with the then current Commercial Arbitration Rules of the AAA. See id. at *4-*5. Among those rules is the well-known provision – AAA CAR 7(a) – for the arbitrator’s authority to “rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counter-claim.” See id.

The Court of Appeals assumed for purposes of argument that one of the plaintiffs (Silva) “lacked” sophistication. Id. at *5 n. 3. Nonetheless, it considered the agreement in question to be sufficiently clear for it to find an intent to delegate arbitrability issues to an arbitrator. Thus the incorporation by reference in the principal arbitration agreement text of terms to be found in another text that is clearly referenced would generally bind even an “unsophisticated” party, at least under governing New Jersey state contract law. (Could there be exceptions due to some other muddling of the arbitration agreement? The Court did not rule that out. See id. at *5n.2.)

We will see in time whether this sort of ruling holds up in other federal circuits. Inasmuch as state law has a substantial place in the analysis, it is unsurprising that there has been inconsistency in that regard to date in the courts generally.

“Class Arbitration”

Another possible variable in connection with the delegation hurdle is the nature of the arbitrability question. For example, the incorporation by reference of AAA arbitration rules seems to have been viewed differently vis-à-vis the “clear and unmistakable” hurdle when the delegation of “class arbitrability” is in issue. The Third Circuit Court of Appeals itself noted, for example, that in Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 809 F.3d 746 (3d Cir. 2016), it held that “the mere incorporation of unspecified AAA rules did not demonstrate an intent to delegate arbitrability in a class action.” See id. at *5 n. 2. Perhaps this variability concerning the delegation hurdle reflects the notable recent emphasis by SCOTUS of the considerable differences from conventional bilateral arbitration that the “class arbitration” construct presents.

Footnotes


1 And how do we determine whether a party is “sophisticated” or “unsophisticated”?