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The arbitrator entered an award in favor of Biosar and Faith finding Aurora abandoned and rescinded the terms of the parties’ EPC contract.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.