The trend to alternative dispute resolution (ADR) procedures has gained national support and recognition. Many courts, at both state and federal levels, require mandatory mediation or some form of settlement conference before a case proceeds to trial. Even so, arbitration remains as a widely recognized procedure for resolving construction disputes. Many standard form construction contracts include mandatory arbitration as the dispute resolution procedure of choice. The use of mini-trials, structured negotiations, or other procedures, short of an actual trial, to facilitate the parties' handling and resolution of a dispute are widely discussed and recommended in trade publications. The search for a quick, cost effective, and party controlled means of resolving disputes has reached the level of a major force in the world of business. Everyone involved in business, particularly contractors, must pay attention to the possibilities and alternatives since a major dispute or breach of contract challenge can mean the financial death of a project and in many cases the entire construction company itself, if not managed effectively.
Arbitration is a Viable Alternative
The development of arbitration as an agreed or mandatory dispute resolution procedure dates farther back, but it was only two decades ago that the United States Supreme Court made it clear that the ancient judicial hostility to arbitration was gone. Rather than blocking arbitration at every turn, the courts would thereafter encourage the parties to use this pioneer ADR procedure. The Federal Arbitration Act, 9 USC section 1, et seq, and the Uniform Arbitration Act adopted by most states, have given formal recognition and detailed procedures to the arbitration process which was once shunned and discouraged by the courts as a direct challenge to their authority.
Arbitration was quickly adopted and included as the agreed procedure for resolving disputes for contracting parties, in the construction field, by the American Institute of Architect's General Conditions and other standard form contracts. More recently, a mandatory pre-dispute agreement to use arbitration has been allowed in employment contracts as the remedy for statutory violations, including Title VII disputes and claims under the other employee rights acts.
Limited Grounds for Review of an Arbitration Decision
Some ADR procedures do not contemplate a final and binding decision on the merits of a dispute, even though their use is mandatory. It is quickly becoming a favorite of many parties to include mandatory mediation or review by a "Dispute Review Board," before arbitration or litigation is allowed. Some standard form contracts require that a dispute be submitted to the architect or engineer of record for a decision before a resort to other procedures. But, in most cases, these initial review steps are not conclusive and binding because some further review of the entire dispute by litigation or arbitration is contemplated by the parties.
Arbitration is different. Where arbitration is mandatory, either by pre-dispute agreement or a post-dispute agreement between the parties, its decision is binding. The grounds for review are very limited and in no event contemplate a complete rehearing and new decision on the merits.
The Federal Arbitration Act and the similar Uniform Arbitration Act provide the grounds for review of an arbitration decision. Review is limited to the vacating of an award procured by corruption or fraud, or where there is evident partiality or corruption in the arbitrators, or an arbitrator is guilty of misconduct in refusing to allow a justified postponement of the hearings or refusing to hear evidence, or where the arbitrators exceed their powers or imperfectly execute those powers so that the decision should not be made final. These bases for vacating an award revolve around the way an arbitration is handled and not the substance of the arbitration decision itself. Arbitrators are not required, without their agreement, to explain or justify their decision. Unless there is some objective indication that the arbitration proceeding was not handled fairly or the arbitration made an award on claims or issues not even submitted for resolution, or which are not within the power of the arbitrators to decide because of the terms of the arbitration agreement itself, then the courts are bound to confirm and enforce the arbitration award.
Manifest Disregard for the Law
A fifth ground for vacating an award in arbitration has grown out of and finds its basis in another decision by the United States Supreme Court. While the Court has sanctioned the enforcement of mandatory arbitration required by pre-dispute contract agreements, where there are statutory rights to enforce, such as in employment contracts, the Court has recognized that an arbitration award may be vacated for manifest disregard of the law. The point is that the ADR procedure of arbitration should be enforced and encouraged but it must provide a dependable and predictable resolution, in accordance with statutory rights and prohibitions.
The grounds for overturning an arbitration award for manifest disregard of the law are limited. As one federal court has said, "it clearly means more than error or misunderstanding with respect to the law," Gov't. of India v. Cargil, 867 F.2d, 130, 133 (2d Cir. 1989). To vacate an award, the arbitrators must have known of a governing legal principle yet refused to apply it or ignored it, and the law ignored by the arbitrators must be clearly defined.
A recent employment contract case arising in the State of New York, led to a decision by the United States Court of Appeals for the Second Circuit ("Court of Appeals") which gives further instruction on this basis for overturning an arbitration award, Halligan v. Piper Jaffray, Inc., et. al., 148 F.3d, 197 (2d Cir. 1998). Halligan was allegedly wrongfully discharged by his employer and, in accordance with his employment contract, took his grievance under the Age Discrimination in Employment Act, to arbitration. The arbitration decision went against him and the case found its way to the Court of Appeals.
Establishing Manifest Disregard of the Law
The Court of Appeals in the Halligan case set forth a detailed review of the record in this age discrimination case. The court concluded that Halligan overwhelmingly established that he did not voluntarily retire and that there was no business or performance related reason to justify his discharge. Accordingly, the only reasonable conclusion is that the claimant's age was the basis of his discharge.
In this case, there was no dispute as to the applicable law. In the arbitration, the trial court, and before the Court of Appeals, the parties agreed on the applicable terms of the statute and its prohibition of certain employer activities. However, there was no written explanation of the decision by the arbitrators. While that might have been helpful in deciding this case, and while most parties to arbitrations might want a written decision if the award is not exactly as expected, there is no universal requirement for a written explanation. For example, the rules of the American Arbitration Association provide that if the parties make the request in advance of the arbitration hearings and the arbitrators agree, a written decision explaining the award will be given. The Court of Appeals in Halligan did not directly criticize the practice of rendering an award without a written decision. However, without a written decision, the Court of Appeals could find no justification for the decision that the court could imagine which would be believable and supportable. Accordingly, the adverse decision was overturned because the Court of Appeals concluded that the arbitrators manifestly disregarded the law because they did not explain their result.
Points to Remember
The Halligan case involved statutory rights, under an employment contract. It might be expected that such cases dealing with personal rights would receive greater attention from the courts where there is a request to overturn what appears to be an unfair and unreasonable award. However, contractors and subcontractors have many statutory rights which are pivotal in deciding claims and disputes. Therefore, the ability to challenge an arbitration on the basis of manifest disregard of the law may furnish a powerful tool. Many states have laws regulating "no damage for delay clauses," total indemnification for negligence requirements, "paid-if-paid limitations," and other similar exculpatory and risk shifting provisions. Under these circumstances, a contractor or subcontractor may be protected from an unpredictable and unjustified result in arbitration, in violation of those statutory rights under appropriate factual circumstances.
No matter the forum, the result should be predictable, where the law is clear and the facts are proven. The power to challenge an award in arbitration for manifest disregard of the law is a long step to assure that the expectations of the parties about their rights and responsibilities are enforced.