John T. Jones Construction Co. was the general contractor on an expansion project relating to the City of Grand Forks' wastewater treatment plant. Jones Co. claimed to have encountered differing site conditions, causing it to deliver the project four months late and suffering productivity losses and delay damages. The city refused the general contractor's claim and demanded liquidated damages from Jones Co. for the delay. The dispute was submitted to an arbitrator who ruled against the contractor and in favor of the city. The arbitration award ordered the general contractor to pay liquidated damages and interest, and required the parties to bear their own costs and fees.
Nothing surprising so far. What makes this case interesting is what happened next. Both parties appealed the arbitrator's decision to the North Dakota Supreme Court. The general contractor wanted the supreme court to flip the award altogether; the city wanted its fees. Neither party argued that the award was:
- procured by fraud;
- the product of undue partiality or misconduct by the arbitrator;
- outside the scope of the arbitrator's powers; or
- not governed by a mandatory arbitration agreement. N.D.C.C. § 32-29.2. In North Dakota arbitration awards that do not run foul of these statutory bases for vacatur, must be "completely irrational;" otherwise they are summarily affirmed. Instead, both agreed that the applicable standard of review was that reviewing standard agreed to by the parties and incorporated into their arbitration agreement.
The arbitrator's decision shall be subject to appeal to the North Dakota Supreme Court based on the following standards of review:
- Issue of Fact: clearly erroneous;
- Issue of Law: de novo review based upon the . . . substantive law of [North Dakota].
The North Dakota Supreme Court had consistently broadened and limited the decision-making powers and processes of arbitrators–always requiring them to conform to the specific terms of the arbitration agreement. Here though, the contracting parties demanded that the court conform its own behavior, rules, precedents, and statutory reviewing criteria to the parties' pre-arranged agreement. While prior to this case, North Dakota's decisional landscape was free of applicable precedent, such was not the case nationally.
Federal circuit courts are split on whether contracting parties can expand the standard of review of an arbitration award. The United States Courts of Appeals for the Third, Fifth and Ninth Circuits all allow contracting parties to control the standard of review of arbitration awards. See Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287, 292-293 & n.3 (3rd Cir. 2001); Gateway Technologies, Inc. v. MCI Telecomm. Corp., 64 F.3d 993, 996-997 & n.3 (5th Cir. 1995); LaPine Technology Corp. v. Kyocera Corp., 130 F.3d 884, 888-889 (9th Cir. 1997). The United States Courts of Appeals for the Seventh and Eighth Circuits have refused to apply reviewing standards that differ from the Federal Arbitration Act, 9 USC §§ 1-16. These courts insist that contracting parties cannot privately legislate a reviewing process that conflicts with that proscribed by the United States Congress. See, Chicago Typographical Union v. Chicago Sun-Times, Inc., 935 F.2d 1501, 1505 (7th Cir. 1991); UHC Mgmt. Co. v. Computer Sciences Corp., 148 F.3d 992, 997-998 (8th cir. 1998).
A majority of state courts to have faced the question have refused to apply a private reviewing standard that conflicts with their own arbitration statute. These courts reason that to do so would allow private contracting parties to expand the court's subject matter jurisdiction beyond the constraints of the applicable statutory standard of review. See, Bruckner v. McKinlay Transp., Inc., 557 N.W.2d 536, 540 (Mich. 1997); Dick v. Dick, 534 N.W.2d 185, 191 (Mich. App. 1995); Oakland-Alameda County Coliseum Auth. v. CC Partners, 124 Cal. Rptr. 363, 370-71 (Cal. App. 2002); Crowell v. Downey Cmty Hosp. Found., 115 Cal Rptr. 810, 817 (Cal. App. 2002); see also, Chicago South Shore and South Bend RR Co. v. Northern Indiana Commuter Transp. Dist., 682 N.E.2d 156, 159 (1997), rev'd on other grounds, 703 N.E.2d 7 (Ill. 1998). The Connecticut Court of Appeals has ruled to the contrary, holding that its courts must review an arbitration award using the standard required by the private contracting parties. Maluszewski v. Allstate Ins. Co., 640 A.2d 129, 132 (Conn. App. 1994).
The North Dakota Supreme Court sided with the majority of her sister states, ruling that neither John T. Jones Construction Co. nor the City of Grand Forks could legislate a reviewing standard that differed from the North Dakota Arbitration Act. The Court reasoned:
We agree with the courts that hold parties to an arbitration agreement cannot contractually expand the scope of judicial review beyond that provided by statute. The Uniform Arbitration Act, N.D.C.C. ch. 32-29.2, provides the sole means for securing judicial review of an arbitration award in the courts of the state, and its provisions must be followed. See N.D.C.C. § 32-29.2-17 (stating the "making of an agreement described in section 32-29.2-01 providing for arbitration in this state confers jurisdiction on the court to enforce the agreement under sections 32-29.2-01 through 32-29.2-20 and to enter judgment on an award under the agreement"). When parties to an arbitration agreement seek judicial review of an award, a court may vacate or modify an award only if one of the grounds set forth in N.D.C.C. §§ 32-29.2-12 or 32-29.2-13 is present, regardless of what the arbitration agreement may specify. See N.D.C.C. § 32-29.2-11. We conclude the completely irrational standard is the appropriate standard of review in this case.
Contracting parties who want a special reviewing standard for an arbitrator's decision can obtain one by contractually creating the appellate tribunal, one that is distinct from the courts. The parties can select their own appellate arbitrators and expand or restrict their reviewing standards, much the same way that our legislatures fashion the appellate jurisdiction of our courts.
We at Maslon could have fashioned an appellate arbitration tribunal that would have legally reviewed the award appealed by Jones Co. and the City of Grand Forks. But given the chance, we would have counseled against burdening the dispute resolution process with such an appellate appendage. We encourage clients to structure the arbitrator selection process so as to dissuade either party from feeling the need to construct a special reviewing process. When the panel consists of seasoned and fair-minded triers of fact, informed and practiced in the field of construction law–as well as construction means, methods and disputes–the parties should live with the panel's decision: win, lose or draw. The contracting parties' arbitration agreement in this case evidences distrust of the arbitration process itself. These parties should have either structured a more comfortable hearing process–one with sufficient procedural safeguards to ensure their trust in the outcome–or foregone arbitration altogether and jointly agreed to litigate their disputes in North Dakota's court system.