By Andy Ness
How far can arbitrators go in fashioning an appropriate remedy without putting the arbitration award at risk of vacatur? A 2022 decision by the North Carolina Court of Appeals sheds light on what arbitrators can do when the contract’s remedy-granting provisions cannot be applied, but basic fairness calls for a remedy.[1]
The Arbitration Award:
This arbitration involved a common construction dispute. The project encountered various problems and delays, resulting in the Contractor (Cleveland) terminating its two subcontracts with the Subcontractor (REM) for default. The arbitration panel found the terminations for default were improper; under the subcontract terms, this meant the terminations were treated as terminations for convenience. The subcontracts specified REM’s damages for a convenience termination: the actual direct cost of all Subcontract Work satisfactorily performed and materials furnished prior to notification of termination. However, certain items were excluded:
No compensation for profit and overhead;
No compensation for work not performed or materials not furnished; and
No recovery of exemplary, special, or consequential damages, or anticipated profit.
Sounds straightforward enough. But there was a problem – the record did not include any evidence of the actual direct cost incurred. In the key paragraph of the award, the panel announced how they would address this:
“It is unfair to deny any compensation to REM as a result of the improper termination of its subcontracts with [CCI]. Therefore, the Panel develops an equitable remedy pursuant to the AAA Rules. Specifically, Rule R-48(a) of the Construction Industry Rules of the AAA states, “The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, equitable relief and specific performance of a contract.”
Based on this provision, the panel estimated REM’s “actual direct cost” and used a Cleveland document showing “the amount of the contract funds earned by REM at the time of termination.” (We assume this document was the last approved payment application). After an upward adjustment of $25,000 for the few days of additional work and demobilization costs not included in the document, the panel awarded the total earned amount in Cleveland’s accounting as REM’s damages for termination for convenience.
Appeal from the Arbitration Award:
Cleveland’s appeal focused solely on the panel’s fashioning of an equitable remedy when the actual direct costs could not be determined from the evidence. Cleveland argued that the award should be vacated because the panel “improperly applied Rule 48 (a) of the AAA Construction Industry Rules … to award [REM] money to which it was not entitled.” Alternatively, it asserted the award should be vacated “because the panel manifestly disregarded the law.”
The Court did not determine if “manifest disregard” is a basis for vacatur in North Carolina, but analyzed whether “the arbitrator exceeded the arbitrator’s powers,” a recognized ground for vacatur under the Revised Uniform Arbitration Act as adopted in North Carolina (and under the Federal Arbitration Act).
The Court held that “an arbitrator does not exceed his powers if: (1) state law allows the remedy for the specified cause of action, and (2) the arbitration contract does not unequivocally preclude it.”[2] Here, state law clearly allowed the remedy, and the forms of compensation REM received were not expressly prohibited by the subcontracts. The panel’s estimate of REM’s “actual direct cost” was properly calculated to be consistent with the subcontracts’ terms, so the award was upheld.
Particularly important to this ruling were two very similar provisions, one in the RUAA and one in the AAA Construction Rules. The first, N.C. Gen. Stat. § 1-569.21(c) (RUAA Section 21(c)), provides that “[A]n arbitrator may order any remedies the arbitrator considers just and appropriate under the circumstances of the arbitration proceeding.” The second, AAA Rule 48(a), says that “the arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties.”
The Court’s conclusion emphasizes the arbitrators’ discretion and equitable powers:
The Subcontracts do not explicitly preclude the equitable remedy that the panel fashioned; rather, they expressly vest the arbitration panel with broad discretion to craft equitable remedies through the specific adoption of the AAA Rules, including Rule 48(a). Hence, in estimating the “actual direct cost” incurred by REM . . ., the panel did not exceed the vast equitable powers with which it was endowed by the parties.
The Takeaway:
This case did not break new ground. The ruling is consistent with the principle that an arbitrator has discretion to fashion an equitable remedy, so long as that remedy is generally consistent with the underlying contract and law. Only when the arbitrator markedly departs from the contract and “dispenses his own brand of industrial justice” (a phrase seen mainly in labor law cases, where the arbitrator is supposed to be applying the terms of a collective bargaining agreement) is there a serious risk of vacating the award.
Notably the Court did not discuss that the Contractor’s “actual direct costs” could have been quite different from the contract amount earned for work completed. If the subcontracts were profitable at the point of termination, the earned value would include elements of overhead, indirect costs and profit, which were excluded from the Subcontractor’s recovery under the applicable clause. But if the subcontracts were losing money, the actual direct costs could have been more than the earned value. Nevertheless, using the earned value was the most reasonable substitute for actual costs under the circumstances, and a reasonable approximation, equitable under the circumstances, was entirely sufficient, and within the panel’s authority as the remedy.
The takeaway from the case is its strong statement that the arbitrator’s power to fashion an equitable remedy (stemming here from Rule 45 (a) of the AAA Construction Rules, but JAMS Construction Rule 24(c) and others are almost identically worded) is real and substantial, not just a throwaway. This Court found in it both “vast equitable powers” and “broad discretion.” It certainly gives comfort to arbitrators looking to fashion a fair result where the contract language is unclear, ambiguous, or when the specified remedies fail to contemplate the fact situation presented. For those looking for a viable ground to vacate an award, it further reinforces the high bar to finding a winning argument.
[1] R.E.M. Construction, Inc. v. Cleveland Construction, Inc., 2022-NCCOA-557, 876 S.E.2d 851 (2022).
[2] Quoting WMS, Inc. v. Weaver, 602 S.E.2d 706 (2004).
