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Courts Uphold Arbitrators’ Contract Interpretations–Right or Wrong

By Leslie King O’Neal

Parties Bargained for Arbitrator’s Interpretation–Courts Won’t Usurp Function

Many arbitration agreements grant arbitrators broad powers, including contract interpretation. The two cases in this post show the difficulty in vacating arbitration awards by claiming the arbitrator misinterpreted the contract.  As stated in Hidroelectrica Santa Rita S.A. v. Corporacion AIC, SA, “Parties to an arbitration dispute bargained for the arbitrator’s interpretation of contractual language . . . courts do not usurp that function”[i]


Hidroelectrica Santa Rita S.A. v. Corporacion AIC, SA

The Hidorelectrica case involved an EPC contract to construct a power plant in Guatemala. The local indigenous community did not support the project, blocking access to the site and threatening the workers. Consequently, the owner terminated the contract for convenience. The owner filed for arbitration, seeking recovery of advance payments and a ruling that the contractor’s advance payment bonds remain in place. These bonds secured owner’s advance payments to contractor. The contractor sought payment for its subcontractor and damages for owner’s breach of the contract’s anti-corruption provisions in an alleged bribery scheme. It also asked to join its subcontractor, who claimed it was entitled to retain advance payments from contractor and sought damages from owner.

Arbitration Award Denied Contractor’s Claims

The Arbitration Tribunal denied the request to join the subcontractor in the arbitration. In the final award, the Tribunal held the contractor could retain payments for work performed but was required to return $7,017,231.52 and €435,168.00 plus interest to the owner. The Tribunal dismissed the contractor’s claims that the owner breached the EPC contract through alleged bribery schemes. In a subsequent “Decision and Addendum” to the award, the Tribunal clarified that the contractor was to keep the required advance payment bonds in place until it made final payment to owner.

Contractor’s Motion to Vacate Award

The contractor moved to vacate the award under §10(a)(4) of the FAA[ii], contending the Tribunal exceeded its power in three ways: (1) by requiring the advance payment bonds be maintained; (2) by denying its claim that the owner breached the EPC contract’s anti-corruption provisions; (3) by refusing to join the subcontractor in the arbitration.

Motion to Vacate Denied

Tribunal Error in Analyzing Contract Makes No Difference

The District Court denied the motion to vacate and the Eleventh Circuit affirmed. “Even if the Tribunal erred in its analysis of the contractual language, it makes no difference . . . as long as the Tribunal construed and applied the underlying contract.” Because the Tribunal explained its contract interpretation, it dd not exceed its authority in ruling that the EPC contract required the contractor to furnish new bonds if the original bonds lapsed.

Court Does Not Review Claims of Arbitrator Legal Error

Similarly, the Tribunal found the EPC contract required compliance with the Foreign Corrupt Practices Act (“FCPA”), but denied the bribery claim, finding it lacked jurisdiction because the FCPA has no private right of action and the contractor failed to produce sufficient evidence. Because this ruling was grounded in the EPC contract terms, the Tribunal did not exceed its powers. The 11th Circuit noted, “The Tribunal’s interpretation of the FCPA may be legally erroneous . . .  but our review under §10(a)(4) does not allow us to ‘sit to hear claims of . . . legal error by an arbitrator.’” The 11th Circuit declined to disturb the Tribunal’s finding of fact regarding evidence, noting “[A] court may not reject those findings simply because it does not agree with them.

Court Will Not Reject Award Because Arbitrator Misread Contract

Finally, the 11th Circuit held that the Tribunal’s decision to deny the subcontractor’s joinder did not exceed its authority because the Tribunal arguably interpreted the parties’ contract. The EPC contract allowed including third parties in arbitration, but the Tribunal interpreted it not to include third party claims asserted against the owner or contractor. Again, the 11th Circuit noted that “a court should not reject an award on the ground that the arbitrator misread the contract.” The arbitration award was confirmed.

CL Costa, Inc. v. Adcock Development, LLC

Similarly, in CL Costa, Inc. v. Adcock Development, LLC[iii] a Texas court upheld an arbitrator’s award finding the contractor and a subcontractor jointly and severally liable for owner’s damages for defective construction and delay. It denied contractor’s motion to vacate alleging the arbitrator exceeded his powers by this ruling.

Arbitrator Held Owner Was Third Party Beneficiary of Subcontract

In Adcock, the owner demanded arbitration against the contractor for alleged construction defects and delays regarding construction of a pre-engineered metal building. After filing its arbitration demand alleging the contractor breached its contract by performing defective work, the owner moved to join the subcontractor, alleging it likewise breached its subcontract by performing defective work. The subcontract incorporated the general contract’s specifications and stated the subcontractor assumed the same obligations to the contractor that the contractor had to the owner. The arbitrator allowed the subcontractor’s joinder in the arbitration, finding the owner was a third-party beneficiary of the subcontract. After hearing, the arbitrator awarded the owner $440,447.59 in damages, finding the contractor and subcontractor jointly and severally liable for the award.

Contractor Contended Joint & Several Liability Not Presented to Arbitrator

The contractor moved to vacate the award, arguing the arbitrator exceeded his authority by finding joint and several liability. Contractor contended this issue was not presented to the arbitrator. The trial court confirmed the award, noting there was no record of the arbitration proceedings to determine if the parties tried the joint and several liability issue by consent. Further, the arbitrator did not exceed his authority, since the owner’s statement of claims against contractor and subcontractor sought to hold both responsible for the same defective workmanship and delays.  Contractor appealed. Upholding confirmation of the award, the court stated, “On this record, the arbitrator was well within his authority to hold both [contractor and subcontractor] liable for [owner’s] losses. In this case we cannot say any alleged failure to expressly plead joint and several liability . . . somehow diminished the arbitrator’s authority to assess full liability against . . . the general contractor.”

Arbitrator Mistake of Fact or Law Not Grounds to Vacate Award

The appellate court noted, “Review of an arbitration award is so limited that even a mistake of law or fact by the arbitrator in the application of substantive law is not a proper ground for vacating an award.”  Because there was no complete record of the arbitration hearing the court found, on the record presented, the arbitrator did not exceed his authority. 

Indemnity Clause Did Not Require Arbitrator to Apportion Liability

The contractor argued that the subcontract’s indemnity clause shifted responsibility to the subcontractor and required the arbitrator to apportion liability. The court disagreed, stating, “Contrary to [contractor’s] assertion, the indemnification clause in the subcontract was not an agreement to apportion liability . . . incurred under the general contract.”

Takeaways

As noted in an earlier post, many arbitration clauses give arbitrators broad powers to fashion remedies ( Arbitration Awards: Avoiding Unfair Results). The Hidroelectrica and CL Costa cases highlight the arbitrator’s power to interpret contracts and courts’ reluctance to review or change these interpretations, even if the court disagrees with the result.  As the U.S. Supreme Court stated, “Of course, an arbitrator’s award must draw its essence from the contract and cannot simply reflect the arbitrator’s own notions of industrial justice. But as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision.”[iv] Arbitrators cannot simply ignore the parties’ contract, but if the arbitration award shows the arbitrator considered the contract and interpreted it, even wrongly, it’s unlikely a court will vacate an award on that basis alone.

Asserting failure to plead a claim as a ground to vacate an arbitration award is somewhat novel. Neither AAA nor JAMS arbitration rules require “pleading” as that term is used in the Fed. R. Civ. Proc. or state procedural rules. (See, AAA Comm. Arb. Rule R-4 https://www.adr.org/sites/default/files/CommercialRules_Web_1.pdf ; JAMS Comprehensive Arb. Rules, Rule 9) https://www.jamsadr.com/rules-comprehensive-arbitration/#Rule-9 ). However, JAMS Rule 9 states, “No claim, remedy, counterclaim or affirmative defense will be considered by the Arbitrator in the absence of . . . prior notice to the other Parties . . . “). It’s common practice for lawyers to attach formal pleadings (complaints, answers and counterclaims) to arbitration filings, but these are not required under AAA or JAMS rules.

However, the Florida 3d District Court of Appeal recently vacated a $1.5 million arbitration award holding, “the arbitrator violated the fundamental fairness of the proceedings by relying solely on a ground for relief that was not pled as an affirmative claim.” The Ferrarro Law Firm v. Royal Merchant Holdings, (No. 3D22-1851 (Fla. Dist. Ct. App. June 12, 2024). https://casetext.com/case/the-ferraro-law-firm-pa-v-royal-merch-holdings. A petition for discretionary review to the Florida Supreme Court (SC2024-1369) is pending. A future post will discuss “pleading” requirements in arbitration.

Citations

[i] Hidroelectrica Santa Rita S.A. v. Corporacion AIC, SA (11th Cir. 2024) (USCA11 Case: 23-12519, Document 27-1, Filed 10/16/24).https://media.ca11.uscourts.gov/opinions/pub/files/202312519.pdf

[ii] 9 U.S.C. §10(a)(4). https://www.law.cornell.edu/uscode/text/9/10 The District Court initially denied the motion to vacate because 11th Circuit precedent disallowed parties to arbitration under the New York Convention to challenge awards under FAA §10(a)(4). The 11th Circuit reversed en banc. Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 66 F.4th 876 (11th Cir. 2023), remanding the case to the District Court for final determination.

[iii]   No: 04-23-00475-CV (Ct. App of Texas, 4th District, San Antonio, July 31, 2024.https://casetext.com/case/cl-costa-inc-v-adcock-dev-1


[iv] United Paperworkers v. Misco, 484 U.S. 29 (1987) at 38. https://www.originalsources.com/Document.aspx?DocID=T8JEDBBN259TU9C





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