Dangers of Arbitration: Decisions Stand Even if Contrary to Law

As recently demonstrated in Uretek, ICR Midatlantic, Inc. v. Adams Robinson Enterprises, Inc. et al., arbitration decisions can be enforceable, even if they are contrary to law and against the parties’ agreement.

The Arbitration

Though the contractor properly terminated the subcontract, the arbitrators determined that the contractor could not receive its excess costs in completing the project. The arbitrators reasoned that the “balance of good faith between the parties weighed” in the subcontractor’s favor. The subcontractor “put forth a good effort to complete” the work, albeit “not adequately or efficiently.”

In contrast, the contractor acted in bad faith by failing to pay properly submitted pay applications, failing to notify the subcontractor of soil issues, and failing to adequately mitigate damages. Using this balance of “good faith” without regard to the contract language, the arbitrators declined to enforce the subcontract provision pertaining to excess costs of completion.

Court’s Confirmation of the Award

The District Court for the Western District of Virginia affirmed the arbitration award because the contractor was unable to establish any of the narrow grounds for vacating an arbitration award. Applicable statutes and common law prescribe only narrow grounds for vacating an arbitration award, including fraud, corruption, exceeding authority, irrationally failing to draw an award’s essence from a contract, and manifest or intentional disregard of the law. The grounds for vacating an award do not include a finding that relief “could not or would not be granted by a court of law or equity.”

Though the arbitration award may have been an “error of law,” the court found that the arbitrators “did not exceed their authority;” did not fail to draw the “essence from the subcontract;” and did not “manifestly disregard controlling law.” It was permissible for the arbitrators to ignore the subcontract’s provision for excess costs of completion. “[F]ailing to base an arbitration award on the express terms of a contract” is an error of “misinterpretation and does not justify vacatur.” The arbitrators’ decision to weight the implied duty of good faith over the subcontract’s express terms constituted “arguably construing” the subcontract. Though two of the arbitrators lacked legal training, an “error of law,” did not constitute a ground on which an award could be vacated.

The Lesson

This case demonstrates that arbitration decisions are very difficult to appeal. Even if the arbitrators fail to enforce the terms of the agreement and act contrary to law, an arbitration decision is likely to be enforced, subject to narrow exceptions. Parties should think carefully about whether their contracts should contain default arbitration provisions. Arbitration provisions may shorten the process but lead to the wrong conclusions with little prospect for appeal.

If you have questions about arbitration issues or other topics in construction law, our Construction Law team is ready to help. Contact Karen Stemland at kstemland@wrvblaw.com or (434) 220–6826.